While the mechanics lien process can be confusing and complicated, there’s no doubt that when it’s used effectively, leveraging your lien rights works. In fact, there’s no other tool that’s quite as powerful as a mechanics lien when it comes to ensuring that you receive your hard-earned construction payment.
How Does a Mechanics Lien Work?
So what is the exact value of a mechanics lien? Why should you file one and how exactly does it work to get you paid? To answer these questions, we’ve put a list together of 17 different ways a mechanics lien can help you get paid. While every situation is different, any one of these reasons (or some, or all) might come into play if you’re forced into a situation where a mechanics lien is called for.
17 Ways a Lien Gets You Paid
1. A Mechanics Lien Encumbers the Property
When you file a mechanics lien, the document is actually recorded with land records and appears on a title search of the property. Anyone who buys or accepts the property after the recording of your lien claim (and sometimes, in some states even before the recording), accepts it subject to the claim. As a practical measure, this means the property will not be sold, refinanced or otherwise transferred without the mechanics lien claim being paid or addressed.
2. A Mechanics Lien Gets the Lenders Attention
Many construction projects have a construction lender, meaning that the construction is being financed by a bank or third party lender. These lenders are loaning tons of money to the project and they have a mortgage against the project property to secure that claim. When you file a mechanics lien, you are intervening in that security interest. In some states, you’re actually getting priority over the lender’s interest. This is a big deal to these lenders, and they usually step in after a mechanics lien is filed to demand action.
3. A Mechanics Lien Gets the Owner’s Attention
As a result of Reasons #1 and #2 above, you also get the property owner’s attention when you file a mechanics lien. If you’re a supplier or a subcontractor, the property owner may not know or care who you are or whether you’ve been paid. Everything about that changes when you file a mechanics lien.
4. When Mechanics Liens Are Filed They Cause Contracts to Get Breached
Every construction project has a number of contracts related to it. The property owner generally has a contract with the prime contractor, and the prime with the subs, and the owner with the lender, and the owner with the architect, and the owner with its tenant, and so on and so forth. It’s common — very, very common — that all of these contracts have a provision in them obligating a party to keep the property free and clear of liens. Once a lien is placed against a project, these contract provisions put one party in breach. This breach puts pressure on the breaching party to resolve the lien claim as soon as possible.
5. More Parties Become Obligated to Your Debt
If you don’t get paid on a project and you don’t file a mechanics lien, you’ll be restricted to filing suit against the party who you contracted with only. So, if you’re a supplier to a subcontractor, you’d only be able to file suit against that single subcontractor. If you file a mechanics lien, however, you bring a lot of other parties to the table. Typically, you’re authorized then to file suit against the general contractor and the property owner, and the land itself! The more parties obligated to pay your debt, the more pockets available to you to collect, and the more likely you’ll get paid.
6. A Mechanics Lien Sets a Firm Deadline
Sometimes, the problem isn’t that you aren’t going to get paid eventually, it’s that you’re waiting and waiting and waiting for payment and fielding promises about payment. Filing a mechanics lien can help in this scenario because it sets a firm deadline for resolution of your claim. Everyone hates litigation, and a mechanics lien will set a firm deadline for when litigation will begin if the claim isn’t paid. Deadlines get folks moving.
7. You Can Always Fall Back on the Property for Payment if You File a Mechanics Lien
One danger whenever you extend any type of credit is that the debtor just won’t pay, and worse, they won’t have any way to pay. Especially in the current economy, debtors are unable to pay and are facing bankruptcy more often. What can you do if someone owes you money and they just don’t have the money? Well, the mechanics lien gives you the authority to actually collect from the property. The real estate itself can be sold at auction to pay your claim, which means that you have to have a perfect storm of defaults to leave your company empty-handed.
8. People Will Pay You to Avoid Dealing With Your Mechanics Lien
It’s common that you may go unpaid on a construction project because there is some type of dispute preventing payment. Maybe the property owner or general contractor disputes the quality of your workmanship, for example. They may play hardball with you and withhold money claiming default, but oftentimes, even in these instances, they fold when a mechanics lien is filed. That’s because dealing with a mechanics lien is expensive, requires attorneys and oftentimes (see below), has a grim outlook.
