Home Improvement Acts (HIA) have proliferated across the country. The purpose of these acts is to protect homeowners from unscrupulous contractors taking advantage, taking money, and doing no work or terrible work. In some states, such as New Jersey, HIA violations can result in treble damages, attorneys fees, and forfeiture of the right to payment. While the HIAs are strict and written to heavily favor and protect homeowners, many interpretations by the Courts have softened the blow for contractors.
A recent case in Connecticut did not follow that trend. The case of Burns v. Adler, 325 Conn. 14, 155 A.3d 1223 (2017) related to a contractor‘s action against a homeowner (HO), arising from home improvement services on a residential renovation project. The contractor sued the homeowner for a balance due for work performed on the home, including an action for foreclosure on a Connecticut Mechanic’s lien. The contractor further alleged that the homeowner acted in bad faith in not paying the amounts due and owing.
In response, the homeowner claimed that the enactment of the Home Improvement Act, Conn. Gen. Stat. § 20-429 (Rev. to 2007), specifically removed a rule previously created by the courts that allowed judges and juries to consider whether a HO acted in bad faith.
The Court held that Judgment for the HO was warranted dismissing the contractor‘s breach of contract claim and request for judgment of strict foreclosure on a mechanic’s lien. The court held that the parties’ contract did not comply with the Act and the bad faith exception was inapplicable in the circumstances (notably the court did not get rid of the bad faith exception, but rather held that it did not apply to the facts presented to it).
In holding that the HO was not required to pay the contract, the court relied mainly on the CT HIA. The court found that the contract did not satisfy § 20-429(a) or (f) because it was not signed by the contractor, did not contain a completion date, and there was no proof that a completed copy was delivered to the HO.
The message from CT is clear: if you are a contractor, ensure you comply with the HIA, or the homeowner has the right to withhold payment, even if you completed your work in a satisfactory manner. To make sure you are in compliance, contractors should visit the Connecticut Department of Consumer Protection webpage that provides Information for Home Improvement Contractors.
Over the course of the last 15 to 20 years, the Connecticut Department of Revenue Services (“DRS”, i.e. the Taxman) has grappled with how to deal with when and how use and sales taxes are to be reported when a subcontractor or supplier has a “pay-when-paid” clause in their contract. The issue seems simple – taxes should only be paid when the subcontractor or supplier is paid – but from the DRS’s point of view, the materials were provided, they have a value, and taxes should be paid. The question is whether the taxes are paid at the time of shipment, transfer, or when money exchanges hands. In the end, the DRS agrees that money needs to exchange hands before sales or use tax is assessed, with some reporting and record keeping requirements.
Essentially, the DRS’s new guidelines, issued and effective as of April of 2017, permit as follows:
1. The pay-when-paid provision allows sellers of building materials and services an exception to the rule that tax is payable when the transaction takes place
2. It applies to materialmen on a construction project, which includes suppliers and subcontractors, among others. (To be considered a “materialman”, you must be entitled to file a Connecticut Mechanics Lien on a construction project).
3. The person or entity claiming the exemption must file an application with DRS by July 1 of every year showing that they or their company was, in fact, a qualified materialman for the last 2 of 4 years.
4. If the materialman then receives permission in writing from DRS, they will be permitted to collect and remit tax on sales of building materials and taxable services related to the materials to contractors “at the time and to the extent that the materialman receives payment.”
6. Record keeping requirements under this guideline include keeping most of the receipts and other records relating to the transaction for six years.
Note that if the receivable on a pay-when-paid transaction is factored (i.e. if the receivable is sold), the sales tax on 100% of the original sales price must be paid in the year the factoring is performed.
These new guidelines provide some clarity on how the pay-when-paid provisions work with the Connecticut tax code, and how subcontractors and suppliers should deal with non-payment issues when they are filing their tax returns.
Liens filed on private property including the land and buildings of charitable organizations are known as mechanics’ liens . In Connecticut, when a construction lien is filed with regard to work performed on privately owned property, it attaches to and encumbers the fee simple ownership of property.
Contractors who have a contract with an owner as well as subcontractors and suppliers who have a contract with a contractor can file a lien. Connecticut also allows design professionals to file liens.
In Connecticut, the lien claim must arise out of an agreement with, or the consent of, the owner, or of some person having authority to act on behalf of the owner.
Connecticut requires that a Notice of Intent to Claim Mechanic’s Lien be served for those who do not have a direct agreement with the owner for the work or materials/services provided. A Notice of intent to lien must be served after work has commenced but no later than 90 days after work has ceased. A notice of intent to lien does not need to be given prior to recording a mechanics lien, and service of the construction lien certificate itself meets the statutory notice of lien requirements.
Connecticut mechanics’ liens on private property must be filed with the town clerk of the town in which the project is located within 90 days of the last date the lienor provided materials or services to the Project.
Service of the lien must be served upon the owner by a process server if the owner residse in the same town as the liened property. Otherwise, service can be made by certified mail within 30 days after filing the mechanic’s lien. Be sure to serve each property owner separately.
Keep in mind that your lien is not valid forever. You have one year after filing the mechanic’s lien to enforce your lien by filing a lawsuit to foreclose.
Liens filed on private property or on funds relating to a public project are known as Mechanics’ Liens. When a lien is filed with regard to work performed on privately owned property, it attaches to and encumbers the fee simple ownership of property.
Contractors who have a contract with an owner as well as subcontractors and suppliers who have a contract with a contractor can file a Connecticut mechanics lien. Design professionals may also file connecticut construction liens.
Prior to filing a mechanics lien, some contrators should file a pre-notice, letting the owner know that you are eligible to file a construction lien. A notice of intent to lien is required for those who do not have a direct agreement with the owner for the work or materials/services provided. A Notice of intent to lien should be served after work has commenced, but no later than 90 days after work has ceased.
With regard to the Connecticut construction lien itself, on private property it must be filed within 90 days of the last date the lienor provided materials or services to the Project. This includes punch list work, and work related to the completion of the contract. It does not necessarily include repair work.
Filing a mechanics lien in Connecticut can help you get paid because it places an encumbrance on the property that makes it difficult to resell or re-finance the property without first removing the lien. This provides incentive to the owner to make sure all claimants are paid.
For more information on filing a Connecticut Construction Lien, a Connecticut Mechanics Lien, a Connecticut Stop Notice, or a Connecticut pre-lien notice, please visit http://www.lienitnow.com/connecticut-faq.asp.