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Filing a mechanics lien protects against nonpayment and other financial pitfalls. However, when banks or other third-party lenders get involved in a construction project, the situation can become complicated. A mechanics lien gives parties furnishing labor and/or material on the project the power to combat these lenders for priority and get paid.
Who Are These Lenders and What Do They Do?
Lenders are an important part of the construction industry. Without financing from banks and other lenders, many construction projects would not be possible. That being said, lenders bring complications as well as benefits. When a bank or financing institution funds a construction project, they take a security interest in the property through a construction loan mortgage or deed of trust. This is a typical and necessary move in order to protect the financial investment they have made in the project. Problems for mechanics lien claimants may arise when priority clashes occur.
Contractors, subcontractors, and material suppliers on construction projects have the right to file mechanics liens in order to protect against slow or non-payment. One of the ways in which a mechanics lien can work to get you paid is by gaining the attention of the lender.
Filing a mechanics lien will definitely get the lender’s attention, but why? And, how does this help a mechanics lien claimant get paid? When you file a mechanics lien and money is tight on the project, the question may arise of who actually gets paid first: you or the lender. This is when the “lien priority” issue becomes important.
Early Bird Gets the Worm (Usually)
Imagine a scenario in which the owner of property you are working on goes bankrupt. This owner took out a mortgage on the property with a bank in order to finance the project. Now, you and the bank need to be paid, but the property on which the work was performed is not worth enough to pay both the lender and the mechanics lien claimants in full. This situation is not unheard of in the construction world and is a perfect example of why the question of priority is so important. The party whose claim has priority gets paid first, while the other party is forced to wait and take the leftovers – if there are any.
Generally speaking, the first-in-time, first-in-right rule applies when determining priority. This rule is simple in concept: the first security interest to attach to the property has priority over subsequent encumbrances. Where the rule may become tricky is in practice. The time when a security interest attaches to property can vary from state to state, and by type of security interest. Typically, a lender’s interest in the property would attach when the mortgage is properly recorded, and, often, a mechanics lien’s priority relates back to when work commences on the project.
Since the first visible commencement of a project may be prior to the recording of the construction loan mortgage, mechanics liens put claimants in a good position to recover.
Mechanics Lien’s Spinach: Super-priority
In certain circumstances, mechanics liens may have an even greater probability of getting a claimant paid. Some states allow for mechanics liens that comply with certain statutory requirements to take priority over mortgages despite date of attachment or commencment of work. This super-priority exists to make sure contractors and subcontractors get paid for their hard work no matter what. Oregon is one of the states that allows certain mechanics liens to take this super-priority.
While Oregon generally follows the well known first-in-time rule, super-priority is given to mechanics liens filed for new residential construction. This “bonus” given to the parties that are the first to build on empty residential property means that a mechanics lien against a new residential construction project has priority over all mortgages and construction lenders no matter when the liens or the mortgages were filed. Claimants should note, however, that this super-priority doesn’t apply to remodels, repairs, or other improvement to already existing residential projects.
Getting Attention Can Mean Getting Payment
Even in the absence of a bankruptcy situation, filing a mechanics lien gets the attention of a lender for other reasons. Mechanics liens being filed clues a lender in to payment issues on the project. Since the lender can control the disbursement of funds, the lender is in the perfect position to put pressure on parties to keep the project free of liens and running smoothly. Mechanics liens can mean delays, and delays cost everybody. Since most construction lenders don’t know the lower-tiered parties on a construction project, filing a lien (after providing the necessary preliminary notices) can be the key to a claimant being visible. And, visibility means it’s more likely the claimant will be paid. The squeaky wheel gets the grease for a reason.
What Does It All Mean?
Filing a mechanics lien is one of the best ways for construction participants to ensure payment, plain and simple. For the most part, states follow the first-in-time, first-in-right rule, but determination of a lien’s actual priority requires a fact and law based analysis of the particular project and lien at issue. The best way to protect yourself from losing out on payment, or being squeezed out by a bank or other third-party lender is to make sure you are up-to-date with your state’s laws and requirements. Filing a timely notice can be the difference between you getting paid or not.
Further, even if the money has’t run out on the project, the notice and lien process provides visibility. The more visible a project participant is, the easier it is for that party to get paid.
Other Ways A Mechanics Lien Works To Get You Paid
A mechanics lien claim will get the attention of lenders, and that’s an important feature of these documents. Nevertheless, it is not the only feature, and there is an assembly of other effects that flow from a mechanics lien filing; all of which will improve your chances of getting paid. We’ve put together a Free Guide to the 17 Ways A Mechanics Lien Works To Get You Paid. The full list of these mechanics lien effects are as follows:
- A mechanics lien encumbers the property
- A mechanics lien gets the lenders attention
- A mechanics lien gets the owners attention
- When mechanics liens are filed they cause contracts to get breached
- More parties become obligated to your debt
- A mechanics lien sets a firm deadline
- You can always fall back on the property for payment if you filed a mechanics lien
- People will pay you to avoid dealing with the mechanics lien
- Mechanics liens are hard to challenge
- Mechanics lien claims help when parties file for bankruptcy protection
- Mechanics lien will effectively freeze money flow on a project
- Mechanics lien claims may force parties into favorable joint check agreements
- Lien claims may entitle you to attorney fees and other costs
- Mechanic liens escalate the situation and prioritize your debt
- Mechanics lien claims may affect a contractor’s bonding ability
- Lien claims affect relationships
- Mechanics liens creative leverage