What is a Mechanics Lien?
In legal-ese, a mechanics lien is an involuntary security interest in real property given to parties who furnish labor or material to improve that property, for the value of the labor or materials furnished. In clearer terms, a mechanics lien is a document filed (at the end of a process) that can result in a near-guarantee of payment, provided the requisite rules and requirements are met.
A mechanics lien secures the amount owed for work on a construction project with the underlying property itself. Just like with a mortgage, the property becomes collateral that may be sold to satisfy the debt. Mechanics liens work in many different ways: by encumbering the property such that it is nearly impossible to sell or refinance, by obligating parties all the way up the payment chain and not just the party with that hired the claimant, by freezing funding from a construction lender on the project until the lien is resolved, and much more.
Mechanics liens are built directly into the law of every state as a way to protect construction participants from nonpayment. This fundamental U.S. public policy of protecting the payment for construction dates back to Thomas Jefferson. For the most part, however, this mechanics lien protection is security available only on private projects. Public property is shielded from being encumbered by mechanics liens, so the general protection for public works is a payment bond – which substitutes a bond (guaranteed available money) for the property itself. In some limited circumstances, however a mechanics lien may be asserted against the project funds on a public project.
It’s important to note that mechanics liens only attach to and encumber real property (i.e. real estate, not other assets that are “moveable” property), and specifically, that mechanics liens are only allowed on the property that was actually improved. A few crucial points about mechanics liens arise from the attachment of the lien to the property improved. First, that means that a lien can’t be filed on one job for money owed on another, or against a different piece of property owned by the debtor for work done on another. Second, this means the lien attaches to the property of the owner even if the owner is not the party that owes the money to the lien claimant.
The long and short of it is, that mechanics liens exist for one reason only: To empower the contractors, suppliers, and others working in the construction industry to get what they’ve earned.
Do Mechanics Liens go by any other names?
It can be quite confusing, but mechanics liens can go by many different names (and spellings).
It’s common to see the word “mechanics” written in the possessive – “mechanic’s.” Additionally, mechanics liens also go by names such as “construction lien,” “property lien,” “laborer’s lien,” “materialman’s lien” or even an “artisan’s lien” or “design professional’s lien” in certain circumstances.
Who needs to use a Mechanics Lien?
This question must be broken down into two separate parts: Who needs to use a mechanics lien, and Who is allowed to use a mechanics lien.
The parties that may need to use a mechanics lien are parties who furnish labor or material to a work of improvement (construction project) and who remain unpaid. Although, as described below, there may be relationship or other issues to consider prior to filing a mechanics lien.
Slow payment and nonpayment are known and prevalent problems with respect to payment in the construction industry, and mechanics liens are one of the most powerful ways to ensure that payment will be made. Mechanics liens are, however, the four-letter word or the nuclear option with respect to construction payment. The same reasons that mechanics liens are so phenomenally effective are the reasons that companies usually wish to avoid them.
The question of who is allowed to use a mechanics lien to secure payment is a bit more complex. First the potential mechanics lien claimant must be a party entitled to mechanics lien protection. This determination varies from state to state, but usually requires (at the least) that the claimant furnished labor or material to a private work of improvement on real property, that the labor or material furnished was for the permanent improvement of the property, that all prerequisite notice requirements have been complied with, and that all rules and requirements related to the mechanics lien itself (timing, form, filing, service, etc.) have been met.
As mentioned, however, the parties entitled to mechanics lien protection, and both the prerequisite requirements and mechanics lien requirements all vary from state to state, from project to project, and by the claimant’s particular role. These determinations can be exceptionally complex, please see the state-by-state and role-by-role breakout section for more detailed information.
In what circumstances is a Mechanics Lien normally used?
Mechanics liens are normally used as a last resort to get paid for work done on or materials furnished to a private construction project. In many situations, the claimant may make a determination whether they intend to do future jobs with the property owner, GC, or others up-the-chain, and weigh that factor in the decision with whether to move forward with a mechanics lien. While a mechanics lien is a right and a tool given to construction participants in ensure payment, it is the “nuclear option” for recovery. For that reason, in many situations, the mechanics lien tool is used after all options to recover payment, other than initiating a lawsuit, have failed, or if communication has broken down on the project with respect to payment.
Does a Mechanics Lien change according to the project location?
Yes, while the fundamental concept of a mechanics lien (and generally, the ultimate result) does not change depending on the project location, pretty much everything else can and does.
From a practical standpoint, the prerequisite notice requirements, the recording requirements, the timelines and deadlines, the information required on the lien document, and more, can all change depending on the project location. These rules and requirements can be exceptionally complex, and a state-by-state breakout section outlining and describing the rules and requirements for every state can be found here.
Does a Mechanics Lien change according to the project type?
In a similar manner to whether mechanics liens or the rules surrounding them change with respect to project location, they can also change according to project type. Also similarly, the fundamental concept of a mechanics lien (and generally, the ultimate result) does not change depending on the project type, but other things can.
Mechanics liens against property are not allowed on public projects. And, there are situations in which mechanics liens and the surrounding requirements can change depending on the particular type of private improvement, as well – i.e. the rules regarding and availability of mechanics liens may vary based on whether the project involves an owner-occupied residential property. See the 50 state-by-state breakdown for more information.
What happens if I make a mistake with a Mechanics Lien?
Making a mistake with a mechanics lien can have significant consequences.
Lien statutes are interesting in that many have specific requirements that they be broadly interpreted in favor of expending lien protection, but they must be strictly construed with respect to meeting the statutory requirements and prerequisites. Simple or tiny mistakes or omissions can result in a mechanics lien being invalid (even if recorded). Losing the security afforded by the mechanics lien, and the associated near-guarantee of payment is only one potential consequence, however.
Filing a fraudulent or improper lien can result in stiff fines, damages, and criminal penalties. And, even if a lien is not fraudulent but is invalid for other reasons, failure to remove the lien can result in liability for damages incurred by the interested parties with respect to the invalid lien. Losing out on security for payment is a harsh enough consequence by itself, but adding liability or penalties on top is exceptionally significant and painful.
Is a Mechanics Lien usually paired with anything else?
Mechanics liens are generally stand-alone documents, but they come at the end of a process in which many other documents may be required. Most states have some sort of notice requirement that must be met prior to claiming a lien. And, there will likely be many requests for payment or other correspondence that are exchanged prior to the filing and service of the mechanics lien.
With respect to the lien itself, some states and situations call for certain documents to be attached to the lien as exhibits. For example, a copy of a required notice or affidavit of such notice’s delivery, a copy of the claimant’s contract or invoices, or some other supporting document may be required to be attached. These rules vary from state to state, and occasionally from project to project.