The fact that mechanics liens are powerful tools to get construction industry participants paid rests mainly on the fact that the lien encumbers the improved property. This means that: 1) the property can be foreclosed upon and sold to satisfy the debt; and 2) that a sale/transfer of the property or additional encumbrance (i.e. the ability to refinance or mortgage the property) is difficult.
Because of this second point, parties sometimes turn to a mechanics lien filing in an attempt to stop or slow down a sale or mortgage foreclosure (on their or a family member’s property) – even if the claimant was not technically a construction industry participant generally allowed mechanics lien protection.
Is this proper, though, or an effective idea? That question depends on several different factors, some of which will be discussed below.
Are You a Party Entitled to a Mechanics Lien?
Mechanics liens are limited to parties contributing to the improvement of real property through construction or construction-related activities. While the reach can be fairly significant, it’s not a catch-all device that should be used as an attempt to bog down the transfer or financing of property, when the claimant performed no work.
If you performed work on your own property – the purpose of and remedy provided by a mechanics lien should be considered. First, if you provided work to your own property, there is likely nothing due to you. While there can be exceptions in the event that you, as a contractor, performed work on property that you happened to own and for which your company was to receive payment, there may be a lien right. Note, however, that the protection of the mechanics lien is tied to the property. Even if your company is owed money for work on your own property, the ultimate remedy is the sale of the property to satisfy the debt. That’s likely not what you are going for – selling a property that you already own to pay back money you owe…to yourself.
Additionally, if you performed work for a family member, there may be other barriers. Some states require written contracts in order to file a mechanics lien, and this can be especially true for residential property. In Texas, for example, in order for a lien to be available on homestead property, the written contract must be signed by both husband and wife if the owners are married, and the contract must be recorded in the property records prior to work. This is rarely going to happen in the event work was done for a family member.
Will a Mechanics Lien Stop a Foreclosure?
In some cases, parties (who may or may not have performed work on their or a relative’s house) file mechanics liens as a last-ditch effort to hold off a foreclosure proceeding. Losing a home due to economic difficulties is a terrible thing, and foreclosure actions are extremely difficult to go through and deal with. Nobody wants to lose their property, and since mechanics liens encumber property, it is not entirely uncommon for a party to attempt to file a mechanics lien to stop the foreclosure sale/auction of a property.
While it’s true that mechanics liens encumber the property and can make it difficult to sell or (re)finance – there are two things to consider when contemplating filing a mechanics lien in an attempt to hinder a foreclosure proceeding:
1) the ultimate remedy of a mechanics lien
2) the priority of a mechanics lien.
As mentioned above, the ultimate power behind a mechanics lien is the ability to foreclose on the property to satisfy the debt. So, in the event the property is already being foreclosed, the mechanics lien is not going to stop it – it’s just going to tag along in the foreclosure proceeding and attempt to do what it’s there for – get the claimant paid through that sale (to the extent the mechanics lien is valid and enforceable).
Whether or not the lien is successful in getting the claimant paid (to the extent the mechanics lien is valid and enforceable) will come down to the second point – the mechanics lien’s priority. The priority of the lien, as discussed on this blog many times, generally comes down to a “first-in-time” rule (subject, like always to some exceptions).
While this likely will not matter if there is equity in the property when foreclosed, if the homeowner is underwater, meaning that they owe more than the property is worth, the first mortgage holder will likely recover the full value, with the lien holder left with nothing.
Mechanics liens are powerful tools to get construction industry participants paid – but they are not the tools to stop or block a foreclosure, even if the party claiming the lien actually performed work on the property. The answer there may be a bankruptcy filing, or some agreement with the mortgage holder.