Sometimes, you end up on a construction project where someone other than the property owner is paying for the work. When that happens, does it really change anything? Does it affect preliminary notice requirements? If there’s a payment issue, does it affect your lien rights? Can you even file a mechanics lien? And if so, against who — the property owner, or the person paying for the project?
While this isn’t an everyday scenario, it (a party other than the property owner paying for the project) still happens. Read on for a brief discussion of what to be aware of should you ever find yourself in this situation.
Why Would Someone Else Pay for the Project?
There are several scenarios that would result in someone other than the property owner paying for the construction work. One of the most common is when the job is a tenant improvement.
Other times, the work is paid for by an insurance company, and insurance work comes with its own set of challenges.
But there’s another, less common scenario that still occurs from time to time — what if another individual or entity besides the property owner is paying for the work?
Here’s a hypothetical scenario to show how this might work…
Every year on the Fourth of July, ‘Bob’ puts on a big fireworks show in his backyard, even though such a display is illegal in the community where he lives. But this year, things got a little out of hand, and an errant rocket ended up starting a fire that damaged the roof of his next door neighbor’s house, ‘Jim.’
After the smoke cleared, Jim hired a roofing contractor, ‘FoolProof Roof,’ to repair the damage to his house. Feeling guilty that his pyrotechnics caused the damage, Bob told Jim that FoolProof Roof should just send the bill directly to him — he’s going to pay for the work out of his own pocket.
Unfortunately, Bob had been a little careless with his finances recently, and he maxed out all of his credit cards and used the equity in his house to go out and buy that fishing boat that he always wanted. Whether he realized it or not, Bob had no way to pay for the repair to Jim’s roof. He was tapped out, financially-speaking.
So, what happens to FoolProof Roof in this situation? Do they have lien rights? Against whom?
Does It Matter Who Pays?
The issue at the center of this article gets to the core of mechanics’ liens and how they operate. In the event of non-payment, filing a mechanics lien gives you a right against the property that’s being improved during the construction project.
The lien on the property essentially functions like a bank’s mortgage. This means that the property owner’s ability to do anything with the property – such as sell it or refinance it – is severely curtailed until the debt is satisfied.
So, in a situation where someone else is paying for the work, it does not change the function of a mechanics lien. It doesn’t matter if Bob and Jim had a signed contract stating that Bob was paying for the work, and it doesn’t even matter if ‘Bob’ is listed as the customer on FoolProof Roof’s paperwork. Regardless of who is paying for the work, the mechanics lien claim “attaches” to the property itself.
Therefore, in this example, FoolProof Roof would have a lien right against Jim’s property, and Jim as the property owner would ultimately be responsible for the debt.
Bob’s debt to Jim is another story entirely!
What Should You Do?
We recommend as a best practice to send any documentation – especially including any preliminary notices – to both the property owner and the payor (the party that is paying for the work). It will increase transparency on the project and ensure that you get paid in a timely matter even if there is a complicated payment structure.
And if you live next door to a guy like Bob, you might want to consider moving!