Episode #4 of the Construction Insider podcast takes a deep dive into the Mechanic’s Lien, its history, its rules, and how they offer builders a powerful tool to get paid without having to sue.
We’re here with Brent Chambers, Executive Vice President of CapitalPlus Financial Services, a factoring firm based in Knoxville, Tennessee that specializes in helping construction companies of all kinds. He has 37 years of experience, and engineering, construction operations, and finance. Brent, thanks for being here.
Brent: Well, good morning, Lisa. It’s good to be back with you.
Lisa: So Brent, over the last few podcasts that we’ve done together, you’ve made a point of just how difficult it can be for construction firms to be paid on a timely basis, or even to be paid at all. I’ve heard you mentioned the use of a mechanic’s lien to ensure payment. Can you tell us what this is?
Brent: Well, Lisa, first, let me say that nothing is going to get you paid faster than making sure you’re working for reputable firms with a strong history of paying their subs and suppliers and, and also that you have a solid contract that’s going to protect your rights and give you remedies for issues that occur at a worksite. All that said, no matter how much prep work you do on the front end, and how solid your contract is, there’s going to be a time there gonna be situations where the project is just going to go bad. And it’s going to put you in a very unfortunate position of having to fight for your payment. As you know here CapitalPlus we provide working capital to the construction industry by purchasing our client’s invoices. Now when we purchase an invoice, we step into our client’s shoes with regards to getting paid by their customer, they become our debtor. So we know from experience that our number one tool and backstop to protect and ensure that we can receive payment is the mechanic’s lien itself. And it’s the biggest tool for all construction contractors, whether it’s a general contractor or subcontractor.
Why is it called a mechanic’s lien?
Lisa: Let me just interrupt a second here. Why is it called a mechanic’s lien and how did it come about?
Brent: It’s funny the mechanic’s lien was actually conceived by Thomas Jefferson back in the colonial days. And back then a mechanic or to be called a mechanic simply meant you were somebody that worked with your hands. Therefore the name mechanic was given to the construction workers. Now back in the late 1870’s when they were trying to construct a new Capitol in Washington DC, the founding fathers needed to attract builders and builders and money to construct a new city. Now at that time, the only way a builder could actually force payment was to file a legal suit, a lawsuit due to a breach of contract. And truthfully, not many builders wanted to take that risk. So Thomas Jefferson was aware of lien-like privileges that had existed in other countries, which gave builders the right to lien property if they didn’t get their payment. Now, this was a much simpler way of then having to file a suit. And since those times all 50 states have adopted their own version of what is known as the mechanic’s lien.
How does a lien work?
Lisa: That’s really interesting. So how does the lien work?
Brent: In the last few podcasts, we keep talking hypothetically, I’ll do the same thing here. So let’s say you own a construction firm, and you offer steel and wood framing, you’re a framing company, and you are contracted by a general contractor to frame up a new commercial office space. And let’s say you agreed to a pay-when-paid term, something that we talked about several podcasts back. Now, let’s say you’re doing your job in accordance or you do your job in accordance with the scope. And the GC doesn’t pay. You ask him why and he tells you, I can’t pay you because I haven’t been paid by the owner. So despite the pay-when-paid terms that you have signed up for, if you’ve actually filed all of your notices required by the state laws, then you can actually file a mechanic’s lien. The lien itself actually appears on the public records, including the title, especially the title of the property. Now this lien creates a black cloud on the property title, and it is going to get the attention of the owner, the owner is not going to be able to sell or market his property without a buyer likely demanding that the owner pay off this lien.
Lisa: So in this example, you said I could file a lien if I had found all the required notices. What notices are you speaking of?
Brent: Lisa, let me say the mechanic’s lien laws are they’re not federal laws. Our mechanic’s lien laws are state statutes and therefore, they vary from state to state. Some state lien laws are extremely straightforward, but some are quite convoluted and hard to understand. Now, that being said, there are generally four steps in the mechanic’s lien process:
1. the first step is you send a preliminary notice. Now this isn’t required in all states. But this notice, when required, simply says to the GC and the owner, I’m out here I’m working on your project. And I have lien rights in case you don’t pay me.
2. The second step, in really one of the more important steps is a Notice of Intent. And that’s second, Notice of Intent serves as a warning that the payment is late and a lien will be filed if you don’t pay me. Now, this particular notice, as I said, is important because liens are viewed as taking something from an owner. And in this case, you’re taking away a clear title from the owner. So prior to the lien being placed on the title, the owner needs to be given the chance to settle up and pay you before you file.
3. Now, the third step in all states is the filing of the lien. And this is typically done at a state or county office, in most states, in most counties is the County Clerk’s office where the deeds are held. Contractors need to take note, listeners need to take note, in many states, if you’re not licensed, and it’s required, you can’t file a lien. So if you’re doing electrical work, and you’re required to have an electricians license, and you don’t have that and try to file a lien, you can’t. And even worse in some states, if you’re required to be licensed, and you’re not, you can’t even file a suit. So make sure that you understand if you’re required to be licensed.
