A mechanic’s lien is a powerful tool for contractors to ensure that they get paid for work they perform on real property. This type of lien can be placed against a home or other piece of real property to secure payment for services, labor, and material provided during the project. While this resource can help protect your security interest, you may not be able to take advantage of it if you have inaccurate information.
Some of the most common myths regarding mechanic’s liens include:
Myth #1: Any Contractor Can Secure a Mechanic’s Lien
One common misconception is that any type of contractor can file a mechanic’s lien. However, mechanic’s liens are usually reserved for those who provided labor or material for a real property project. The people who can file mechanic’s liens are identified by state law.
A subcontractor or supplier to a subcontractor may not be able to file a lien. Also, unlicensed contractors are often barred from filing a mechanic’s lien.
Myth #2: A Mechanic’s Lien Form Can List All Costs, Penalties, and Fees
A mechanic’s lien must follow specific state laws regarding the costs, penalties, and fees that can be included in it. If you include costs that are not permitted under the relevant state law, the mechanics lien may be invalidated, and you may lose all protection that it would have otherwise provided.
State law determines which costs can be included, but these may include:
- The value of the labor or supplies
- The amount of labor or supplies that was provided and agreed to under the contract
- The amount of labor or supplies that were part of a signed change order
While most states do allow it, rental equipment or items that were not installed may not be allowed to be included with the lien. The costs to perfect the lien or attorney’s fees may or not be included in the lien amount.
Myth #3: There Is No Time Limit on Filing a Mechanic’s Lien
A dangerous myth is that you can file a mechanic’s lien at any time. Sometimes a contractor may not consider filing a mechanic’s lien until the owner of the real property has refused to pay. However, if this is too far after the last day of work on the project or when the supplies were provided, the contractor may not be able to file a mechanic’s lien at all. Or, in other cases, the contractor may only be able to file a lien on property only for the value of work or materials that were most recently provided but not for older work or supplies. Ultimately, all states have time limitations on filing a lien, making it important to lien it now, rather than later, to avoid missing the deadline.
Many states require a contractor to deliver a preliminary notice to the general contractor and property owner at the beginning of the project. If this notice is not filed, the contractor may not be allowed to later file a mechanic’s lien.
Additionally, there are often deadlines after work is completed. If the contractor tries to be patient and give the owner or general contractor more time to pay, he or she may wait so long that the deadline passes. All states require mechanic’s liens to be filed within a specific deadline, which is often within a short time from substantial completion of the work.
Myth #4: Filing a Mechanic’s Lien Guarantees Payment
Filing a mechanic’s lien only reserves your right to payment for the labor or supplies performed. If proper work was not provided and the property owner has a valid claim, the mechanic’s lien may not help secure payment. The issues may be sorted out in litigation.
Additionally, other liens may have priority over your mechanic’s lien. A deed of trust may have priority over other claims. If a mistake was made in the mechanic’s lien process, payment may be avoided.
Myth #5: A Mechanic’s Lien Ensures Prompt Payment
The final payment on a construction project is often the most difficult to secure. If the property owner has a legitimate complaint about the quality of the work or there were extra work charges that are not reasonable, a dispute may delay a prompt final payment.
Myth #6: I Can Correct Mistakes on a Mechanic’s Lien Form
Some contractors may inflate costs or include penalties or fees that are not permitted under state law. Contractors may make mistakes such as:
- Overstating the value of the work
- Including amounts not permitted under the mechanic’s lien statute
- Violating other portions of the lien statute
The contractor may not have the option to correct a mechanic’s lien form after it is filed that includes incorrect information. Additionally, the contractor may wind up liable to the property owner for placing an illegal lien on the property.
Myth #7: Mechanic’s Liens Last Forever
The mechanic’s lien process is designed to help ensure payment for work. However, states often require that a contractor act on the lien by perfecting it within a limited amount of time. The time limit depends on state law, with some states providing contractors with only three months from the filing date of the lien.
It is important to know the deadlines in your state so that you can maintain the leverage to receive your final payment.
Myth #8: Bankruptcy Can Defeat the Purpose of a Mechanic’s Lien
Some contractors are worried that someone else associated with the project may file bankruptcy. They may think that this action will defeat the purpose of the lien completely. However, in some situations, a mechanic’s lien may still be effective even if there is a bankruptcy filing.
Myth #9: A Mechanic’s Lien Isn’t Worth the Trouble
A dangerous myth is that a mechanic’s lien is not worth the trouble. However, having a valid lien in place may be the only way to protect your business. A valid lien can help ensure compensation for the value of the labor or supplies you contributed to the project. A valid lien requires a complete understanding of the mechanics lien process to help avoid potential problems.
A LienItNow representative can discuss the steps necessary to file a valid lien. Contact us today to get started on protecting your construction project receivables.