March 10, 2022
By Cody W. Lyons
Most individuals are familiar with the general principles related to construction liens; if a customer fails to pay a contractor for work performed, the contractor may file a lien against the customer’s real property where the work was performed. What many people may not be familiar with is that there are meticulous requirements that must be satisfied in order to file a valid lien. Additionally, there are many lesser-known implications and consequences that result from a contractor’s or owner’s action, or inaction, in relation to a materialman’s lien.
When a property owner fails to pay a contractor for improvements made to real property, one of the contractor’s most powerful and efficient tools is to file a lien against the property. This is a well-known tool amongst contractors; however, it is frequently used improperly or not in compliance with statutory requirements, resulting in an invalid and unenforceable lien. Lien statutes are in derogation of the common law, are strictly construed against the lien claimant, and thus, liens must be in strict compliance with statutory requirements to be enforceable. A lien may be invalidated if notice of the lien is not sent to the owner within the time required, if the lien lacks proper language regarding the expiration of the lien, if it is not filed within 90 days of the date the work was completed, or for a number of other procedural reasons. If a contractor’s lien is found to be invalid, and the 90-day limit to file a claim of lien has expired, a contractor will lose its security interest in the real property it has improved.
When a contractor does satisfy all of the statutory requirements and holds a valid and enforceable lien, the contractor then has a tool that is extremely effective with collection efforts. A properly recorded lien is filed with the real estate records of the county wherein the subject property lies. A recorded lien effectively conveys an interest in the property to the lien claimant. This may result in a loan default if the property has been pledged as collateral. Additionally, a lien will constitute a title defect, which will prevent an owner from refinancing or selling the property without first satisfying the lien by paying the indebtedness or posting a bond. Most importantly, the contractor may seek a court order to perfect and foreclose upon the lien, which can result in the property being auctioned to the public in order to satisfy the indebtedness.
Sometimes property owners have a factual basis to assert that they do not owe their contractor any money and that a lien should not have been placed on their property. In such a situation, the owner may attempt to force the contractor’s hand by filing a notice of contest of lien. When a notice of contest is filed, the contractor must file a lawsuit against the property owner within 60 days of receiving the notice or else the lien will be extinguished. Owners may also attempt to wait out the lien deadline: If the contractor does not file a lawsuit to perfect the lien within one year of filing the lien, the lien will expire. These tactics, however, can cause the owner significantly more harm if they indeed owe the money claimed by the contractor. If the contractor is forced to file a lawsuit, it will incur legal and attorneys’ fees, which could be assessed against the owner if the contractor wins on its claim.
Contractor’s liens are tools for payment collection. All contractors should become familiar with the benefits and rights that come with liens. While liens are a very important tool for contractors, it is imperative that they are executed in strict compliance with the law and within the relatively short deadline permitted.
Cody W. Lyons is an attorney at Flint, Connolly & Walker, LLP and currently represents individuals and businesses in numerous corporate and real estate matters. Cody routinely advises investors, sellers, and lenders on negotiating and structuring real estate and corporate transactions. Cody is also a business owner and real estate investor and has knowledge and experience with various asset acquisition and exit strategies, including note purchases and assignments, tax sales, estate acquisitions, foreclosure sales, and stock purchases and sales.