4. then the fourth step is simply the enforcement of the lien itself should the filing of notice not induce payment?
Can you place a lien on anything associated with construction?
Lisa: Now, are you able to place a mechanic’s lien on anything associated with construction?
Brent: The answer to that is no, not everything is lienable. And what is lienable is going to vary greatly from state to state. But I want to be very clear out here. First and foremost, a mechanic’s lien cannot be placed against a public property, it’s just not allowed and that’s in any state. Now, in accordance with what’s known as the Miller Act, most government projects require what is called a Performance and Payment bond. And this is a bond that the contractors and sometimes subcontractors have to post. If you are a subcontractor, where it is a federal project and is bonded and you’re not being paid, then you can make a claim against the bond. There’s a lot more to this. I know we’re talking about mechanic’s liens and I might suggest that we talk about this on another podcast. But going back to the private property side, generally speaking, all labor or materials used for the permanent improvement of a real property is considered linkable. Real property Lisa is basically laying in the buildings at the construction site. Now, to say this even more simply to be linkable, your work must produce a permanent improvement to the land and buildings, and this improvement can be a renovation to an old building or a new construction. Now, a permanent improvement is defined as anything that is incorporated into the structure of a building or improvement to the land that occurs during construction. Now, a permanent improvement also includes supplies and materials that actually get consumed, or better put, get used up in the process of the construction.
So, probably the best thing to do is to give you an example here and try to put all this into context. In the example that you and I discussed earlier – you own a framing company, your company is warded a job that has a scope, which includes the design, fabrication, transportation, and installation of these tailor-made modular wall systems that your company’s making back at your fabrication shop. Now in addition to that, as part of your scope, you have to provide your safety equipment for your people. And the project, including safety netting, traffic codes, personal protective equipment, PPE (typically hard hat, safety glasses, gloves, steel-toed boots, and quite often a high visibility vest). Okay, now let’s assume you properly execute your work and of no fault of yours the project ends up going south in a shutdown and ultimately you’re not paid. So what can you lean in? And what can your lien include? First, we talked and he talked about the engineering design and design and submittal of engineering drawings is typically let’s say, typically, not lienable, because we can all state to vary, but it’s not linkable in some states because it doesn’t directly produce a permanent improvement to the real property. That is your engineers are not out there running a backhoe, they’re not swinging a hammer, and they’re not providing supplies. I will say in some states that if the designer is working directly for an owner, then the design and the engineering can be liened upon. Again, I go back to that. Understand it’s every state has different laws that have different requirements or different rights in terms of mechanic’s lien.
All right, let me put you on the spot and see if this is telling you is making sense. So based on what I’ve described here, do you think your safety equipment is linked?
Lisa: I don’t believe so.
Brent: Well, you’re right, the safety equipment is not lienable. And that’s because it is reusable. So your safety netting, traffic cones, PPE, they’re not being used up in the process. So ultimately, it is not lienable.
Now, let’s take the materials and the labor and the equipment that’s required to fabricate, transport, and install the modular wall systems that you’ve actually produced, is this lienable?
Lisa: Ah, yes.
Brent: Okay. You’re right. It’s lienable simply because you know, your labor, and your materials are directly producing a permanent improvement. They’re creating these modular walls that will be installed on the property. Right. So that is lienable.
Now I’m gonna, I’m going to add a twist here for you. Let’s say you fabricated the balls back in your fabrication warehouse, the project goes south, and the walls were never delivered to the job site. Now, the walls would not be lendable in this case, simply because they were never delivered to the job site.
Now, in that same circumstance, let’s say you fabricated the walls, you deliver them to the site itself, and then the job shut down. Are they lienable? So the answer is yes, the key is, the walls were made for a specific purpose. And they’re not reusable. And second, they were actually delivered to the project site. So understand, if you’re fabricating materials and or you’re creating something and carrying it to a job site, if it doesn’t get to that job site, it is not lienable.
Now I want to reiterate to the listeners, that lien rights vary largely from state to state. And they’re evolving. Because right now, as we talk, there are court cases that are going on. And legal precedent is being set by actual case law.
So as a construction professional, you really don’t need to be the person trying to figure out what’s lienable and what’s not. You should have a legal counsel, or there are consulting services, there are multiple ones that can guide you on a project-by-project, state-by-state basis. And let you know and keep you abreast of the lien runs. Now, CapitalPlus we understand lein rights and we think we’re pretty darn good at however, given the variation from state to state, and the ever-evolving nature of the mechanic’s liens, we have a consulting service that we use. We basically enter every project into the system with the consultant service, they do the tracking, they do the notices, and it’s a small price to pay to know that our lien rights are protected.
How do I file a lien? How does force payment?
Lisa: So Brent, say make all the proper notices, and I have lien rights and don’t get paid. What is next? And how do I file a lien? And even more important, how does this help me get paid?
