In today’s economic climate, many contractors, both general and specialty, are finding they are not getting paid for the work they have performed. This can be due to the homeowner running out of money or the general contractor using the money paid to him to cover his mortgage instead of paying his subcontractors. In fact, many general contractors are declaring bankruptcy, leaving their subcontractors and suppliers in the lurch.
How do you protect yourself? One way is to take advantage of the mechanic’s lien laws of your state. Mechanic’s lien laws were developed to protect contractors who provide valuable services to a property and then don’t get paid. The laws, which vary slightly from state to state, provide basic procedures for notifying a homeowner that his property might be subject to a lien and then recording and perfecting the lien.
Preliminary lien notices
If you are a subcontractor or a supplier, the homeowner does not know that you are performing work on their property. You have contracted with the general contractor for your services, and the general may or may not have informed the homeowner of your existence. The law requires you to tell the homeowner that you are doing work on their property and that you have a right to lien their property if you are not paid. There are specific forms to use and a copy must be sent to the homeowner, the general contractor and a lender if the project is subject to a construction loan. If you don’t send this form, you can usually kiss your mechanic’s lien rights good-bye. If you are the general contractor, the homeowner already knows you are there because they signed a contract with you. Therefore, you don’t need to send this preliminary form.
Recording the lien
If you are not paid for your work, you will need to record a mechanic’s lien against the property you are working on. Again, a specific form is used; it must be signed under penalty of perjury, and it is recorded with the county recorder’s office in the county where the property is located. Check with the recorder to see if you need to mail a copy to the homeowner or if the recorder will do the mailing.
There are specific timelines for recording the lien. Usually it is 90 days after the project is substantially complete or earlier (30 to 60 days) if the owner records a notice of completion. If you don’t meet the deadline, your lien is invalid. Many times you will be told “the check is in the mail” or “we need to review your billing.” This simply delays the process and by the time you realize they have no intention of paying you, the deadline is missed. You are better off recording the lien and then let them review your bill. If the payment is truly “in the mail,” you can always cancel the lien after you receive the payment.
Perfecting the lien
The biggest mistake contractors make is putting a lien on a property and then forgetting about it. They just assume that when the owner sells or wants to refinance, they will get paid. Not so! Your lien is only valid for a limited amount of time (usually 90 days) before you need to “perfect” it. That means that within that time period, you must file a lawsuit to foreclose the lien. In other words, you are asking the court for permission to sell the property to pay your claim. If you don’t file your lawsuit in a timely manner, your lien is invalid.
Effect of current real estate market
Before you go through the expense of filing a lawsuit, make sure there is some equity in the property to ensure you will be paid. You will be throwing good money after bad if you try to foreclose on a property that already has debt far in excess of the value.