While the best case scenario is to receive full payment after a mechanics lien has been filed, it doesn’t always work out that way. Cash-flow problems, the potential need to pay several different parties, or any number of other unfortunate circumstances can mean that the debt cannot be paid all at once. And, since some money is better than no money, the mechanics lien claimant is eager to take that partial payment.
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Mechanics Liens and Partial Payment
What is a lien claimant to do when partial payment occurs after a mechanics lien has been filed? There are three general options, and choosing how to proceed can be a high-stakes decision involving balancing the competing interests of the lien claimant and the customer, where choosing poorly could invalidate the filed lien.
Option One: Do Nothing and Leave the Mechanics Lien in Place As-Is
This is generally the safest option. When given the choice, a lien claimant should generally accept the partial payment, say thanks, and leave everything exactly how it is.
While many states have rules regarding the removal of a lien after its satisfaction (when the claim giving rise to the lien has been paid in full) that is not the case for partial payments that do not satisfy the lien, but rather only reduce the amount claimed to be due. Leaving the lien in place as-is means that the lien continues to provide security for the entirety of the lien claimant’s claim. In a foreclosure action, if necessary, the amount recovered by the lien claimant would be the value of the work performed or materials supplied less the value of any payment to that point. The property owner is in no worse position for the lien being left unmodified.
However, some parties require action to be taken by the lien claimant upon the making of a partial payment. While this may or may not have any actual effect (I’ll get to that in a moment), it provides some comfort that reciprocal actions are being taken by each party to resolve the payment issue.
Option Two: File a Partial Release/Satisfaction of Lien
This is, generally speaking, the second safest option for the lien claimant. In this option, an entirely separate document would be filed, in the same location in which the lien was originally filed, that states partial payment has been received, and that the lien claim is released to the extent of that partial payment. So, for example, if the original claim was for $75,000 and the lien claimant was paid $25,000, the lien claimant could file a “Partial Lien Release” referencing the original lien and saying something like:
The Claim of Mechanics Lien filed on ____ date, in the records of ______ County, as instrument number ____________, was originally filed for the amount of $75,000. $25,000 has been paid to the Lien Claimant, and the Claim of Mechanics Lien recorded as instrument number ___________ is released solely to that extent. The new total of the amount secured by the lien recorded as instrument number ____________ is now $50,000.
You may notice, however, that I mentioned that the release may or may not have any effect. Some states have laws on the books that any release of lien is not effective unless the lien claim is paid in full. However, to the extent that the party making the partial payment requests the lien claimant to take some action to “modify” the lien claim to reflect the partial payment, this is likely the safest option.
Option Three: Amend the Existing Lien to Reflect the New Total Lien Amount
By far the riskiest option when confronted with this type of situation is to amend (or attempt to amend) the previously filed lien itself. While modification of liens is possible, and sometimes set out specifically by statute, the time period for successful modification of a lien is limited to the time period in which a lien could have been filed originally, if it is allowed at all. This means that if the time period in which a lien could have been filed has already run out, the lien would not be able to be properly modified.
An attempt to modify the face of the lien claim can, and likely will, result in the date of filing being re-set to the date of the modification, for the purposes of calculating compliance with lien deadlines. This is a very dangerous area for a lien claimant. A valid and properly filed lien can easily be extinguished by attempting to modify the lien at a later time. The lien could be viewed as released, and the modification as a new lien for the different amount. If the “new lien” is filed outside of the statutorily mandated time period, it’s not valid.
Will this happen every time? No, probably not, but why take the chance when safer and easier options are available?