Filling Out the Contractor’s Final Payment Affidavit

David Adelstein | Florida Construction Legal Updates

When preparing a contractor’s final payment affidavit, I always suggest for a contractor (or anyone in privity of contract with the owner) to identify the undisputed amounts their accounting reflects is owed to ALL subcontractors, etc., regardless of whether that entity preserved their lien rights.  If the contractor provided a payment bond, I footnote this simply to support that none of the lower-tiered subcontractors have lien rights or are the traditional “lienor.”   (Thus, there is no prejudice to the owner if an entity is inadvertently omitted from the affidavit.)

There are times, however, where a contractor does not identify a subcontractor that did not serve a notice to owner and, therefore, has no valid lien rights.  Or, a contractor omits a lienor that actually did serve a notice to owner and preserve its lien rights; this happens.

There was an older First District Court of Appeals case that harshly (and, quite, unfairly) held that the contractor must identify everyone in the final payment affidavit regardless of whether that entity timely served a notice to owner or their lien is invalid.  This case, however, predated, a 1998 statutory change to Florida’s Lien Law.

Today, the statute (in Florida Statute s. 713.06) currently provides:

(d) When the final payment under a direct contract becomes due the contractor:

1. The contractor shall give to the owner a final payment affidavit stating, if that be the fact, that all lienors under his or her direct contract who have timely served a notice to owner on the owner and the contractor have been paid in full or, if the fact be otherwise, showing the name of each such lienor who has not been paid in full and the amount due or to become due each for labor, services, or materials furnished….

The contractor shall have no lien or right of action against the owner for labor, services, or materials furnished under the direct contract while in default for not giving the owner the affidavit; however, the negligent inclusion or omission of any information in the affidavit which has not prejudiced the owner does not constitute a default that operates to defeat an otherwise valid lien. The contractor shall execute the affidavit and deliver it to the owner at least 5 days before instituting an action as a prerequisite to the institution of any action to enforce his or her lien under this chapter, even if the final payment has not become due because the contract is terminated for a reason other than completion and regardless of whether the contractor has any lienors working under him or her or not.

Fla. Stat. s. 713.06(d)(1).

The Fourth District Court of Appeals in Fetta v. All-Rite Paving Contractors, Inc., 50 So.3d 1216 (Fla. 4th DCA 2010), claimed that the purpose of the statute is for the contractor to identify all lienors who have timely served a notice to owner that has not been paid in full.  (Hence, you do not need to identify those that did not timely serve a notice to owner even though, from a practical standpoint, identifying all makes sense as a just-in-case.). Further, even if there was an omission, that would not render a lien invalid unless the owner can prove prejudice and prejudice is not so easy to prove.

When in doubt, consult counsel when finalizing or filling out a contractor’s final payment affidavit.  Rights can be preserved and items footnoted as appropriate for clarification purposes, such as the fact that the amount in the affidavit may not include amounts that are not available under the lien law (i.e., delay damages).

Construction Lien Waiver Provisions Contractors Should Be Using

Jason Lambert | Construction Executive

It is common in construction for a subcontractor or material supplier of any tier to be required to provide a lien waiver when receiving payment. But not all lien waivers are created equal. While at a minimum, a lien waiver, by definition, needs to include a release of liens, it can also include many other terms that can tie up loose ends or resolve potential problems before they begin. 

ADDITIONAL RELEASES

A typical lien release is going to release any liens and right to claim liens on the subject property. But a lien waiver can also include releases of any claims against surety bonds, other statutory rights or claims, and at its broadest, claims against the paying party. One example of a provision that could help accomplish this is a release of “any right arising from a payment bond that complies with a state or federal statute, any common law payment bond right, any claim for payment, and any rights under any similar ordinance, rule, or statute related to claim or payment rights.” Broad release language can also be used to effectively preclude any claims arising prior to the date of the release. 

PAYMENT REPRESENTATIONS AND WARRANTIES

A typical lien release has no representations or warranties about payment to subcontractors or material suppliers of a lower tier. But contractors can include language requiring the company receiving payment to represent and warrant that all subcontractors of a lower tier have been paid or will be paid within a certain timeframe using the funds provided and that these are material representations and inducements into providing payment. On a related note, if the contract requires subcontractors to provide lien releases from lower tier subcontractors in addition to their own release when seeking payment, contractors can require the sub-subcontractor releases to include representations that they have been paid by the subcontractor to try and tie up payment loose ends all around. 

PAYMENT AFFIDAVIT

Piggybacking on the prior suggestion, contractors can also turn a lien waiver into a miniature payment affidavit and require the party receiving payment to swear that subcontractors have been paid or will be paid. They can also require that a list of unpaid subcontractors or material suppliers be listed on the affidavit to give them the ability to track a continuing lack of payments or to confirm that previously unpaid subcontractors have been paid as the project continues. 

