Collecting payment in full and on time is an ordeal that construction businesses face on a regular basis. Fortunately, contractors have an incredibly powerful payment tools at their disposal: the mechanics lien. The process of claiming a lien can be complicated, from calculating notice deadlines to determining the lien amount. One step in the lien process that can cause a lot of confusion: filing lis pendens. Here’s what contractors need to know about lis pendens — and how it works to protect your right to payment.
What is a lis pendens?
A lis pendens — Latin for the phrase “suit pending” — is a form of public notice filed with the county recorder in the property’s chain of title, informing that public that the property is subject to a lawsuit and a clouded title. It is only used for claims against property, like those resulting from a mechanics lien, mortgage, or tax lien.
Essentially, whenever a property is the subject of a legal dispute, the plaintiff will record a lis pendens in its chain of title. A lis pendens doesn’t necessarily prevent a property from being sold, but because it attaches to the title it follows the property rather than the owner. Financial institutions rarely lend money to purchase a property with a lis pendens, and prospective buyers generally don’t want to be held responsible for another party’s claim against it.
3 things contractors need to know
When contractors and suppliers work on a property and don’t receive payment, they have a legal right to file a mechanics lien on the property. Each state has their own rules about mechanics liens — including when and whether a lis pendens is required. Construction businesses need to ensure they follow the legal requirements to protect their payment rights. Following are 3 things construction businesses need to know about lis pendens.
1. Lis pendens is not a mechanics lien
A lis pendens is not a mechanics lien, but it is often required as part of the lien process. Remember that a lis pendens is a notice of a pending lawsuit. Because a lien is not a lawsuit in and of itself, a lis pendens isn’t generally a requirement of filing a lien claim. In fact, because the act of filing a lien is so effective at producing payment,
However, after filing a lien claim, a lis pendens may be filed with the county clerk to inform the owner — and the public — that a mechanics lien has been placed on the property and a foreclosure suit is pending. Pay close attention to the deadline to file. California’s mechanics lien law gives claimants 20 days to record lis pendens after filing suit to foreclose.
A lis pendens can also greatly expand the enforceability of a mechanics lien. If one is not recorded, the lienholder may not be able to enforce their claim against subsequent purchasers, since they did not receive proper notice.
It is important to note that the rules vary by state. The rules of the relevant jurisdiction should always be consulted before pursuing any payment collection strategy.
Additionally, most states (like California) require the notice to be served on all parties with an adverse interest in the property. This includes mortgage holders and other lien holders. If the necessary parties are not served, the lis pendens is considered void and invalid.
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2. Lis pendens may be required to foreclose
If a contractor still does not receive payment after filing a lien, they may foreclose on the lien and take the owner to court.
The contractor will record the lis pendens shortly after taking action to enforce the lien (if they haven’t done so already). In certain jurisdictions a lienholder cannot seek foreclosure without it. This notifies all prospective buyers that there is a lien on the property and the contractor is moving to foreclose.
The property owner can get a lis pendens removed after the lawsuit is resolved in court or by settling with the plaintiff out of court. The contractor can also decide to remove it by filing a motion to withdraw.
Once removed, a new one cannot be recorded without leave of court.
3. There are strict penalties for improper use of lis pendens
There are rigid rules governing when and how a lis pendens can be used, and most states have codified these rules into statutory law.
In almost all jurisdictions, it can only be filed in conjunction with a complaint, and that complaint must be a legal action affecting title to real property.
If a party suspects it was wrongfully filed, they can move to have it expunged. In some states, the party moving for expungement must demonstrate that it is more likely than not that the underlying claim (e.g., the mechanics lien) will fail.
Just as there are penalties for filing a fraudulent lien, improper use of a lis pendens can have severe consequences. The lienholder could be accused of slander against title and held liable for all related damages. They could also be forced to pay the property owner’s legal fees.
Some states impose unique penalties for inappropriate use of a lis pendens. Arizona, for example, grants three times the owner’s actual damages or $5,000 of statutory damages, whichever is greater, in addition to attorney’s fees.
Don’t skip a step in the lien process
When it comes to collecting payment, the mechanics lien is the most powerful tool available to contractors. And depending on the project’s state, a lis pendens is often an important part of enforcing a mechanics lien.
Contractors are fortunate to have powerful payment collection tools, like mechanics liens, at their disposal. However, a lis pendens is only suitable in certain circumstances, and contractors should adhere closely to the relevant procedural laws and rules.