Real Estate Law: How To Avoid a Mechanic’s Lien
At Hard Money Bankers, we always have to be on the lookout for contractors or subcontractors that may try to file a lien against one of our projects, as it can impact the investor’s ability to repay our hard money loan.
Mechanic’s liens are liens permitted under State law to contractors or subcontractors when they have performed work or provided materials to a real estate project and haven’t been paid. If the contractor follows proper procedure, he can maintain a lien on the property that clouds title until the dispute or debt is settled.
And these liens are not just problematic for hard money lenders. As an investor, if you hire a general contractor to manage other sub-contractors, pay the contractor, and that contractor fails to pay the subs, you can get stuck paying for the same work again to cover for the contractor. Ouch!
Here is a checklist I’ve created to help you avoid mechanic’s lien headaches:
Before Work Begins
- Call the local BBB and the State agency responsible for maintaining contractors’ licenses – They will advise you if any complaints have been filed.
- Get references of work completed – CALL THEM!! If the contractor refuses, that should be a red flag.
- Stipulation of subs – have the contractor give you a list of all subs he will use on the project, along with addresses and telephone numbers. Don’t let him change subs without written notification to you.
- Written contract – All proposed work must be in writing. The contract should address the following:
- Contractor’s promise to keep property free and clear of any liens and, in the event any lien is filed, his promise to take immediate steps to remove the lien or be in breach of the contract.
- Authorization for change orders – don’t let contractor make changes with the subs without your prior written consent.
- Hold harmless and indemnification – make the contractor responsible for all injuries or damages on the jobsite, or any claims, suits, damages, or causes of action related to actions of contractor.
- Attorney fees – put into the contract that the prevailing party in any suit or claim may collect reasonable attorney or professional fees and court costs.
- Warranty language – the contract should require the contractor to insure materials are installed in a manner which will not void any factory warranties.
- Surety bond – This is normally used only with larger commercial projects. It puts an insurance company on the hook in the event the contractor defaults on his obligations.
After Work Begins
- Inspections – Get an independent inspector to monitor progress and completed work. If not done correctly, withholding payment can be justified.
- Lien waivers and releases – Get these from both the contractor and each sub every time a draw is requested. Ask to see billing invoices and/or paid receipts. If anything looks fishy, simply contact the sub directly.
Upon Completion of Project
Final completion certification – In addition to lien waivers, have the contractor provide another affidavit of all subs used and stating that all debts/subs have been paid.
- Contact all subs – You may wish to contact all listed subs directly to insure they’ve been paid.
- Joint checks – If money is due to any subs, make check payable to both parties.
One other note: Most states require that, in order for a mechanic’s lien to be enforceable, the contractor/subcontractor must file a notice of intent to establish lien within a certain time period, and then a full-blown lawsuit within another time deadline. If these deadlines are missed, the right to enforce the lien may be lost. So even if a lien has been recorded, or a suit filed, you should make certain the contractor or sub has complied with the timing requirements.
Mechanic’s liens are serious business. Protect yourself or you could watch your project fall into a deep, dark hole!
Til’ next time, Jeff