12.12 Mechanic's Liens

12.12.1

In General

Mechanics and materialmen are persons who furnish labor or materials in the construction of improvements on a parcel of land, and generally include architects, engineers, general contractors, and subcontractors. A mechanic's or materialman's lien is a statutory lien in favor of mechanics, materialmen, and other parties so designated by statute, for the purpose of securing the payment of services rendered and materials supplied in the construction, improvement, repair, or maintenance of a specific property.

The lien is called a mechanic's lien and the person furnishing the work or material is the lien claimant.

Mechanic's lien law is purely statutory and is established by the law of the state wherein the property is located. A few state constitutions and all state statutes include mechanic's lien provisions, which are state specific. State mechanic's lien laws can be described by order of priority relevant to construction loan mortgages; and these laws are conveniently grouped in the following four categories. Each state has enacted mechanic's lien legislation and a few provide on the subject in their constitutions. It needs to be noted that mechanic's liens legislations vary greatly among the states.

Mechanic's liens laws can be grouped into four general categories:

  • Construction loan mortgages that always have priority over mechanic's liens if certain procedures are followed.

  • Construction loan mortgages that have priority over mechanic's liens so long as all advances under the mortgage are "obligatory."

  • Construction loan mortgages have priority over mechanic's liens until a lien is filed.

  • Construction loan mortgages have no priority over mechanic's liens.

The mechanic's lien statutes and court decisions reflect a strong public policy favoring contributors of services and material and preferring payment to mechanics and materialmen from funds designated for improvements.

12.12.2

Time Of Commencement And Termination Of The Work

The whole essence of the mechanic's lien law revolves around two concepts:

  • The time of commencement of the work and

  • The time of termination or completion of the work.

All the possible obligations, the inchoate rights, the priorities, the statutory liens, and the legal causes of action are based on and depend on a time element, when the work was commenced and when it was terminated.

There is no agreement among the state legislations as to what this time is. In the enunciation of these pivotal concepts, each jurisdiction has followed its own set of principles and rules, many times the effect of a combination of legal acts and physical actions.

12.12.3

General Contractors And Subcontractors

The determination of the claimant's condition as a general contractor or a subcontractor is important. Mechanic's lien law establishes fundamental distinctions between the rights of general contractors and subcontractors and the conditions for their enforcement.

The definition and scope of both terms lie exclusively in the applicable state law.

12.12.4

Property Subject To A Mechanic's Lien

In general terms, mechanic's or materialmen's liens attach primarily to the structures that are improved. Additionally, such a lien may attach to all or a portion of the land upon which the structure is situated, but not to personal property or chattels.

State mechanic's lien laws vary and the differences arise from the quantity, location, use of the land, and value of the improvements.

12.12.5

Interests In Land That May Be Affected By A Mechanic's Lien and Requirement of Owner Consent

The mechanic's lien attaches to the fee or to so much thereof as required for the use and occupancy of the improvement, if the fee owner (or authorized representative) has given express or implied consent to perform the work or to deliver the materials.

However, if the owner or agent owns a property interest less tan a fee, and the fee owner has not expressly or impliedly consented to the improvement, the lien attaches exclusively to the property interest owned by the contracting party.

An owner may prevent the attachment of the mechanic's or materialman's lien to the land or improvements by showing the absence of owner consent or agreement to the work contract. State statutes recognize an absence of owner consent in the following situations:

  • Land owned by a minor

  • Land owned by an incompetent

  • Work ordered by any of the following:

    • Tenant

    • Contract vendee

    • Not all of the joint tenants

    • Not all of the tenants in common

    • Only one spouse (title is vested in both)

    • Life tenant

    • Any other party with an interest in the land.

In mechanic's lien law, the term "owner" usually includes all interests, legal and equitable, and interests subject to under contracts to purchase. Property interests less than an estate in fee simple absolute can become subject to a mechanic's lien.

Mechanic's lien statutes. It is common for lien statutes to exempt public property improvements from attachment and enforcement of mechanic's liens. Unless there are statutory provisions to the contrary, a mechanic's lien does not attach to public property, owned by the United States, individual states, counties, municipalities, and other governmental agencies.

12.12.6

Persons Entitled To Be A Mechanic's Lien Claimant

Not every mechanic or materialman is entitled to become a mechanic's or materialman's lien claimant because certain kinds of labor and materials are not lienable.

Mechanic's lien statutes enumerate the persons and laborers of every class who are entitled to file a mechanic's lien claim or a materialman's claim based on work performed or material furnished in connection with a specific parcel of land.

The statutes also delineate the kind of work and type of material that is lienable. Some states distinguish between "on-site improvements" (labor and material furnished only to the structure or the land upon which it is situated) and "off-site improvements" (streets, sidewalks, curbs, gutters, and public utility installations).

