Determining whether a project is public or private is incredibly important when assessing lien rights. On privately owned projects, mechanics liens may operate as normal (whatever “normal” may be, under the state’s lien laws). When work takes place on public property, a mechanics lien won’t suffice. That’s one of the reasons that the Miller Act and state Little Miller Acts exist – rather than lien property, subcontractors and suppliers may file payment bond claims that function as a sort of lien replacement. Having a method of recovery for private projects and another for public ones is a great source of security, but what about when the project is a little bit of both? We’ve actually tackled this issue in the context of P3 projects, but a recent news story out of Missouri presents a new issue. A tax planning agreement between a city and a private company has (probably) left subcontractors with no lien rights, and it appears that no payment bonds were present.
Pet Food and Mechanics Lien Problems
This story comes from this article from The Joplin Globe.
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Let’s set the stage:
Heartland Industrial Services (“Heartland”), a pet food manufacturer, operates a manufacturing plant in Joplin, Missouri. In an agreement with the city, Heartland receives tax breaks through a bond-lease program. Under the agreement, the city of Joplin technically “owns” the manufacturing plant and Heartland pays the city “lease” installments. Because the city “owns” the property being “leased,” Heartland does not have to pay the taxes associated with owning the property. In all other respects, Heartland acts as the property owner.
While the city and Heartland utilized a nifty tax relief system, construction work was performed at the Heartland plant and subcontractors went unpaid. When those subs went to file mechanics liens on the property, they were likely surprised to find that the property was owned by the city of Joplin. The liens were filed anyway, but they stand little chance since the property is public. It appears that no payment bonds were present on the project.
It should be noted that this type of bond-lease agreement is not unheard of, and that it sounds like a pretty smart deal for everyone involved. Heartland obviously receives a lightened tax load, but the city of Joplin also gets something out of the deal – the Heartland plant is bringing jobs to Joplin in exchange. For a city that has been working at revitalization, the agreement makes a lot of sense. However, that is no excuse for creating mechanics lien problems.
The solution to this problem is simple, and it wouldn’t cost the city a dime. Win-win!
The public authority should require payment bonds for construction projects on tax relief plans such as this one. A short clause in the bond-lease agreement could likely fix the issue. By requiring a payment bond, the authority would give subs and suppliers the protection of a surety. If payment problems arise in the course of a project, an unpaid party can make a claim on the contractor-provided bond much in the same way that they can file a lien on a private project.
Want to know more about surety bond claims? We’ve got you covered: What is a Surety Bond Claim?
A lien is a powerful tool for payment. That’s why when mechanics lien problems arise, the situation can get scary for the claimant. Since mechanics liens are not available on public projects, it’s important to make sure that claimants are still protected. This is usually accomplished through the use or surety bonds on public projects. Had they been present in this situation, the subcontractors would not be losing a legal battle with the city.