Even With A Valid Mechanics Lien There Is Occasionally Not Enough To Go Around.

Mechanics liens provide some of the best payment protection available to parties in the construction industry. The mechanics lien instrument allows the party furnishing labor and/or materials on a construction project to secure his payment with an interest in the property itself. This is great security, and can basically eliminate the worry of non-payment if used correctly. However, even the best plans sometimes don’t work out as hoped. Getting a security interest in the property itself is about as good as the security can be – it situates the contractor in a similar position as a bank – but there can still be potential pitfalls on the way to getting paid.

Even With A Valid Mechanics Lien There Is Occasionally Not Enough To Go Around

While generally rare, it is possible for a valid mechanics lien to go unpaid if the proceeds of the sale of the property liened are insufficient to satisfy all of the creditors. These situations are the situations in which it becomes necessary to determine the relative priority of each claimant’s claim. The further up the priority ladder, the more likely that the claimant will end up getting paid.

It’s worth noting that this situation is rare, the amount of mechanics liens that require a foreclosure action is already small, the amount that require a foreclosure action that not only results in an actual sale of the property, but also from which the proceeds are insufficient to satisfy all creditors is even smaller. When that does happen, though, a creditor (potentially a mechanics lien claimant) without top priority runs the risk of not getting paid. And, with the relatively recent state of the housing market in this country just a handful of yeas ago, the amount of houses that were over-leveraged was significant. The more value the property has, the more security it provides.

This shows an aspect of mechanics lien security that sometimes goes undiscussed. While the mechanics lien is the strongest tool available to make sure payment is forthcoming, and, when used correctly, can virtually eliminate non-payment it is not an infallible tool. If work is done on a property that is under water, the priority of the lien claim becomes paramount to determining the relative security provided by that lien. If the mortgage on the property has priority, guess what – the lien claimant would be out of luck. But, even if the property is worth less than the outstanding mortgage balance, a mechanics lien claimant may still be able to get paid if the mechanics lien has priority over the mortgage.

When viewed through this lens, it becomes clear why the value of the property has a direct bearing on the security it provides to the lien claimant. The more value the property has, the more security it provides.

The Rebounding Housing Market Means Properties Provide More Security

So, the recent rise in home values is good news for potential mechanics lien claimants. It’s an easy equation: the more the property is worth, the less likely it is that a mechanics lien will go unpaid.

The increase in security provided by mechanics liens in a market where values are rising is good news for construction companies and their credit managers. The even greater likelihood of payment can allow for a greater acceptance of business, which, in turn, can create a more robust cash flow.