12.12.7

Time At Which A Mechanic's Lien Attaches - Priorities

The statutory time designated for attachment of a mechanic's lien determines priorities between the lien and the claims of purchasers or other encumbrancers. State statutes vary in defining the time of attachment; and various statutes have set the attachment time as follows:

  • Time at which the contract is signed or the work was ordered.

  • Time of commencement of the construction.

  • Time at which the services or materials are first furnished.

  • Time of completion of the work.

  • Time of filing the claim.

  • Time at which the notice of the lien is recorded, filed, posted, or served.

The priority of a mechanic's lien is wholly a function of the locally applicable statute. Each state statute must be researched to determine the priority of a mechanic's lien in relation to:

  • Another mechanic's lien.

  • A bona fide purchaser of the improved property.

  • A mortgage affecting the improved property.

  • A judgment creditor holding a lien on the property.

  • A governmental authority having a lien on the property.

  • A vendor's lien for the purchase price of the land.

  • Other creditors of the owner of the property who is subject to bankruptcy proceedings.

  • Statutory homestead exemption.

12.12.8

Perfecting A Mechanic's Lien Claim

In order to perfect and establish the priority of a mechanic's lien, the claimant must comply with the enforcement provisions of the statute in the state where the land is located and the work was performed.

A state statute may set different enforcement procedures for contractors, subcontractors, materialmen, or for persons not in privity with the owner.

Typically, the lien claimant may be required, (1) to file a claim or statement of lien in the manner, form and within the time established by statute; and (2) to notify the owner upon the timely filing of the claim in the public records:

  • However, in Virginia, a general contractor is not required to notify the owner upon the timely filing of the claim in the public records

  • A Virginia sub-contractor is required by statute to timely file the claim, and to provide notice to the owner and to the general contractor. See Va. Code Ann. Sections 43-1 through 43-23.

  • The Connecticut statute requires both the general contractor and the sub-contractor to serve notice of intent to lien in the format of the statutory lien certificate. The sub-contractor must also notify the general contractor or his agent. See Connecticut General Statutes 3349-33 et seq.

  • Statutory notice to the owner of the property is in the format established by statute.

Strict compliance with all statutory requirements is required to perfect the mechanic's lien, including the procedures pertaining to service or publication. The Connecticut Statute requires the claimant to file a lis pendens within one year after recordation and to commence an action to foreclose the lien. Failure to comply automatically discharges the lien, without any further action on the part of the property owner or general contractor.

In most states, mechanic's lien claimants are required to enforce the claim by timely judicial action if the claim is not paid within the statutory period of time.

Statutes require strict compliance with the requirements established by law for the perfection of a mechanic's lien. Generally, in this area, the lack of strict compliance with the statutory provisions is of fatal consequence.

12.12.9

Duration Of A Mechanic's Lien

Mechanic's lien statutes usually provide that a mechanic's lien ceases to exist unless proper steps are taken to enforce it within a specified period of time after its filing. This period, depending on the jurisdiction, ranges from a few months to two years. Any action filed to foreclose the mechanic's lien within the statutory time will extend the duration of the lien until the final adjudication thereof.

There is a certain degree of risk in the elimination of a mechanic's lien from a title commitment or policy on the basis that the statutory time for its enforcement has expired and that the lien has become enforceable. If the statute has been tolled, suit may be filed during the statutory time period remaining after the toll is lifted.

12.12.10

Enforcing A Mechanic's Lien

When a mechanic's lien has been duly perfected, the normal procedure for this enforcement is a suit to compel the sale of the affected land for the payment of the claim within the period established by statute. This procedure is purely statutory. In most states it is called a foreclosure action and follows many of the particulars of an equitable action to foreclose a mortgage. The enforcement action must be brought in the county where the affected land is located. These statutes do not give a right of redemption from the foreclosure of a mechanic's lien.

In certain jurisdictions, the enforcement of a mechanic's lien is cummulative to other remedies available to enforce the obligation which such lien secures. "Stop notices" or "notices to withhold" are examples of cumulative remedies used to enforce mechanic's liens.

Compliance with all statutory conditions precedent is required to enforce a mechanic's lien.

12.12.11

Loss Or Extinguishment Of A Mechanic's Lien

The right of a claimant to assert or enforce a mechanic's lien may be lost or extinguished in the following ways:

  • Agreement of the parties

  • Equitable estoppel

  • Waiver

  • Release

  • Assignment

  • Failure to comply with the proper statutory requirements for either the creation or enforcement of the lien

  • Running of the statutes of limitation

  • Satisfaction

  • Payment of the basic debt

  • Discharge of the suit to enforce the lien

  • Dismissal of the suit to enforce the lien.

12.12.12

Contract Against Mechanic's Lien

In certain jurisdictions, a contractor may covenant or agree in writing with the owner of the property not to file a claim of lien against the property or permit liens to be filed by others.

