Contractor Termination and Homeowner paid him

2 weeks ago

I am a homeowner and have a potential mechanical lien coming my way. We have terminated our GC and he has told his subs he will not be paying them because of his termination (no pay if paid clause in place). We have been paying the GC through our lender after the HUD inspections have passed, and he signed the lien waiver and release for his termination payment which contains verbiage that all subs have been paid. Could there still be a claim if the sub was paid through the GC, and we have these forms proving payments?

Senior Legal Associate Levelset

Good question. Alabama is typically considered an “unpaid balance” state (rather than a “full price” state). Meaning, sub-tier lien claimants will usually only be entitled to file a mechanics lien to the extent that the project’s prime contract was owed payment but not paid. i.e. If the prime contractor is paid in full, generally, their subs and suppliers won’t be entitled to lien claims – they’d have to go after that contractor if they’d already been paid for the work. So, to some degree, fears about liens from subs and suppliers might be quelled a bit.

However, note that if subs and suppliers properly sent a Notice to Owner, they’ll be entitled to file a mechanics lien for the full value of what they’re owed but unpaid unless the owner disclaimed responsibility upon receiving that Notice to Owner. Levelset discusses Alabama preliminary notices and the potential for “full price” liens, here: Alabama Does Require Preliminary Notices — And Strict Compliance Required.

In any event: regardless of whether a lien claimant is actually entitled to a valid and enforceable mechanics lien, that claimant can typically actually have their lien filed. Recorders offices generally have neither the authority nor the bandwidth to investigate each claim made. Granted, if a filed lien is improper, it should be relatively easy to challenge the filed lien, and the claimant might even have to pay for the owner’s attorney fees and maybe even damages if they’ve filed an improper lien.

With all of the above in mind, note that Alabama owners will typically have a bit of leverage over their contractors in making sure that no subs or suppliers file lien claims. Under § 35-11-227(b) of the Alabama mechanics lien statute, a contractor will have to defend any legal action – like an action to enforce a filed lien – on behalf of the owner. So, if a lien is filed and a legal action erupts from that filing, the contractor will be on the hook for the owner’s defense. Reminding a contractor of this fact can help convince that contractor to try and smooth things over with their sub.

I hope this information has been helpful. I think these resources should be valuable, too:
(1) I Just Received a Notice of Intent to Lien – What Should I Do Now?
A Mechanics Lien Was Filed on My Property – What Do I Do Now?

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