How to Use Mechanic’s Liens to Protect Your Construction Business
Oct. 29, 2021
The construction industry is based upon contractors, subcontractors and suppliers furnishing labor, equipment, material and supplies consumed on a job site with a promise of repayment. If that promise is broken, and the owner fails to pay, those contractors, subcontractors and suppliers can be out several months of gross income, while still owing their own suppliers, subcontractors and employees. Suppliers and subcontractors don’t even have written agreements with owners. Conversely, if owners had to put up all the money before the work begins, many projects would become unmanageable.
Mechanic’s liens are created by statute to protect contractors, subcontractors, and suppliers who add value to a construction job. A mechanic’s lien secures the right of payment with a lien against the real estate being improved. If the property is sold, valid mechanic’s liens, like mortgages, are liens against the real property that must be paid before the owner receives any proceeds from the sale.
Contractors and subcontractors should design every construction agreement to include mechanic’s lien notices, statements, and filing and service requirements into the workflow. Mechanic’s liens are as essential as billing, if not more.
How a Mechanic’s Lien Helps Ensure Payment
A mechanic’s lien, once filed and of record, makes it difficult to obtain new financing until the mechanic’s lien is satisfied. If the claim is clearly meritorious and the real estate assets. If liens are not being paid, work may stop, and the property sits idle.
If payment does not come, the lienholder may file a foreclosure case. In a foreclosure case, the court determines the amount owed and the priority of lienholders (who gets paid first, second, etc.). A title report should be run to find all persons who may have an interest in the property, including, but not limited to, any mortgage company. Foreclosure cases are usually complicated and expensive. The owners are angry and feel shortchanged. The lienholders are jockeying for priority in time (lienholders priority depends in large part on when the claim was filed. If a lien has priority over the first mortgage for example (work began before the mortgage was filed), the lien is almost certain to be paid in full.
Early Notice to the Owners is Essential
For all potential lien holders—especially suppliers and subcontractors—early notice to the owners is essential. Owners should be informed that liens may be filed if suppliers and subcontractors go unpaid. The owners should have an incentive to ensure that payments made to the general contractor for suppliers and subcontractors are paid to them.
A warning statement must be delivered to the owner for improvement to residential real estate
A notice of intent to perform must be filed with the clerk of the District Court for new residential construction
Creating a Mechanic’s Lien
A mechanic’s lien is established by filing a lien statement with the Clerk of the District Court in the county in which the real property being improved is located. The lien statement must include:
The Name of the Owner
The Name of the Contractor
The Name and Address Sufficient for Service of Process of the Claimant
A (Legal) Description of the Real Property
A Reasonably Itemized Statement of the Amount of the Claim (or a Written Instrument or Promissory Note)
In addition to these minimum requirements, it is good practice to include the following additional information:
The address of the Owner
The address of the Contractor
Both the Street Address and Legal Description of the Jobsite
Detailed Itemized Statement with Supporting Documentation
A copy of the notice of intent to perform and the warning statement filed or served earlier
Contractors must file their liens within 4 months of the last work done and materials supplied, with a possible extension of one month upon request and may include all the subcontracted supplies and work.
Subcontractors must file their liens within 3 months after the date last furnished, with a possible extension of two months upon request.
Service of Lien Claims
Lien claims must be served in the manner provided for service of process on any one owner of the real property, any holder of a recorded equitable interest, and any party obligated to pay the lien. Failure to make proper service could make the lien unenforceable, so it is important to comply with the provisions of K.S.A. 60-304 for service of summons in state and K.S.A. 60-308 for service outside the state. Service can be tricky, so it would be advisable to have the assistance of counsel to complete the service. The statutory requirements for service of subcontractor liens are more stringent than for contractor liens; however, if an owner contracts with more than one vendor, the contractor may become a “subcontractor” when the case is decided. Compliance with the stricter subcontractor service rules should be the practice for all contractors.
Enforcing a Mechanic’s Lien
Filing a mechanic’s lien statement creates a lien on the real estate for one year from the date of filing. If no foreclosure case is filed within one year, the lien ceases to exist. In a lien foreclosure lawsuit, the lienholder is a plaintiff (or counter plaintiff). The defendants include anyone with an ownership interest, equitable interest, or lien on the property including, but not limited to, mechanic’s liens, mortgages, taxes, and purchase agreements.