From a title insurance point of view, reliance on a "contract against mechanic's lien" is hazardous Such contracts are often challenged in litigation. Specific approval from the National Legal Department must be obtained prior to the acceptance of contracts against mechanic's liens for title insurance purposes.

12.12.13

Repairs And Improvements To Real Property Under Agreement With A Tenant

Whether a contractor who makes repairs and improvements to real property under agreement with a tenant is entitled to impose a lien against the landlord's interest in the property is site-specific, and subject to state mechanic's lien law.

Generally, most state mechanic's lien statutes use the following guidelines to determine the liability of a landlord to a contractor engaged by a tenant:

  • A tenant is not the "agent" of the landlord merely by virtue of a lessor-lessee relationship.

  • A landlord's interest in real property may be subject to a lien for work performed or material furnished only if:

    • The lease specifically requires the tenant to contract for the tenant improvements.

    • The landlord has done some act in ratification of or consent to the work done and the furnishing of material and labor.

    • The landlord has failed to disclaim liability as required by state statute.

12.12.14

Phase Construction

In certain jurisdictions, when a tract of land is to be developed pursuant to an overall comprehensive plan, there is a serious threat to the priority of the mortgages securing the financing of the project arising from subsequent mechanic's liens.

The danger is that mechanic's lien claimants may convince the court that the entire group of buildings constitute one improvement project, so that all the mechanic's liens relate back to the date when work first commenced on the first building, and the completion date is the date of final completion of the last building. In states where prior recording of a construction loan mortgage has secured priority over mechanic's liens, the construction loan mortgage on the first building is protected against all mechanic's liens. However, the construction loan mortgages on each of the subsequent buildings and all of the permanent mortgages lack priority and are primed by the mechanic's liens. Although all construction bills on the first building are paid, the cost of constructing subsequent buildings can attach to the completed building and date back to the start of the first building.

The following guidelines enable the developer and the lenders to avoid the application of the single project concept:

  • Limit the construction contract to the building or buildings which can conveniently be treated under the single project concept. Require in the contract that the contractor "let" all subcontractors and supply orders on a similarly limited basis. The use of different contractors for different phases of the development is desirable, but seldom obtainable.

  • Plat the area so that each building or phase has its own designated lot.

  • Separate the ownership of the lots or of the plots with respect to separate buildings or phases of the project.

12.12.15

Most Common Types of Notices Found in State Mechanic's Liens Statutes

Notice of Cessation of Labor

When a notice of cessation of labor is filed in the public records, the statute of limitations begins to run in favor of the owner against mechanic's lien claimants.

Notice of Completion

When the owner files a notice of completion of improvements, the statute of limitations begins to run against the mechanic's lien claimant for the statutory time during which the mechanic's lien claimant may file a claim of lien.

Notice of Intention

A lien claimant gives written notice to the owner of labor or material furnished pursuant to a contract with the contractor; and this notice of intention must be given prior to the filing of the mechanic's lien in order to allow the owner to satisfy the claim.

Notice of Mechanic's Lien

A notice of mechanic's lien is required by statute to be given the owner of property by one claiming a mechanic's lien thereon, for work on the subject property performed in the capacity of a subcontractor or mechanic or for materials furnished under a contract with the principal contractor.

Notice of Nonresponsibility

A notice of nonresponsibility is authorized by statute for relieving a property owner of responsibility for the cost of improvements ordered by another person. The notice of nonresponsibility must be in writing, signed, and verified by the owner of the property who did not contract or consent to the work, and comply with any statutory requirement in regard to contents, recording, and publication.

Stop Notice

A stop notice enables unpaid subcontractors and suppliers to make and enforce a claim against a construction lender (and in some states, the owner) for a portion of the undisbursed construction loan proceeds, if any.

12.12.16

Title Insurance Considerations In Regard to Mechanic's Liens Coverage

In General

Title insurance coverage of mechanic's lien claims hazardous. Mechanic's lien coverage is a contract of indemnity insuring the lender against loss or damage due to the lack of priority of its mortgage lien over mechanic's liens. This kind of coverage has become a source of enormous loss for title insurance companies. Extreme care must be exercised when deleting the mechanic's lien exception from any title insurance policy.

Mechanic's liens can exist as real property liens although unrecorded in the public records. Once a mechanic's lien is perfected, the lien relates back in time to the commencement of work on the improvement. If the mechanic's lien exception is deleted from the title policy, the unpaid lien claimant is entitled under the policy to file a claim and receive the amount of the lien plus attorneys' fees spent to collect it.

The General or Standard Exception Mechanic's Lien Exception

Consult Company guidelines for each state to determine whether mechanic's lien coverage is available. Generally, if state law provides that mechanic's liens prime all construction loans, the coverage is unavailable.