Specific requirements to secure mechanics lien rights vary depending on the state on which the project is located. This variability between mechanics lien laws is a frequent topic for me, because just like modifications to mechanics lien law, the differences in requirements by state serves to further complicate an already confusing topic. These complications, though, besides being interesting, are what separate the credit department wheat from the chaff. Knowing the minutiae of the lien law, or knowing where to find resources and/or compliance help so you don’t need to know, can be the difference in securing mechanics lien rights, or letting those rights slip away. And that can be the difference between getting paid, and not. “no lien shall exist [on residential property]…if unreasonable advancement of credit was given by the furnisher of materials to the general contractor or subcontractor”
Suppliers in Hawaii Have Unique Requirements to Protect Mechanics Lien Rights
It sometimes seems like suppliers have the most arduous path to securing mechanics lien rights, whether or not that path is always more difficult is debatable – but it is definitely true for Hawaii. In Hawaii, material suppliers, at least on residential projects, have to comply with some unique requirements.
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Hawaii Code Sec. 507-50 provides, among other things, that “no lien shall exist [on residential property]…if unreasonable advancement of credit was given by the furnisher of materials to the general contractor or subcontractor”.
While only making reasonable extensions of credit is sound business sense, and a generally smart thing to do, the requirement that only reasonable extensions of credit are protected by mechanics lien rights is unique to this Hawaiian situation. This statute states that if a supplier supplies material to a contractor or subcontractor who may not be a fantastic credit risk, that supplier can be unable to lien for the materials supplied to that party. That’s a pretty harsh penalty.
So, who decides whether the extension of credit was reasonable (and thus if the material supplier is entitled to mechanics lien protection)? The circuit judge. The statute goes on to state that:
if the furnisher of materials has secured a credit application form from the general contractor or the subcontractor to whom the materials were furnished or has reasonably inquired into the credit status of the general contractor or subcontractor, the advancement of credit by the furnisher of materials shall be prima facie reasonable.
That is, if the supplier has its customer fill out a credit application (that meets the statutory requirements), the extension of credit is presumed to be reasonable. The information required to be included on the credit application, in order to gain the benefit of the presumption of reasonableness of credit extension, is lengthy, and includes: name, address, type of business, date business started, contractor’s license number, bonding companies generally used, banks used, list of current creditors, balance sheet, total of all outstanding construction contracts, and the incompleted portion of all contracts. Additional requirements exist for corporate accounts.
This is a unique requirement, and in my opinion a requirement that delves too far into the regulation of a company’s business decisions. In any event, suppliers in Hawaii should be wary, and make sure to check on the credit status of the party to whom they will supply materials on residential projects.