Construction Liens 101

Borrowing, Home Equity Loans & Line Of Credit, Mortgage Refinance

A construction lien, otherwise known as a mechanic’s lien, is a claim that is made against a property by a contractor, subcontractor, or other professional party involved in a construction project. These liens exist to protect construction professionals from non-payment for materials or services rendered.

If you are withholding payment to a contractor for a construction project of any sort for substandard work or another dispute, the contractor has a right to file a construction lien on your property. Unfortunately, the same principle allows a subcontractor to file a construction lien on your property if the contractor did not pay the subcontractor. You, as the property owner, are still potentially on the hook.

Do not ignore a construction lien filed against your property. In the best case, the lien makes it virtually impossible to sell or refinance your property. If it is not properly addressed, the lien could eventually result in legal action that forces a sale of your home to pay off the lien amount. The lien may also severely damage your credit score and remain on your credit report for several years. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.

Rules vary by state, but the construction lien timeline generally consists of a preliminary notice and/or a notice of intent, filing of the lien, and enforcement of the lien. The deadlines also vary by project role (contractor, subcontractor, material supplier, etc.).

Preliminary notices are typically filed at the beginning of a project (if the state requires one to file a construction lien), preserving the right to file a lien if it’s required at a later date. The notice of intent (NOI) is the document that starts the process, notifying parties that if a certain payment is not made within a certain timeframe, the lien will be filed. Once a lien is recorded with the proper local authorities (such as county court or registrar of deeds), the recording party has a certain amount of time to file the court action to enforce the lien.

The notice of intent is the warning shot that begins negotiation. Contractors and subcontractors are more interested in getting paid than they are in taking you to court. It’s in your best interest to meet with the contractor and attempt to resolve the issue before the lien is filed. You should seek legal representation at this point.

If a lien has been filed against your property, your first step is to verify that the lien is valid. Did the filing party follow all steps (such as filing a preliminary notice and/or NOI where required), did they meet all deadlines in doing so, and do they have standing to file a lien? (For example, a supplier who supplies material to other suppliers and not directly to the project has no standing to file.) You may be able to get the lien dismissed on a technicality.

If the lien is valid, your best bet is to negotiate before the court action is filed. Understand that you may have reduced leverage at this point. Make sure that you retain all relevant documents (invoices, photographs, correspondence, etc.) that support your case.

Homeowners can protect against some construction liens by establishing a lien waiver, a document that waives the right to file a mechanics lien in exchange for payment. Waivers may be conditional or unconditional, with conditional waivers typically triggered by receipt of payment.

As part of due diligence, homebuyers should always check for the presence of a construction lien against any property. You can easily do this by checking with the county agency where liens are filed – no legal representation is necessary. Such a lien should be disclosed before closing, but it’s wise to clarify the situation early.

Construction liens are serious business that can cause significant damage to your pocketbook – if for no other reason, the legal fees necessary to address them. Your best defense is to be proactive by thoroughly researching your contractor (and, if possible, the subcontractors and material suppliers that the contractor prefers to use). Take the time upfront to find a contractor whom you can trust, and establish a relationship with them that allows you to amicably settle disputes before it comes to the filing of a lien.

MoneyTips is happy to help you get free mortgage and refinance quotes from top lenders.

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