Construction Liens Explained: How Unpaid Contractors Recover Payment

In construction, there are many forms of recourse available to contractors and suppliers who haven’t been paid. First and arguably foremost amongst them is the construction lien. Construction liens are a unique and vital recovery method available to those who go unpaid (or underpaid) after furnishing labor, supplies or equipment on a construction project.

Lien Basics

First, the basics: A lien is a security interest in a specific piece of property granted to someone other than that property’s owner. A valid lien acts as an encumbrance on a property, preventing its sale or transfer. If the lien is enforced, a lien can even force foreclosure or repossession of a property, to make whole the holder of the lien.

There are several different types of liens. For example, a mortgage lien is typically placed on a property by a lender for the duration of the loan. The IRS and state governments can also place a tax lien on property for unpaid personal or business taxes. 

Liens in Construction

A construction lien, widely referred to as a mechanics lien, is a statutory lien secured by real property for labor or materials used to improve property. A construction lien provides the lienholder with an interest in that property, which can be enforced against the property if a specific debt is not paid.

In layman's terms, this means that a person or company who contributes to a building project, but isn’t paid for any portion of their work, can actually secure an interest in the project itself — effectively gaining a stake in the property that is being built or improved upon.

Construction liens are available in all 50 states, though the parties entitled to lien rights, filing requirements and deadlines vary. 

Why Construction Liens Exist

Construction requires contractors to make significant financial investments up front, and getting paid for work on construction projects can be slow and difficult. The owner and lender only release payment after verifying that the work and materials have been put in place, well after the contractors and suppliers have incurred the costs. Unlike retail goods and other personal property, most improvements to real property can’t be returned. If the owner doesn’t pay, the contractor generally can’t “take back” their product and resell it to another party.

On top of all this, the construction payment chain can make it difficult for the owner of a property to identify everyone who has performed work on a project. Conversely, a subcontractor, sub-subcontractor, laborer or supplier will often have little to no interaction with the owner of a project on which they’ve been hired to work.

Construction liens exist to provide peace of mind to all those who provide labor or materials to a project, so that they can perform their work secure in the knowledge that they will be paid properly for their efforts.

Parties Involved in a Construction Lien

There are multiple parties to a construction lien are as follows:

• Claimant: The claimant is typically a contractor or material supplier on a construction project who wasn’t paid for their services. The claimant is the party filing for the lien.
  
• Hiring party: The hiring party is the person or entity that contracted with the Claimant to work on a construction project. This is often a project’s general contractor, though subcontractors can also hire other parties to work on a project, like a sub-subcontractor, a material supplier or an equipment lessor.
  
• Property owner: The owner is the party or entity that holds the legal title to a property. It is the owner whose property rights become encumbered with the filing of a lien.
  
• Lender: The lender is the financier of a construction project, if any. Some states require that a project’s lender be listed on a lien claim, if one exists.
  
• General contractor: If the general contractor is not the claimant, some states will require information from the general contractor. 

Preliminary Notice Requirements

In a majority of states, filing a preliminary notice is required for a claimant to be eligible for lien rights. A preliminary notice is a document sent to the owner of a property informing the owner (and, sometimes, the project’s general contractor and/or lender) of the intended work of a contractor, subcontractor, materials supplier or equipment lessor.

Preliminary notices may be termed differently depending on the state where the work is being performed. It may be called a notice to owner, 20-day notice, notice of furnishing, notice of right to lien, etc. But all operate with the same basic intention: to officially put on notice an owner, hiring party and/or lender of a claimant’s intended contribution to a construction project, and to secure future lien rights in the project should the claimant go unpaid for their work.

Though some states do not require the filing of a preliminary notice to be eligible for lien rights, it is always in the best interest of a contractor, subcontractor, materials supplier or equipment lessor to file a preliminary notice at the beginning of every job. Levelset has a wealth of free resources for filing preliminary notices in all 50 states.

Filing a Construction Lien

Though the process and requirements vary from state to state, there are generally four basic steps a potential claimant must take to file and enforce a valid construction lien.

