As the owner of a construction project—whether a church going through a sanctuary renovation or a nonprofit adding on some office space—you know how important it is to pay your contractor and other companies working on the project in a timely fashion. But did you know that, even if you’re a nonprofit, a lien can be imposed on your project property if your construction vendors aren’t paid on time or aren’t paid all that they are due? Below is an overview of the concept of mechanics liens on construction projects and some key concepts to keep in mind to prevent your project from being held up by a lien.

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What is a Mechanics Lien?

Generally, liens give creditors the rights to money or property in the event a borrower does not fulfill its obligations (think of a bank repossessing a car because the owner didn’t pay its loan—that’s an example of a bank executing a lien). On a construction project, if a contractor (and often, subcontractor) is not paid for its work, the contractor can file a lien against the property where the project is taking place. This is known as a “mechanics lien.”

A mechanics lien gives that contractor limited interest in the property it worked on until it is paid in full, or the lien is discharged by a court. The mechanics lien is usually filed for the amount of money that a contractor is owed. For instance, if the owner fails to pay a contractor $50,000, that’s how much a contractor would assert its mechanics lien for.

Having a mechanics lien filed on your project can be a real pain. If a mechanics lien is successfully filed against your project, the free and clear title to your property could be in jeopardy, and the process of fighting or rectifying the underlying action that caused the lien (even if the owner is in the right) can be costly.

Mechanics liens are not just an issue on large projects—they can affect small ones, too. Depending on the statute, the right to file a mechanics lien may be available for parties such as direct contractors, subcontractors, design professionals, and even laborers. It is important to check the law of the state where the construction is taking place to see which parties have a right to file a mechanics lien, because the laws vary widely by state.

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When and How are Mechanics Liens Filed?

Contractors don’t have forever to file their liens. Each state prescribes a specific time limit for contractors to assert their lien rights—often, something like three or six months from when the contractor finishes its work on the job. It is important to check the laws of the state where the project takes place to confirm this time period, because untimely filing is often fatal to a mechanics lien.

The lien laws of each state also lay out the framework and deadlines that an interested party must follow to assert their rights. Mechanics liens will generally require the filing party to notify the relevant parties, state the property address, describe the work performed, and file the lien within a certain amount of time after completing work on the project. State laws will also explain what kind of priority an entity filing the mechanics lien will receive. In some states, the party that files the lien will receive priority over mortgagees or others with a claim on the property. An example of what the form of a mechanics lien looks like is provided in a link at the end of this article.

Elements of filing a mechanics lien vary from state-to-state. For instance, some states require parties to file notice of intent to file a mechanics lien before actually filing the lien itself. This gives the owner time to make a payment to the contractor or prepare a defense if needed. If a mechanics lien is filed and the owner still doesn’t pay the contractor because it contests the validity of the lien, the contractor can “foreclose” the lien by filing a lawsuit in the relevant jurisdiction. From there, parties will litigate over the validity of the lien, claimed amounts, and any defenses the owner has for failing to pay the amount the contractor has claimed. Ultimately, the court will decide whether the contractor is owed the money it claims.

It is important to be sure of the requirements under each state’s lien law, because if a party fails to properly follow all the steps laid out in the statute, it could be harder for their rights to be enforced. Certain states also award attorney fees to the party who prevails in a mechanics lien suit, so your organization could be on the hook for more than just the cost of the contractor’s unpaid work. If your nonprofit is involved in a construction project, begin by reviewing the mechanics lien laws in the state of construction. If you have further questions or concerns, it may be time to speak to an attorney who specializes in mechanics liens.

Steps an owner can take to prevent a mechanics lien from being filed:

Thankfully, there are steps owners can take to protect themselves from having mechanics liens filed against them, or to defeat a lien that has already been filed.

1) An owner can take an active role in managing its project. By playing an active role in project management (including properly documenting payments and any issues that arise with a contractor’s work), an owner can help ensure that parties are properly paid for the work they have done on a project and get a better sense of whether the general contractor is timely paying subcontractors and other entities involved in the project. An owner should ensure that it has a proper contract with its general contractor and understands what other vendors will be doing work on the project.

2) If allowed by the state, an owner can require “lien waivers” with its payments to a contractor. These waivers essentially require the contractor to agree that it will not lien the amount it has been paid by the owner. So, if an owner makes a $10,000 progress payment on a renovation, by signing the lien waiver, the contractor will waive its rights to lien $10,000 on the project. There are multiple types of lien waivers, and each state handles them differently, so be sure to check with an attorney about the state-specific rules you should be following.

3) Some states allow owners to “bond over” liens. In this scenario, if a lien is filed against its property, an owner may contact a surety company to purchase a bond for the same amount of money as the underlying lien claim. Once purchased, this removes the lien from the property itself, instead attaching it to the bond.  Bonding over a lien is helpful so that an owner’s property is not encumbered by the lien. If allowed in the state where the project takes place, the process of bonding over a lien should be considered at the contract development stage, wherein an owner may negotiate for the general contractor to agree to bond over any mechanics liens that may be filed by subcontractors or other vendors. This kind of contract provision ensures that there is no lien on your organization’s property and that the owner may recover the cost of the surety bond from the general contractor or other entity.

4) If a mechanics lien is filed, an owner will likely have several defenses available to it (though these will also vary from state-to-state). An owner will want to make sure all of the information and claims that the contractor included in its lien are correct and accurate, because incorrect information (or information filed with an intent to defraud) can impact the eligibility of the lien interest. Additionally, an owner will want to see if the contractor that filed the lien has properly followed all notice, statute of limitations, and filing requirements prescribed by statute. Failure to properly follow these rules may also affect the filing party’s interest.

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Key takeaways for owners:

1) Mechanics lien laws vary from state – to state. Be sure to familiarize yourself with the particular state in which your construction project is taking place. Some states (such as Illinois) have notoriously complex lien laws and require referencing case law in addition to the applicable statutes. If an owner is facing a complex project, or one with many entities who will need to be paid, it may be appropriate to seek a specialized construction law attorney.

2) Consider contract drafting methods to prevent a lien from affecting your project. An example of this would be negotiating an agreement that the general contractor “bond over” any filed liens (if allowed by the state of the project). You don’t want your project to be held up due to circumstances outside your organization’s control, such as the general contractor failing to pay its subcontractors.

3) Familiarize yourself with the notice and deadline requirements laid out in the state statutes. Ensure that any party asserting its rights is doing so according to the law. Some states’ requirements are so specific that drafting errors or filing missteps by the contractor filing the lien could nullify, or severely impact, the lien claim. For individuals who will be working extensively with lien law in multiple states, it may be worthwhile to discuss lien issues with a construction-specific attorney, or to utilize online resources to familiarize themselves with state specific laws. See the “Helpful Links” section for more information.  

4) There are defenses to mechanics liens. While defenses also vary by state, owners should keep in mind that just because a mechanics lien is filed, it does not mean the claimant will prevail. Mechanics liens may be filed with improper information, outside of the legal deadlines, with fraudulent intent, or for construction work that is considered defective and unworkmanlike. Depending on state law, these are the types of issues that owners should consider when determining if they can defeat a mechanics lien.

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While proper payment of contractors and effective project management are the best ways to ensure a mechanics lien will not be filed against the project, the above tips will allow project owners to understand what mechanics liens are, understand how they work, and be prepared in case a mechanics lien is ever filed on a construction project.  

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Helpful Links:

See an example mechanics lien here.

Levelset allows you to look at some high-level information about state-by-state lien laws.

LienLawOnline is a subscription-based service with detailed explanations, templates, and other lien-related information. This resource is geared towards attorneys.

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