9. Mechanics Liens Are Hard to Challenge
One reason property owners and general contractors pay up when confronted with a mechanics lien is that they are extraordinarily difficult to challenge. If you don’t follow procedures when filing the lien and make a technical mistake, the lien will get tossed quick and easy. But, if you filed your lien properly, it can be a challenge to get a judge to toss the lien claim. And, it can be risky. Some states, like Washington, will award lien claimants attorney fees if someone challenges the lien claim and fails to win. That’s a big risk factor for those challenging a lien.
10. Mechanics Lien Claims Help When Parties File for Bankruptcy Protection
When unpaid for services or materials furnished to a construction project, the reason is often that one or more of the parties on the project have sought bankruptcy protection. This puts most debts in a state of limbo and makes it challenging to collect. Mechanics lien claims help in a bankruptcy situation, though, by doing one or more of the following:
- (i) It secures your debt to put you towards the top of the list of those entitled to payment in the bankruptcy; and
- (ii) It may give you the ability to proceed in court against other parties while the bankruptcy is pending.
11. Mechanics Lien Will Effectively Freeze Money Flow on the Project
Getting paid on a construction project can be tough because money has to be exchanged across multiple tiers of parties. Frequently, money is misappropriated before it ever gets to you. When you file a mechanics lien, however, you frequently force this flow of money to stop. The lender or the owner will actually stop paying its general or certain subcontractors until it gets assurances that your claim is paid.
12. Mechanics Lien Claims May Force Parties Into Joint Check Agreements to Benefit You
Sometimes, a mechanics lien claim will expose a party’s financial difficulty. For example, you may be supplying materials to a subcontractor going through tough times. When you’re not paid, filing a mechanics lien may be the only way to get the owner and the general contractor’s attention, prompting everyone to look at the subcontractor’s situation and learn that they are not able to pay the bills. This may result in the parties agreeing to pay you through a joint check on the project, allowing you to continue to profit on the job, but not subjecting you to the financial problems of your customer.
13. Lien Claims May Entitle You to Attorney Fees and Other Costs
When you file a mechanics lien claim, most states have statutes that allow you to add attorneys fees, collection costs, filing costs, interest, and other expenses and charges on top of the lien claim (remember, don’t actually put them in your lien amount). This makes it a lot riskier for property owners and others on the project to dispute your debt because if they do dispute and refuse to pay, every day and every move they make subjects them to more expense.
14. Mechanic Liens Escalate the Situation and Prioritize Your Debt
Sometimes, getting the owner or prime contractor to open the coffers and pay your debt just needs a little push. Filing a mechanics lien escalates your collection efforts and shows the other parties on the project that you’re serious about getting paid. This prioritizes your debt and gets you paid.
15. Mechanics Lien Claims May Affect a Contractor’s Bonding Ability
If you file a mechanics lien claim on a bonded project, the contractor’s bonding company is going to be ticked off. It creates more exposure for them, and they usually require the contractor to answer to them for the lien claim right away. This increased pressure results in getting you paid.
16. Lien Claims Affect Relationships
Typically, the prime contractor has a good relationship with the property owner, the property owner has a good relationship with the lender, and subcontractors have good relationships with the prime contractor. There are relationships all around on a construction project, but they are all very delicate. When a party isn’t getting paid and files a mechanics lien claim, these relationships are heated up to resolve the dispute — resulting in getting you paid.
17. Mechanics Liens Create Leverage
When negotiating a debt, leverage is everything. Any attorney or collection agent will tell you, having a mechanics lien connected to a debt is going to significantly increase the chances of having that debt paid. A mechanics lien on the property gives your debt security, it involves more parties, it creates contractual breaches, and it’s hard to remove — a lot of the reasons explained above. For these reasons it creates leverage, which becomes another way the mechanics lien can help get you paid.
Having payment problems? Get your lien deadline.
Mechanics Lien Resources
What Is a Mechanics Lien? (Definition)
What Are Lien Rights? (State-by-State Lien Laws)
File a Mechanics Lien (File a lien now)
What Are the Chances that a Mechanics Lien Will Work?
