No-lien Contracts? No Way!

A second-generation remodeler and friend, Bob Hanbury, CGR, asks someone wanting a no-lien contract: “Why, don’t you plan to pay me?” I agree completely. No-lien contracts really aren’t all that terrible, but you need to act like they are because early in the job they represent to some extent a surrender of control.

A mechanic’s lien on a residence is of real value only when there are no recorded mortgages or there is a great deal of equity in the property. If you are a company with a clean record, there is no good reason for a client (or client’s lawyer) to ask for a no-lien contract.

A lien, when filed by a contractor, is not automatically a debt the owner owes; it must be proved in court (prosecuted) and become a judgment (or perfected). Even if that happens, a perfected lien or one that the court has approved is inferior to any prior claim on the property, like a first or second mortgage. Sure, you can foreclose on a perfected lien and even force a sheriff’s sale, but to get the property you would have to pay off all of the debts (like the mortgage). Big deal, you get interest on the money you are owed until you collect. That’s OK, I guess, if you want to be a banker.

Liens are governed by state, not federal, laws and in some states — Florida, California and Texas, places where oranges grow — you are required to notify the owner before the job starts that you have lien rights and will enforce them — sometimes called a notice of intent. You can’t file a lien on an address (you must have a legal description) and legally you have only so many days to file the lien from the time of last meaningful work. Driving by the job or sweeping the sidewalk may not qualify as meaningful work nor, by the way, does repair or warranty work. Check your state law and know what you need to do.

With 35 years in the business, I filed four liens. One was paid immediately because the owner didn’t know his agent had not paid us. Another was paid in 30 days after discovering that we kept a daily job log. The third was settled during a mediation hearing (I got about 70 percent of what I was owed, two years later), and the last one went to trial. In that one, the judge, wanting to be fair, gave me half of my money and them the other half (of my money). A 50-50 split ain’t all it’s cracked up to be sometimes.

If you have a good contract that describes how and when you are to be paid, make sure the client understands that nonpayment according to terms is taken very seriously by you. Keep your jobs up to date, make sure your trade contractors and suppliers are paying their bills, and, if appropriate, get lien releases from them for the jobs but don’t give up your lien rights. Keep your company’s record clean so that you can point to it when you refuse to give up your lien rights.

There are all manner of releases or waivers of liens. If your client is financing construction, their lender will want a lien release from you and that’s reasonable. We send a lien release with an invoice stating that we released the lien rights for that invoice providing it was paid — an advance release, so to speak, and the lenders love it.

Don’t give in on no-lien contracts. If they refuse to pay, file the lien properly but remember one important factor: If it comes to having to file a lien, you have probably let things get way out of hand and gone too long already, so don’t plan on buying your spouse’s next anniversary present with the lien payoff, while you’re here . . .