Full Price Lien to Unpaid Balance Lien – What Changes?
States have different ways to determine what is “fair” in deciding which parties on a construction project bear the most financial risk, especially in regard to what amount a mechanics lien actually secures. The parties’ relative positions in the project can be a significant, or even deciding, factor in whether a party can recover through the use of a mechanics lien.
Many states can be defined as “full-price” lien states, in that an unpaid subcontractor is entitled to a mechanics lien for the full price of the labor and/or materials he/she furnished to the project. In these states, it makes no difference whether or not the property owner has already paid the general contractor. There is a risk that the property owner would need to pay twice – and then recover the difference from the general contractor who failed to pay the subs.
Some states, on the other hand, are “unpaid balance” lien states. In these states, an unpaid subcontractor’s mechanics lien is limited to the amount that the property owner has not yet paid the general contractor, (either when notice was given, or when the lien was filed).
Read more on this topic: Full Price Lien v. Unpaid Balance Lien States
In full-price mechanics lien states, the state has made a determination that the property owner is the party best suited to bear the initial burden of non-payment to subcontractors, or that the state’s economic interest in making sure that subs/suppliers get paid for construction projects outweighs the potential for double-payment by a property owner. In an unpaid balance lien state, the calculation has been flipped, and the state believes either the unpaid subcontractor/supplier is in the best position to bear the burden of non-payment, or that protecting property owners from double-payment is of paramount importance. Therefore, a subcontractor in an unpaid balance lien state is only entitled to lien for the amount still due to the general contractor, such that the owner is not liable for more expenses than originally contemplated.
West Virginia Changes to Unpaid Balance Lien for Most Residential Project
With the passage of HB 4347, West Virginia joins the ranks of the unpaid balance lien states, and limits the ability of subs/suppliers to lien for the total amount due. The bill, effective 6/6/14, provides an affirmative defense (or partial affirmative defense) to mechanics liens to the extent that the property owner has paid the general contractor. These protections extend to projects on existing single-family dwellings, and new residential construction of a primary residence; it does not apply to the construction of multiple residences as a single development.
Potential lien claimants in West Virginia would likely be wise to not wait on filing a mechanics lien if they are unpaid for work done on a residential project. While the time period in which a lien must be filed is unchanged by this modification of the lien law, the fact that a lien is only valid as to the amount still unpaid to the general contractor should prompt quick action. The longer a sub/supplier waits to file a lien, the more likely it is that the property owner has made at least some payment to the general contractor that may eat into the sub/supplier’s claim. Prudence, therefore, would dictate that a sub/supplier on a residential construction project in West Virginia not delay when unpaid.
These changes to west Virginia lien law go into effect on 6/6/14. If any other states follow suit and become unpaid balance lien states (as may happen with Pennsylvania) the Construction Payment Blog will be on the story.