What Are Lien Rights?
A mechanics lien can be filed by unpaid parties who furnished labor or materials on a private (residential or commercial) project. Filing a mechanics lien provides the claimant a security interest in the improved property. If the claimant remains unpaid, they can enforce a foreclosure action on the property and receive payment from the proceeds of the sale of the property.
A bond claim serves a parallel function on public (federal, state, county, or city) projects. However, when the property in question is owned by the government, claiming an interest in the property is not an option. Instead, bond claims are filed against the surety bond, which is a sum of money reserved to protect against problems such as project disruptions or failure to meet contract specifications.
Though the ideas at the root of lien rights can be traced to the Roman Empire, the modern version was introduced to the United States by Thomas Jefferson in 1791. Lien rights did not exist in England where land ownership was an indicator of class status, providing builders with a stake in a nobleman’s property would have undermined the class and power structure. In America, however, circumstances were different; land was abundant and there was an immediate need for rapid development.
But how to the young country develop so quickly? Lien rights were integral to this process of development because they assured builders that they would have a stake in the improved property in the event of nonpayment. This protection provided them with the security to move forward and supply labor and/or materials on credit. Lien law has since been refined, and securing lien rights is more complicated than it used to be.
Who Has Lien Rights
Lien rights are available to some extent in all 50 states, though specific rules vary from one state to the next. To see who has lien rights in your state, visit zlien’s state-by-state resources and select your state.
Generally, direct contractors, subcontractors, material suppliers, equipment lessors, design professionals (architects and engineers), and laborers possess lien rights. Typically suppliers to suppliers do not have lien rights. However, every state’s lien statute is different and there are exceptions to these general rules. It is also important to note that failure to meet the appropriate requirement scan invalidate lien rights.
Even though top-of-chain parties – like property owners and lenders – aren’t technically endowed with lien rights, they can use the lien rights system to their advantage. Continue reading to see how properly utilized lien rights reduce risk and make construction payment fair for everyone.
How Lien Rights Protect Everyone From Payment Problems
Payment in the construction industry is complicated and unique. Due to the credit heavy nature of construction work, the high number of businesses involved on projects, and the lack of visibility regarding who is involved on a project, construction payment issues arrive frequently for the parties providing the work as well as the parties funding the project.
Everyone is trying to protect themselves from financial risk as much as possible, and lien rights help protect parties on both ends of the hiring chain. Sub-tier parties can employ lien rights to secure payment for improvements made to a property, and top-of-chain parties sponsoring projects can utilize the lien rights system to protect from double payment and to reduce the risk of having a lien filed on the project property.
Most parties hired to furnish labor and/or materials on a project are endowed with the lien rights to ensure that they are compensated for work provided on a project. This is especially helpful for hired parties on large projects where there are several degrees of separation between the money funding the project and the party in question.
When lien rights are employed correctly and all requirements are met, a lien claimant is fully protected from nonpayment. This makes it safe to furnish labor or materials on credit.
Lien rights can also protect parties at the top of the hiring chain, such as the property owner or lender. These parties typically want to avoid having a mechanics lien or bond claim filed against the project, and also want to avoid double payment. Double payment can occur when a hired party files a lien even though they have been paid.
While top-of-chain parties don’t technically possess lien rights, protections are built into the lien rights system to ensure fairness for all construction participants, including owners, lenders, and other parties at the top of the hiring chain. There are limits to the extent of lien rights to protect top of chain parties from unfair, unexpected, or unreasonable liens.
Protecting Lien Rights
Lien rights aren’t automatically granted to every participant on every project, certain requirements must be met to secure lien rights and maintain their validity. The mechanics lien is an incredibly powerful tool at the disposal of contractors and other hired parties, so requirements were put in place to level balance the playing field by providing some protection for top-of-chain parties.
These rules and requirements vary from one state to the next, so visit zlien’s state-by-state resources and select your state to determine the requirements that apply in a specific scenario.
States in which notice is required.
Most states (38 to be exact) require lien claimants to send some sort of notice to top-of-chain parties in order to secure the lien rights. There are two categories of notice: preliminary notice and notice of intent.
Preliminary notice (sometimes referred to as pre-lien notice, notice to owner, or notice of furnishing) is typically sent preemptively, shortly after labor and/or materials are first furnished on a project and long before a payment issue arises. The purpose of sending preliminary notice is to give top-of-chain parties a heads up regarding which sub-tier have been hired to work on a project and how much they expect to be paid. This promotes transparency and protects top-of-chain parties from being blindsided by an unexpected lien. Even if preliminary notice is not required, it is generally a good idea for sub-tier parties to send one anyway because it can build stronger relationships with clients and speed up the payment process.
Notice of intent is like a preliminary notice 2.0, it is the final warning before a lien is filed. Some states require the sending of notice of intent, but like preliminary notice, it is generally a good idea to send one even if it is not required. Sometimes the threat of a mechanics lien is enough to initiate payment, and avoiding a mechanics lien filing is beneficial both for the party making payment and the party receiving payment.
As the name suggests, lien waivers waive lien rights. Typically, lien waivers are used in payment transactions and the hired party waives the right to file a lien in exchange for payment. This protects top-of-chain parties from double payment, in other words, from making payment and also having a lien filed against the property.
Deadlines are another limitation to the extent of lien rights. Required notices must be submitted on time in order to secure lien rights, and mechanics liens and bond claims must be filed within a mandated time frame to be valid. The right to file a lien does not last forever.
Deadlines vary by document and by state, so visit zlien’s state-by-state resources to check requirements and deadlines in your state.