The coronavirus outbreak has yet to show any signs of slowing down, and its impact on the construction industry is becoming apparent. Construction businesses right now are scrambling to find ways to protect themselves and secure their payments. However, there is one incredibly effective way that’s been available this whole time, mechanics liens. And filing mechanics lien claims now may be more important than ever.
Using mechanics liens to secure payment
Mechanics liens are hands down, the most effective way for those in the construction industry to ensure their right to payment. In fact, we’ve actually counted 17 different ways a mechanics lien can help you get paid.
Mechanics liens are statutory rights that help prevent unjust enrichment and protect a contractor’s rights to receive the money that they’ve rightfully earned. Liens allow project participants to make a claim for payment against the project owner’s property, instead of having to solely rely on breach of contract claims with their hiring party.
This claim grants the party a secured interest in the property itself. Once filed, the lien claim will either be paid by the owner (or the owner will force the non-paying party to) or force the foreclosure and sale of the property to satisfy the debt. There’s no better way to secure your right to payment on a construction project.
Why the mechanics lien is critical during coronavirus
Securing your right to file a mechanics lien is important for every construction project, no matter the circumstances. And, when push comes to shove, filing that claim is just good business practice to ensure payment.
The importance of using these rights is multiplied during the COVID-19 outbreak. Here are a few reasons why.
Payment delays will become more prevalent as COVID-19 spreads
The construction industry has always had a problem with cash flow. Even before the outbreak of the coronavirus, over half of all contractors in the US don’t get paid on time, causing serious cash flow issues. With all of the anticipated project delays, disruptions in supply chains, shelter-in-place ordinances, and more cash is going to be tight.
Taking all of this into consideration, it’s not much of stretch to predict that payment time will also begin to decline. This can be caused by either project or supply delays, unsavory contractors taking the money and running (which happens more so during hard times), or project developers and owners simply running out of money. If you are experiencing slow or non-payment, filing a mechanics lien is the best line of defense to help you get paid.
Mechanics liens survive bankruptcy
Speaking of financial struggles, there’s another issue that will become more and more prevalent as COVID-19 spreads. As the coronavirus-fueled recession expands, more construction projects will fail, and those in charge may have to file for bankruptcy. If a general contractor or property owner files for bankruptcy during the progress of a project, it causes a financial ripple effect on everyone involved in the project.
Whether or not a contractor will be able to collect their debt during the bankruptcy proceedings depends on whether their debt is “secured.” Secured means that it is “backed” or protected by some type of collateral.
A mechanics lien is a “secured debt” because it is a security interest in the real property. This is provide directly by the US Bankruptcy Code, “an allowed claim of a creditor secured by a lien on property in which the estate has an interest… is a secured claim.” Those creditors who only have a claim on the estate due to a breach of contract, will either collect next to nothing, or be completely discharged.
Time to file is running out
Lastly, one of the most important reasons to secure your mechanics lien rights now is that time is running out, in more ways than one. No one knows how long the impacts of coronavirus are going to last, or how much time you’ll have to file a mechanics lien claim. One major impact is that county recorder offices are shutting down all around the country. If you have a legitimate claim, get that claim recorded now. Even if the office isn’t allowing walk-ins, many are still accepting remote filings.
Has your project stopped due to Coronavirus?
As these offices and courthouses continue to close, many are releasing statements that some filing deadlines will be extended. And others have yet to release such statements. Even if many deadlines have been extended, imagine the floodgate of documents being filed when the office reopens. Mechanics liens operate under the “first in time, first in right” rule. This means that the earlier you file your mechanics lien claim, the higher priority it will receive against other creditors and claims. The lien claimant who files first has the first right to get paid.
Get that lien filed now while you can, to avoid competing with multiple filings later on.
Construction work may become more scarce
Another reason to file now is that construction work will start to become scarce. Many states are shutting down construction altogether, while others are allowing projects to continue if they are deemed “essential work.” Your next project may not be for some time, which is why it’s important to get your accounts receivable in order now. Secure those debts with a mechanics lien to prepare your business for the eventual downturn.
Additional construction & coronavirus resources
- How Contractors Can Survive the Coronavirus: Get Paid, Not Burned
- 9 Construction Lawyers Give Scary Advice for Contractors to Survive Coronavirus
- Construction & Coronavirus: 8 Contract Clauses that Could Sink You
- How to Get Paid in Construction During Coronavirus Suspensions and Terminations [Webinar]
- Are Coronavirus Pandemic Delays Covered By your Force Majeure Clause?