1. Send preliminary notice: Many states require a claimant to have sent a preliminary notice within a specific window of time after beginning work on a project. A claimant who failed to send preliminary notice, or who was late in the sending of the notice, will often be ineligible for lien rights.
   
2. Send notice of intent: A notice of intent officially informs the owner, hiring party and/or lender that the claimant will soon file for a lien due to non-payment for their work on a job. Though only a handful of states specifically require a claimant to send a notice of intent, this notice can have a powerful effect — many owners will work quickly to resolve the issue to avoid a lien being placed on their property.
   
3. File the lien: A construction lien is typically filed with the county clerk in which the project is located. The paperwork and filing requirements vary by state, but will usually involve listing the work performed, the unpaid amount(s) at issue, as well as attaching copies of contracts and any required notices. Again, Levelset is an industry leader in the filing of construction liens in all 50 states.
   
4. Enforce the lien: Once a valid construction lien has been secured, if the claimant remains unpaid she or he will then become eligible to enforce the lien – meaning they can go to court and force the foreclosure sale of the property, in order to satisfy the unpaid money at issue to the lien.

Lien Filing Deadlines

Various deadlines exist for the filing of a construction lien — chief among them the deadline for the filing of the lien itself. This filing deadline will be different depending on the state in which the project is located, but should be somewhere within two months to a year from working on a job.

Also unique to each state is when the lien filing deadline begins to run. In some states, like California, the filing window closes 90 days after the completion of the job as a whole. In others, like Pennsylvania, the lien must be filed within six months of the specific claimant’s last day of work on a job. Knowing your state’s filing deadline is important.

Important as well is knowing the deadline to enforce the lien. “Enforcing” a lien, also sometimes referred to as “foreclosing” a lien, means going to court and forcing the sale of a property, so that sale proceeds may be used to satisfy unpaid debts. Lien enforcement is relatively rare, as owners will typically attempt to resolve the lien, either by contesting its validity or by satisfying the lien via payment to the Claimant.

Regardless, construction liens do not last forever: Claimants have a limited window to enforce their lien rights.

Lien Waivers: Releasing Lien Rights

A lien waiver is a document signed in exchange for payment that waives the signer’s right to file a lien for the amount specified in the waiver, akin to a receipt for payment in the construction industry. General contractors collect and record lien waivers from everyone who is paid on a project, both for accounting purposes and to protect against the filing of frivolous liens. While the majority of states are silent on requirements for the contents of a lien waiver, there are several states which mandate the use of a form specified in the statute.

Broadly, there are two types of lien waivers in the construction industry: conditional and unconditional.

Conditional Lien Waivers

A conditional lien waiver is an acknowledgment that a potential claimant will waive their right to file a lien when and if they are paid the money they are owed. With a conditional lien waiver, a potential claimant retains the right to file a lien if funds are not actually received. Conditional lien waivers can be signed for both partial and final payment.

There are two types of conditional waivers: the partial conditional waiver and final conditional waiver.

Unconditional Lien Waivers

Unconditional lien waivers are effective immediately when signed and are an acknowledgment that a potential Claimant is waiving any and all rights to the file a lien, making them much more risky for a subcontractor or supplier to sign. 

Subcontractors and suppliers should always insist on conditional waivers, as they satisfy both parties: Owners can take comfort in knowing that a lien will not be filed for properly paid out work, and Claimants know that a lien remains available should funds not actually come through.

Construction Liens and Public Works Projects

A final, but important, note on construction liens: Construction liens are unavailable on public works projects — there are no legal means for a private party to gain a property interest in a public school, hospital, highway or the like.

Rather, subcontractors, suppliers and laborers who go unpaid on these types of projects should instead file a claim against the payment bond of the general contractor overseeing the project. Payment bonds are required on all public projects past a certain statutory value.

The bottom line: Construction liens protect contractors.

In conclusion, construction liens are a key protection for those contributing to construction projects. Both property owners and contractors alike should make an effort to familiarize themselves with their state requirements, so as to best utilize these important regulations.

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