For anyone who considers filing a lien on a project, this question comes almost automatically comes to mind:
“What are my chances that this mechanics lien is going to work??”
Before I take a lawyerly approach and “adjust” the question, the no frills answer is this: the chances that a mechanics lien works and gets you paid are pretty darn good.
Now for that lawyerly approach…
Before we answer this question, may we respectfully suggest that the question we should really be asking, is this: “Is a mechanics lien more likely to get me paid than some other route to recovering payment?”
The answer to that question – the right question – is a resounding “YES!”
A mechanics lien is the most powerful tool in construction payment, and when a valid lien is properly filed, it’s hard to find a better way to resolve a payment claim.
To better understand the chances of getting paid after filing a mechanics lien, context will help. Let’s take a look at the following:
- (1) what mechanics liens actually do
- (2) how liens are different from other recovery methods
- (3) why other parties want to avoid liens
1) What do mechanics liens actually do?
We sort of answered this question above.
Mechanics liens secure claims for payment. By filing a mechanics lien, a claimant clouds the title of the property. Understandably the phrase “clouds the title” may itself be a little foggy. Here’s another way to put it: a charge has been placed on the title. When such a charge exists on a property title, selling, transferring, and taking out loans against the property becomes a real headache, and in some cases, becomes flat-out impossible.
This is all due to the power of a mechanics lien. This power rests in the ability to foreclose (aka “enforce”) a lien. By doing so, a claimant can force the sale of the property in order to get paid the money owed.
2) How are liens are different from other recovery methods?
The real value in a mechanics lien is obvious when it’s compared to its “peers.” Here are some alternatives for recovering payment in construction: sending continued demands, a breach of contract claim (through collections, arbitration, or litigation), joint check agreements, a promissory note, or a personal guaranty.
But here’s the baseline reason mechanics liens are superior to the above remedies: it’s the only remedy that attaches itself a debtor’s property. While taking someone to court may seem like the classic route for going after non-payment, litigation is risky and expensive.
3) Why do other parties want to avoid liens?
The “other parties” we speak of are the top-tiered parties on construction projects. Specifically, we’re talking about the project/property owners, general contractors, and lenders. Read on as we’ll briefly talk about each.
As stated above, a property owner will have a tough time selling, transferring, or taking loans against the property when a lien is present. But what’s the big deal if the owner doesn’t plan on moving or taking out a loan or mortgage? Liens still present an issue.
A mechanics lien foreclosure could force the sale of the property. We probably don’t need to elaborate on that- involuntarily losing your property sounds like a nightmare. But there are other reasons liens are avoided, too.
While not necessarily a reason that an owner would avoid a mechanics lien, construction contracts often require that an owner must be defended and indemnified by a general contractor in the event a lien is filed. If a general contractor does not resolve the lien claim in these cases, they may be liable for all sorts of costs, including potential litigation costs and potential damages resulting from a breach of their contract if lien claims persist.
One reason lenders will want to avoid mechanics liens is that mechanics liens relate back. Without getting too technical, when multiple liens or encumbrances lie on a property, the priority (aka “order in which they’re paid”) is often first-to-file (aka “first come, first served”).
When we say that a mechanics lien relates back, this means that the mechanics lien’s priority is not based on when the lien was filed. Rather, the lien will relate back to when work began. If a loan or mortgage was taken against the property after that work begins, the mechanics lien could very well jump to the front of the line for priority purposes.
Bottom Line — Liens Work
Chasing after a delinquent customer – making phone calls, sending emails, and writing demand letters – all seem like fruitless endeavors. No matter how much effort you put into your collection attempts, at the end of the day, there’s nothing really on your side that will force a delinquent customer to pay. It can leave you feeling pretty helpless.
But mechanics liens change all that. Mechanics liens are powerful, and as we’ve shown above, they give you a quite a bit of leverage that can compel a delinquent customer to pay up. Not only are the chances that a mechanics lien will work pretty darn good, a lien is also the best option to remedy a payment situation on a project, by far.
If you’re having trouble getting paid on a project, we might be able to help. Let’s talk about getting you paid.