What Is A Mechanic’s Lien And How Can I Avoid One On My Property?
Lauren Nowacki9-minute read
June 15, 2021
Inspired by similar privileges in Europe and even laws traced back to the Roman Empire, Thomas Jefferson introduced the modern mechanic’s lien to help encourage the rapid and robust development of the nation’s capital – and the nation itself.
While mechanic’s liens have helped homes, communities and even nations get built, they can cause financial distress to owners who have one put on their property. To avoid a mechanic’s lien on your home, it’s best to understand how they work, the steps to take to prevent them and what to do if you receive one.
What Are Mechanic’s Liens?
A mechanic’s lien is a type of mortgage lien that allows anyone who contributed supplies or labor for renovating a property to seek payment, using a legal claim against the home. Essentially, a mechanic’s lien, or financial encumbrance, transforms an unsecured debt into a secured one – and that security is the value added to the home.
Who Can File A Mechanic’s Lien?
In real estate, most mechanic’s liens are filed by contractors, suppliers, subcontractors, and laborers who provided products or services on a permanent home improvement or remodel. They typically file a lien when a permanent improvement to real property goes unpaid.
What Is The Purpose Of Mechanic's Liens?
The reason for mechanic’s liens is to make sure all parties involved get paid for labor and supplies. They can come about in two ways: either the homeowner didn’t pay the contractor, or the contractor didn’t pay the supplier or subcontractor.
Yes, you read that correctly – even if the homeowner pays the contractor and the contractor is the one who doesn’t pay the parties involved, the law states those parties can go after the homeowner and their property. This means the homeowner could end up paying for the construction project twice. And if they don’t, they could lose their home.
Why Is The Homeowner’s Property Encumbered Even When The Homeowner Paid Their Bill?
It often surprises homeowners to learn that subcontractors and suppliers could go after them even it was the contractor who didn’t pay them. While it may seem unfair, including the property owner in the dispute can help put extra pressure on the contractor to pay the other parties what’s owed to them. Essentially, this is meant to encourage settlement instead of having it go to court.
Of course, the homeowner can sue the general contractor. However, this legal process can take much longer, and, in the meantime, the homeowner is still on the hook for taking care of the mechanic’s lien on their home by paying the amount owed with a deadline of only a few days to a few months.
It can also be argued that the homeowner is the one who benefited from the work and that the value of the work – what’s being used to secure the debt – went to the homeowner, not the general contractor.
How Does A Mechanic’s Lien Work?
While the process for placing a mechanic’s lien typically follows the same basic steps, mechanic’s lien laws and procedures depend on the laws of the state where the property is located. Here’s what you can expect, though it’s wise to look up mechanic’s lien law in your specific state.
Construction Professionals And Suppliers Send A Preliminary Notice To The Property Owner
A preliminary notice helps protect the right of construction professionals to make a claim in the future and is required by some states. Typically, it’s required that any party that doesn’t have a direct contract with the homeowner send a preliminary notice within 20 – 30 days of starting their work. This notice is sent at the beginning of a project to inform the property owner, general contractor and any other parties that the sender is working on the project. It will usually contain such information as the name and address of the property owner, the name and address of the party that hired them, their contact information and a description of the work they’ll be contributing.
A Notice Of Intent Follows
If the party has not been paid, they may file a Notice of Intent (NOI), which alerts the general contractor, property owner and others involved that the unpaid party plans to file a mechanic’s lien. This is an effort to resolve the issue before there is a need to file a lien.
You must not ignore this notice, even if you’ve paid the general contractor like you were supposed to. Remember, payment could still fall on you if the general contractor fails to follow through on their payments to their workers or suppliers.
The Lien Is Filed
If payment is still not made, the lien claimant files a lien claim form with the property clerk in the county where the property is located. The lien claim form will likely include such information as property data, work performed or supplies provided and the amount owed. Depending on the state, the lien claimant has a certain number of days after their last day of work on the project to file a lien.
Once a lien is filed, the property will not be able to pass a title inspection. With a lien on the property, it may be difficult to sell the home.
The Lien Is Either Released Or Enforced
Once the lien is in place, the unpaid party is responsible for either removing the lien, if their claim is satisfied, or enforcing the lien, if it is not. This means the unpaid party can bring a court action to foreclose on the property. If this happens, the property owner should seek the advice of a real estate attorney.
What Should I Do If …
I Get Notice Of A Lien On My Property?
First, ensure that the lien is valid by making sure they followed the proper steps and provided the correct information. Ensure that they provided a preliminary lien notice (if required by the state) and notice of intent and that the lien form was filled out correctly and filed with the county clerk within the number of days allowed after completion of the project.
If you haven’t paid your contractor, do so as soon as possible. If you haven’t paid them because of a dispute, contact an attorney right away.
If you’ve paid the general contractor, but get a notice from a subcontractor or supplier, contact the contractor to discuss the situation and demand payment. Mechanic’s liens are designed to have the property owner put pressure on the contractor to pay the subcontractor or supplier and avoid court.
If I Paid The Bill (Twice) And I Still Have A Lien On My Property?
