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Hoping and praying are not good options instead of a mechanics lien.
However, there are some other options available.
Liens can affect relationships (though not necessarily in a bad way!), and like many industries, relationships are key in the construction business. We would not recommend risking your ability to receive payment for fear of upsetting another party, but we understand that mechanics liens may not be a perfect fit for every situation. Instances such as when a property owner is recovering from storm or accident damage, or where the property owner is a trusted long-term customer both come to mind as situations where filing a mechanics lien to remedy a payment issue is perhaps not ideal. Depending on the unique circumstances involved in a given construction project, there are surely many other possible scenarios where a lien may not be the best choice.
Before we go any further, we want to make sure that everyone reading this knows that mechanics liens and bond claims remain two of the most powerful tools available to construction companies to secure their payments. When utilized effectively, both of these tools can virtually guarantee that companies will get paid the money they’ve earned on their projects.
However, for situations where filing a mechanics lien may not be ideal, there are other options available, including the five options that we’ll discuss in this article.
5 Other Options to Mechanics Liens
1. Promissory Note
It’s a great idea to use a promissory note to avoid a lot of the hassle of the court system. Cases involving promissory notes could be as simple as presenting the note and saying “pay up.” Plus, if the other party is unwilling to sign a promissory note at the outset of a project, you will know early on that payment problems could be on the horizon and use this information to secure your lien rights. (Yes, in a post about options other than lien rights, we just suggested to preserve your lien rights. Sorry, it’s what we do. Also, mechanics liens are just that powerful.)
Credit managers should have a promissory note template that’s ready to go on a moment’s notice. When a company owes funds and agrees to sign a promissory note, the company has admitted:
- (1) that the debt exists, and
- (2) they promise to pay according to a defined due date or structured schedule.
Promissory notes are preferable to a verbal promise to pay or even a simple written admission of debt because they’re basically self-proving in court.
Promises to Pay Mean Squat to Your Lien Deadlines
by Levelset CEO Scott Wolfe Jr.
2. Settlement Agreement With Confession of Judgment
Like a promissory note, a settlement agreement is an affirmation that a debt will be paid at a later date. A settlement agreement makes the most sense when there’s already a dispute on the project. A settlement agreement can look both backwards and forwards – a prior dispute can be spelled out, a resolution can be put to paper, and a structured method for making payments can be settled.
The confession of judgment part is not necessary, but it’d make life a whole lot easier. A confession of judgement would put you in the fast lane if things come down to litigation.
3. Post-Dated Checks
Another option is to get post dated checks from the party who owes you money. You’ll run the risk of the checks bouncing, but by using this method:
- (1) you have evidence of an admission of the debt, and
- (2) if the checks bounce, you’ll have plenty of firepower to recover the debt.
Every state has laws penalizing companies and individuals who write bad checks. Plus, the penalties are steep! Some states allow a creditor to recover 15%, 25%, or even 100% on top of owed amounts.
4. Personal Guaranty
A personal guaranty guarantees that some other party is going to pay the debt. These are typically seen at the outset of a project attached with a credit application, but there’s nothing prohibiting you from having another party sign a personal guaranty in the middle of a project (or even at the end when payment is already overdue). If personal guaranty wasn’t given at the outset, don’t be afraid to ask for one later. However, personal guarantees are only as good as the credit worthiness of the party signing it. So, beware. (And don’t accept a personal guaranty from anyone named ‘Wimpy’!)
5. Joint Check Agreement
Joint check agreements are a great way to battle payment issues in the construction industry. Essentially, all parties in a joint check agreement agree that any payments will be issued jointly to the parties. Joint check agreements are not a creature of statute, but a creature of contract. In other words, there is no state or federal law that governs joint check agreements specifically or offers any guidelines. All the guidelines would be contained in the contract or agreement signed by all of the parties.
This means that there is no such thing as a “standard joint check agreement.” Flexibility can be nice, but the result is that the industry is flooded with many different joint check agreement templates, and each one may create drastically different effects. As always, your best bet is to use a form you’re familiar with and triple-check to be sure you have the terms of the agreement nailed down.
There are even more options available in certain states, such as Stop Notices and the California Notice of Credit, to name a few. At the end of the day, however, litigation may be unavoidable even when the above remedies are utilized. That’s why we always recommend keeping your lien rights alive. Liens are the most powerful tool in construction, and they’re there for a reason. Don’t be afraid to file a mechanics lien. But if you really don’t want to file a lien, the above methods are some other available options.