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Construction projects can be intricate beasts. There are a large number of different project participants: from the property owner and the lender, to the sub-subs and suppliers, and everybody in between – and the relationships between all of these parties are complex.
The complex web of participants means that payment issues arise more often than it seems like they should, and companies all look to best position themselves to get paid on time, and what they have earned. One of the most effective ways to ensure timely payment is through the use of construction notices (and associated mechanics lien rights, when required).
But, there are complexities that must be dealt with in the notice and lien process, as well. One situation that can seem especially troubling to project participants is if the property upon which the project occurred is sold. The outcome of this event depends on several factors, but is not necessarily bad for the potential claimant.
Property Sells Prior to Sending Preliminary Notice
If you are hired to furnish labor or materials to a project and the property is sold before you have sent preliminary notice (or prior to your preliminary notice deadline), the solution is fairly simple: send the preliminary notice to the actual (new) owner of the property.
Preliminary notices, when required, generally have to be sent within a certain time frame. If the deadline is met, and the notice is sent to the actual owner, you should remain in a secured position and able to file a mechanics lien, even if the property has been sold to someone else.
However, if you have already sent a preliminary notice to the old owner, and if you are still within your notice deadline, then it wouldn’t hurt to send a preliminary notice to the new owner as well, even though this may not be technically necessary.
Providing notice helps provide needed clarity and visibility on projects, and communication is always a good thing with respect to getting paid.
Property Sells After Preliminary Notice Deadline, But Before Lien Deadline
Generally, as long as you comply with the timing/deadline and other requirements for filing your mechanics lien, the new property owner will be on the hook. Since the lien encumbers the actual property itself, the property owners are kind of secondarily important (despite the fact that the owners or the GC are the ones who end up needing to pay the amount due).
Note, however, that while this is a general rule, there can be exceptions. Two of these exceptions are:
- The liability of certain purchasers may be limited by statute; and
- “Unpaid balance” liens work to bar claims against any third party purchaser.
In some states, the liability of certain purchasers is eliminated, or subject to different timing (or notice) requirements. Note, however, that in many cases this only applies to bona fide non-related third-party purchasers for value. Or in other words: an owner can’t protect the property from lien claims by transferring the property to their spouse or child.
Also, states in which mechanics liens are limited to the unpaid balance due the GC from the owner (rather than the full price of the labor or material furnished, if different) limit the ability to recover from subsequent purchasers by application of the unpaid balance rule. If the lien could only be valid for amounts the property owner still hasn’t paid the GC – that amount is likely to be non-existent when the original property owner sells.
Subject to the above, the sale of the property is not necessarily a limiting factor for a potential mechanics lien claimant. And in many situations, the claimant may proceed with noticing and liening the property as they otherwise would have had the property remained in the hands of the original owner.