Even if you’ve paid the contractor, and later paid the subcontractor again to resolve the lien, you must make sure that the paperwork for removing the lien is completed before making the payment.
Without completed paperwork, the lien may not be removed. And even if you ensure the lien was taken care of, the title search might still show a defect if you attempt to sell the home. By the time you sell your home, the subcontractor may have moved or passed away and wouldn’t be able to verify. It could take time and be expensive to resolve the matter, so make sure you have a record of the lien being satisfied and removed.
In extreme cases, where there is a high level of distrust between the parties, an escrow account can be set up so the payment is made ahead of removing the lien but not disbursed until after the lien is removed.
I Want To Buy The Property With The Lien And The Seller Refuses To Pay?
If you’re in the process of buying a home and the title search uncovers a mechanic’s lien, you may have some tough – and possibly expensive – choices to make if you really want that property.
You, the buyer, can either walk away – with or without your earnest money deposit – from the purchase or negotiate with the seller so that the lien is paid out of the proceeds of the sale. It’s important to know that lenders will not proceed if the title search reveals a title defect until that defect is lifted.
All Cash Buyers
Just because all-cash buyers don’t have to go through the mortgage process, it doesn’t mean they shouldn’t take some of the same steps to protect their investment and their future. If you’re an all-cash buyer, you should still perform a title search before buying a property. If a mechanic’s lien shows up, you can either negotiate with the seller or, if finances allow, simply agree to pay off the lien.
Any buyer who does not include a title contingency in their offer might have to forfeit their earnest money. A title contingency will allow you to back out if the title search reveals an issue, like easement issues or liens, and receive your deposit back. Without a title contingency, you’ll likely lose that deposit.
I Have Recently Purchased Property And Just Received A Notice Of Lien?
When this happens, there are two possibilities, depending on the situation.
Your Title Insurance Will Cover It
Title insurance protects you from outstanding liens on the home should the title company miss a lien during the title search. Keep in mind that title insurance is optional and protects against past errors, not future problems.
You’re On The Hook
If there’s no owner’s title insurance, or if the lien is new – even if the work was done before you purchased the property – you’ll have to pay. Liens are attached to the home, not the owner, and will stay with the home even when it changes owners. Even if the lien is for work done before you owned the home, as the new owner, you are responsible for the lien. That’s why it’s important to have a title search conducted before the purchase to make sure there are no liens on the home and to get owner’s title insurance in case a lien slipped under the radar during the search.
What Can I Do To Recover From Damages Caused By Mechanic’s Liens?
To collect on lien-related damages, a lawsuit against the previous owner or the contractor may be the best – or only – option, depending on the situation. There are also legal remedies that can compel a lienholder to remove the lien if the evidence proves the expense was paid or they didn’t follow the correct pathway or state laws to file the lien. Keep in mind that lawsuits are costly and may take time. It’s best to talk to a real estate attorney to see if taking legal action would be worth it and to determine the best course of action.
How Can I Keep My Property Free Of Mechanic’s Liens?
There are a few ways to help keep your property free of mechanics liens. Take these precautions when purchasing a home, planning a home project and entering into a contract.
- Perform a title search. Always run a title search on the property, whether required or not, before purchasing it to ensure there are no existing liens on the property.
- Get title insurance. Make sure you have owner’s title insurance to protect you from a mistake made during the title search.
- Do your research on your general contractor. Read reviews, search for any red flags in their past payment practices, discuss how they pay third-party workers and ask for references.
- Request preliminary notices. Make sure you receive preliminary notices from all parties involved on the job, so you can keep track of everyone getting paid for their contribution. Even if they’re not required by state law, request them anyway.
- Make payments with joint checks. That means making checks out jointly to the general contractor and third party. This way, neither party can cash the check unless the other endorses it.
- Ask for a lien waiver provision in your contract. This absolves the property owner from the responsibility of payment for anyone the general contractor is supposed to pay.
- File a notice of completion. In many states, parties must file a mechanics lien within a certain number of days after project completion. This document makes the date of completion official and, in some states, can even shorten the filing deadline by several days or even months.
- Pay the third parties yourself. Instead of having payments go through the general contractor, make direct payments to the suppliers and subcontractors. Always pay on time and in full. However, keep in mind that you may have to deal with income tax and social security deductions this way, so it’s best to keep this as a last option.
- Keep all documentation involved in the project. This includes contracts, preliminary notices, the notice of completion, receipts and other paperwork.
The Bottom Line: Mechanic’s Liens Help Ensure Payment
Mechanics liens help ensure that all parties involved in a project are paid. The labor and material debts are secured by the value they add to a property. Even if a property owner has paid the general contractor, they could still end up responsible for paying the debt if the general contractor fails to uphold the responsibility of paying subcontractors or suppliers. That means a property owner could end up paying for the project twice. If they fail to make payment, the mechanic’s lien could be enforced, and they could face foreclosure to satisfy the payment.
If there’s a mechanics lien on a home you’re thinking of purchasing, you would be responsible for paying it if it’s not satisfied before you buy the home. Liens stay with the property; they do not move with the previous owner. To learn more about home buying and what to watch out for when purchasing a home, check out more articles in our Learning Center.
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