Brent: It’s a great question, Lisa. And candidly, this is where the road meets the pavement, as they say. First, you can file a lien anytime your customer has not paid you regardless of the pay-when-paid terms. Let me kind of dive into that — the pay-when-paid terms, pay-at-paid terms do not have any bearing on your lien rights. That’s a contract between you and your customer. Let’s just say your customer can try to enforce those rights, but he can’t use that pay-when-paid or pay-if-paid to extend terms to keep you from being able to file liens so they’re separate matters altogether. Now, I will tell you that filing liens early often puts pressure on the general contractor and will often result in payment if for nothing else a joint check arrangement. However, filing a lien is often considered as a nuclear option that is taken into consideration if you wish to work for the customer again before being too trigger-happy now. I’m not advocating you fear us In a lien process, I’m not advocating that at all if you need to use it, I just encourage the construction companies out there in the audience to communicate to your GC and the owner that you need to be paid or you’ll have to file a lien before your rights expire. You need to make phone calls, you need to send, you know, formal letters and emails. Let them know, and give them every chance to pay before you actually pull the trigger.
Now that I’m speaking of exploration of your rights, each state in their laws will set a specific deadline and timeframe by which you must file a lien or your rights will expire. So these rights don’t go on forever and ever. Many states and I would probably say most states require you to file your lien within 90 days of your last furnishing of services or supplies. Last, furnishing means the last day, I did anything on that project of any kind, it’s not the invoice date, it’s the last day you furnish services or provided supplies. Now, that being said, some states are 45, and some are 60. Again, it goes back to make sure you’ve you know, the laws or more importantly, you’ve got a service helping you or, or you’re you’re looking and being advised by your legal counsel.
When a lien is required to get paid, so that is you have to follow in just to get paid. Know that each state has their own processing format. And I mean, format. You can go online and find that states have their own form in which you must use and the state laws will direct who actually receives the lien. Sometimes it’s the GC and the owner, sometimes it’s just the owner. And sometimes it’s everybody working on that project. So don’t play attorney. And don’t try to navigate this muddy water, engage your legal counsel, or as I said, or do what we do, as a company, get a consulting company that does this, and they will actually follow the lien for you.
Now, Lisa, the lien is an extremely powerful tool. So powerful that once file, you file the lien, there’s a 90% chance that you’re going to get paid before any legal action is required to be taken. So think about that. I file that lien and there’s 90% chance I get paid. It’s pretty remarkable. In this is so powerful, because owners don’t want their titles encumbered with the lien. I mean, a lot of people were developing projects, developing and building, you know, let’s just say a housing development. And they’re doing that to sell homes. If the property is leaned, you know, that title is, again, it’s encumbered. And you’re not going to go buy a home in a development where there are liens on the property, the liens are on your house.
If legal action is required and a foreclosure suit has to be filed, there’s a 65% chance you will prevail in court. And it’s simply because liens are hard to challenge and output and I put an escalation point on this: Liens are hard to challenge if it’s done right.
Advice when filing a lien
Lisa: Well practice is a lot of great information that we are running out of time. Any last thoughts for our listeners?
Brent: I said early, don’t be too trigger-happy. But I want to tell you that many of our customers will err on the other side and they tell us they’re afraid to send the required notices to the owner, to the GC, fearing that they might get angry and worse, they might lose the work. The mechanic’s lien has been around for two and a half centuries. And they’re in place in all 50 states. So this is not something that the reputable owners and GCs don’t know about. They know the process well, and they’re not going to be bothered with proper notices. In fact, they’re gonna question if you’re a reputable sub, if you’re not filing notices. So rest assured, the GC is filing their notices, I promise you they’re protecting their rights you need to do the same. But at the end of the day, if they are bothered by this, you’re going to finish your job but truthfully, you ought to question whether you want to continue to work for these folks.
Now, here’s another way to look at the lien process. The mechanic’s lien is simply an insurance policy. Every good businessman has general liability, they have worker’s comp you know. Bottom line, this is an insurance policy and like any insurance, you don’t want to use it and you don’t want to rush to use it. However, it is there for your protection when needed.
Last know the state laws you’re working in and file all required notices or your lien rights will not be there when you need them.
And lastly, let the experts handle this for you to make sure it’s done properly and timely. And folks listening out there, the one thing it does is it helps you sleep at night because it is a powerful tool and if somebody’s handling this for you, then hopefully you can rest at night. So, Lisa, that’s it. I want to thank you for having me again here today and for you hosting the podcast.
Lisa: Well, thank you, Brent. It’s always a pleasure. We appreciate your insights and your time explaining how a mechanic’s lien works. So if listeners would like more information, you can always reach Brent at CapitalPlus.com.
Thank you for listening to this episode of Construction Insider. We’re frequently updating our podcast so check out the others posted on our site visit often because we’re always adding new things. Until next time, take care.
Back to podcasts