Thanks to the strength of a mechanics lien, there are few things more effective in getting a construction participant paid what they have earned (as long as the construction participant in question has lien rights and has met all necessary requirements and deadlines). This means that potential lien claimants want to make sure that nothing beyond their control has detrimental effects on their potential lien rights.
One particular situation that some construction companies find worrisome is what happens if the property is sold before their lien is filed. It’s well known that a property filed mechanics lien encumbers the property and makes it difficult (if not impossible) to sell or refinance the property – but what happens if sale of the property occurs prior to a lien’s filing?
General Rule: New Owners Are Responsible
There are deadlines in every state by which a mechanics lien must be filed in order to be valid. But, if this deadline is met and the mechanics lien claim is filed on time, most states don’t care whether the property has been purchased by a third party who didn’t contract for the work.
A mechanics lien is a claim against the improved property – yes, the owner involved, but really is just kind of along for the ride. In a case where an innocent third party purchases the property, they will generally be liable to satisfy the lien claim and will need to seek recovery from either the original owner, or, potentially, the title insurance company.
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But, as always with mechanics lien law, there are some exceptions which we’ll discuss below.
Liability of Third Party Buyers May Be Restricted By Statute/Deadline
The liability of an innocent third-party buyer can be limited through a state’s specific mechanics lien law. One example is in Illinois, where the mechanics lien law sets out two completely different lien filing deadlines. These two deadlines restrict the liability of a third party purchaser by shortening the time period in which a lien may be effective against him or her.
The deadline by which a lien must be filed to be effective against all parties is set at 4 months after the claimant’s last furnishing of labor or materials to the project. If the lien is filed by that deadline, it doesn’t make any difference whether the property was sold, and Illinois follows the general rule above. After that time, however, there is a secondary deadline.
The secondary lien deadline in Illinois allows a claimant to file a lien up to 2 years after they last furnished labor or materials to the project. However, any lien filed after the first 4 month deadline but within this extended period is only effective against the original owner’s interest in the property. This means if the property was sold prior to the lien’s filing, the claimant is out of luck, and the unsuspecting third party purchaser and the original owner are both off the hook.
“Unpaid Balance” Lien States Make Sale of Property a de facto Bar to Lien Claims
States are generally either “full price” lien states, or “unpaid balance” lien states. In an unpaid balance lien state, the value of a mechanics lien is limited to the amount that has not yet been paid by the property owner to the GC. This provides protection to the property owner against being forced to pay twice for the same work. Though this provision of the law is not specifically directed to whether a mechanics lien is effective against a third party purchaser, it definitely has a significant practical impact.
Practically speaking, once a property owner sells the property to a third party, there is very little chance that any amount is still due to the GC. It’s much more likely that the property owner already paid out the entire contract amount in preparation for sale. Therefore, this is another area in which the general rule upholds the power and applicability of mechanics lien claims. But, like so many other questions about mechanics liens, this is one that must be examined to make sure it’s not derailed by one of the “it depends” exceptions.