This week’s question comes from a General Contractor in Alabama. With the housing market in such a volatile state, we thought several people may be wondering what happens to their lien rights when a property is sold. Construction lawyer and payment expert Matt Viator weighed in.
Question: “We are waiting for payment from an insurance agency, but they are preparing to close on a property. If they do not pay us by the time they close on the property, how does that affect our lien rights?”
Answer: Mechanics liens are powerful tools when it comes to payment disputes, and a big part of that is the fact that lien claims allow contractors to actually gain an interest in the property they’re filing against. Of course, this makes a property harder to sell, as the real estate title is far from clear. But what changes if you don’t file a lien before the property is actually sold?
As Matt Viator notes, “If a mechanics lien claim is being considered, and if it appears that a sale of the property is imminent, it’s usually a good idea to make sure that the lien can be filed before the property is sold…if the property is actually sold before the lien is filed, that can make recovery a bit more complicated.”
It’s going to be a good idea to make sure that a mechanics lien is filed before the property gets sold so that the owner can proceed with the sale with that knowledge. This keeps the entire process above-the-table for the owner and buyer alike. Generally, lien claims stay with the property, so if a property is sold prior to a claim being filed,
“If the owner knows there’s a lien filed, they’re generally required to inform the buyer,” Viator adds. “What’s more, during the process of the sale, the buyer’s title company and/or mortgage company will likely become aware of the lien filing and could halt the process until the mechanics lien claim is resolved.”
There are a number of other scenarios where keeping people informed is generally going to drive the best practices.
If a property you’re working on has been sold before you’ve been able to send preliminary notice, sending notice to the new owner of the property is enough for lien rights to be maintained. The same is true if preliminary notice was previously sent to the prior owner — sending notice to the new owner creates a strong line of communication that can help curtail payment problems.
If a property is sold after the preliminary notice deadline, but before the lien deadline, the new property owner is responsible for payment. However, this also opens up the situation for some fairly specific exceptions.
In some states, the liability of certain property purchasers (legitimate third-party purchasers) is eliminated or subject to different timings than the original property owner. Similarly, in some states where mechanics liens are restricted to the unpaid balance due from the project’s general contractor to the owner.
However, as Levelset’s Nate Budde notes, there’s an element of danger to this. In some of these situations “the lien could only be valid for amounts the property owner still hasn’t paid the GC – [and] that amount is likely to be non-existent when the original property owner sells.”
That said, exceptions are just that. The bottom line when it comes to situations like this is that property sale is not necessarily a limiting element when it comes to making a lien claim.
Lien claimants usually still have the power to push forward with placing a lien on a property regardless of who the owner is, as rights stay with the property itself.
However, staying ahead of the situation is key. Filing a lien claim before a property sale can be a major difference in terms of the speed of getting payment issues resolved.
Matt Viator suggests the following resources:
- I’m on a Construction Project and the Property Was Sold. What Happens to my Lien Rights?
- 17 Ways That Mechanics Liens Force Payment
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