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While parties on construction projects have at least some sort of protection in many places around the world, the mechanics lien is a uniquely American instrument. The mechanics lien has a long history within the United States (tracing all the way back to Thomas Jefferson), but that particular type of protection is relatively unknown outside U.S. borders. The idea that a subcontractor or supplier to a construction project would be able to force a sale (or partial sale) of the improved property itself in the event of non-payment was, and to a great extent still is, unheard of in countries with less available land, or an aristocratic class.
But what about project locations that are not in the 50 U.S. states, but are also not completely foreign – what about projects in US Territories?
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The first U.S. territory that we will take a look at is Puerto Rico. Depending on factors such as the claimant’s role in the project, there are three potential remedies in the even of nonpayment. In order for any of these remedies to necessarily apply, however, the contract for the project as a whole (not any specific subcontract) must be greater than $15,000. If that contract amount floor has been met, the three potential remedies available in Puerto Rico are 1) a Bond Claim; 2) a Claim Against Funds; and 3) a Mechanics Lien.
The first of the potential remedies to protect against nonpayment on projects within Puerto Rico is a bond claim. Bonds in Puerto Rico work in the same manner as any other payment bond familiar to parties in the construction industry, and claims against the bond are also made in generally the same way. While the process is similar there are, however, some interesting differences and important notes to consider.
First, the bond’s protection is statutorily limited to laborers and the employees of the contractor or subcontractor providing the bond. Further, the exact requirements for making a successful bond claim are only set forth by the text of the specific bond itself – NOT by statute. This means that a potential bond claimant in Puerto Rico must obtain a copy of the bond in order to determine the required notice and claim procedures, and associated deadlines.
Claim Against Funds
A claim against funds is the most universal protection available on Puerto Rico construction projects. A claim against funds may be familiar to some continentally based U.S. companies as it is a relatively common remedy on public projects, and states such as North Carolina have used the same remedy for private projects, as well. In Puerto Rico, making a claim against funds is an available remedy for any party who has furnished labor and/or materials to the project for which they are unpaid.
The claim against funds, therefore, cannot ever exceed the amount due to the contractor at the time of the claim. The claim is limited to the amount still left unpaid by the property owner to the original contractor on the original contract at the time the claim is made, so the quicker a claim is made subsequent to nonpayment the better. The claim against funds, therefore, cannot ever exceed the amount due to the contractor at the time of the claim, such that if there is nothing owed to the general contractor, no claim can attach.
No preliminary notice is required to make a claim on funds in Puerto Rico, but the claim itself must be in writing, and delivered to the property owner. As with corresponding claims in the continental United States, it makes good sense to deliver the claim to all parties “up-the-chain” from the claimant, whether or not delivery to that party is strictly required.
Contrary to how mechanics liens generally function in the 50 U.S. states, in Puerto Rico, a mechanics lien is the most restrictively available nonpayment remedy. A mechanics lien is only available to laborers, and is only available if no bond was provided on the project. If a mechanics lien is available, however, the procedure for obtaining that protection is relatively simple. No preliminary notice is required for mechanics lien protection, and the lien itself must only be delivered to the owner prior to initiating a suit to enforce. The suit to enforce the lien must be initiated within 1 year of the date on which the claimant last furnished labor and/or materials to the project.
Protection against nonpayment on construction projects in Guam is much more aligned with the traditional remedy and procedures familiar to most U.S. claimants. In Guam, the protection available to guard against nonpayment is the mechanics lien, and the requirements therefore are similar to the requirements of states like California and Arizona.
Guam’s mechanics lien statute is generally expansive as to the parties to whom a mechanics lien is available, all parties providing labor and/or materials (whether the materials are sold, leased, or prodded to be consumed) are entitled to mechanics lien protection. However, no mechanics liens can attach to property when the underlying project is a tenant improvement, mechanics liens are only available on private projects, and interestingly, when a project consists of constructing 2 or more separate residential units, each unit is considered a separate work of improvement, such that a separate lien would be required to protect the provision of labor and/or materials allocated to each separately.
In order for a valid mechanics lien to attach, preliminary notice must be provided by all parties other than wage laborers and parties in direct contract with the property owner, within 20 days of first furnishing labor and/or materials. Similarly to California and Arizona, the notice may be provided late without entirely destroying the claimant’s lien right, but tardy notice is only effective as to labor and/or materials furnished from the preceding 20 days. This preliminary notice must be personally served on the property owner, or served via certified mail return receipt requested.
The time by which the lien itself must be filed depends on whether the property owner filed a notice of completion. If a notice of completion is filed, parties with a direct contractual relationship with the property owner must file their liens within 60 days of the filing of the notice of completion, and all other parties must file their liens within 30 days of that date. If no notice of completion is filed, all claimants have 90 days from the completion of the project in which to file a valid lien claim.
The protection available in the Virgin Islands is the mechanics lien. Similarly to Guam, the protection available in the Virgin Islands is the mechanics lien. Also similarly to Guam, preliminary notice is required prior to the filing of a valid mechanics lien. This however, is where the similarities, at least as regards the required preliminary notice, end. In the Virgin Islands, there is no set time period in which the preliminary notice must be provided. It is a best practice, however, to provide the notice as soon as possible (either before or after starting work) because the notice is only effective to preserve lien rights against amounts not yet paid to the general contractor by the property owner. The notice, when given, must be delivered to both the general contractor and the property owner by registered or certified mail.
The lien itself must be filed within 90 days of the claimant’s last furnishing of labor and/or materials to the project, and generally must be foreclosed upon within 90 days of the lien’s filing. However, this enforcement deadline may be extended to up to 1 year (in several 90-day increments) from the date of filing the lien. The mechanics lien provides protection tied to the property itself, but that protection is limited to amounts not covered by bond protection if the property owner or the GC obtained a bond for the project.
Securing extensions of credit is important wherever a project is located, but if the project is located outside the 50 U.S. states the protections available, and the methods by which those protections are gained, may be different that what many companies are used to. With some knowledge of the protections available, however, companies can be empowered to accept and seek business in US territories without worrying about how it will effect their credit policies.