INDEMNIFICATION

To the extent the contract does not already include indemnification language, a contractor can include an indemnification provision requiring the party receiving payment to indemnify them (and maybe even the property owner) from payment claims made by lower tier subcontractors or material suppliers. This can provide another incentive to a payee to use the funds to pay downstream subcontractors if they know that failing to do so will subject them to additional liability. 

OTHER REPRESENTATIONS AND WARRANTIES

The lien waiver can also include representations that the work for which payment is being made is free from defects, that no defective work was covered by their work and that local code requirements were followed by the subcontractor. While the “sky’s the limit” in terms of what could be included, it’s important to consider that many of these types of provisions should be included in the main contract and any reference to them in a lien waiver should be a short “belt and suspenders” type provision. One exception to this could be a reaffirmation that there are no additional agreements between the parties other than those in writing and that compliance with those documents has not been waived. 

There are two additional points to be made with regarding to using a more comprehensive lien waiver form. First, these lien waiver forms can be used by anyone in the chain of work. Subcontractors can use a more substantial lien waiver form, even if the general contractor is not requiring one. 

Second, not every state allows the use of more substantial lien waiver forms. California, Nevada, Utah, Arizona, Colorado, Texas, Missouri, Michigan, Massachusetts, Mississippi, Georgia and Florida all have statutory lien waiver forms that must be used for some or all construction projects. These statutory forms vary in complexity and comprehensiveness. For example, Florida’s statutory final lien waiver form is just 73 words long. 

That being said, some states will allow use of a more comprehensive lien waiver form so long as the parties agree to use that form in their contract. Contractors should consult with an attorney if in one of the aforementioned states to see if they can contractually alter the statutory requirement or if they must use the statutory form. 

Construction Lien Does Not Include Late Fees Separate From Interest

David Adelstein | Florida Construction Legal Updates

Construction liens can include unpaid finance charges.   But, what about late fees?  You know, the late fees that certain vendors like to include in their contract or purchase order unrelated to finance charges.  An added cost for being delinquent with your payment.  Can a late fee be tacked onto the lien too?

In a recent case, Fernandez v. Manning Building Supplies, Inc., 2019 WL 4655988 (Fla. 1st DCA 2019), a residential owner hired a contractor for a renovation job.  The contractor entered into a contract with a material supplier.  The terms of the supplier’s contract with the contractor provided that there would be a 1.5% delinquency charge for late payments and it seemed apparent that the delinquency charge was separate from finance charges.

Florida Statute s. 713.06(1) provides in relevant portion:

A materialman or laborer, either of whom is not in privity with the owner, or a subcontractor or sub-subcontractor who complies with the provisions of this part and is subject to the limitations thereof, has a lien on the real property improved for any money that is owed to him or her for labor, services, or materials furnished in accordance with his or her contract and with the direct contract and for any unpaid finance charges due under the lienor’s contract.

The supplier in this case recorded a construction lien and filed a lien foreclosure lawsuit.  The issue was whether a 1.5% per month “delinquency charge” or late fee, as set forth in the contract, should be factored into the lien amount.   The First District Court of Appeal held no:

[A] ate payment fee is not a “finance charge” as that term is generally understood…[T]he difference between a finance charge and delinquency fee is recognized by Black’s Law Dictionary (10th ed. 2014) which defines a “finance charge” as “[a]n additional payment, usu. in the form of interest, paid by a retail buyer for the privilege of purchasing goods or services in installments.” As such, a finance charge is the cost of credit — not the cost of paying late. The 1.5% fee required by the [the supplier’s] contract is to be paid only upon default; it is not a cost of credit per se.

Fernandez, supra

A Practical Approach to Resolving Mechanics Liens in Illinois: Just Deal With It.

Elizabeth J. Boddy | Taft Stettinius & Hollister

Owners of property encumbered by a mechanics lien often find themselves in violation of loan covenants and under pressure from their lenders. Liens are also a significant hindrance to the sale of the property to an otherwise willing buyer. How best to deal with a mechanics lien depends upon the circumstances, but here is a look at some options.

1. Bonding Over the Claim. In 2016, via amendment of the Illinois Mechanics Lien Act[1], Illinois joined most other states in providing a statutory process for bonding over a mechanics lien. Essentially, once a claim for a mechanics lien has been asserted, an owner or other eligible person having an interest in the subject property may petition the local court to substitute a surety bond in lieu of the property as security for payment of the lien. If the petition is timely filed, and no objection is presented and sustained by the court, an order will issue (1) substituting the surety bond for the property securing the lien claim, and (2) substituting the lien claimant’s right to recover on the bond for claims that could otherwise be asserted by the claimant under the Mechanics Lien Act. The order discharges the lien, and once recorded effectively releases the claimant’s encumbrance on the property. Litigation then proceeds among the claimant, surety and bond principal only. Other persons having an interest in the property who would otherwise be joined in the action are excused.

Some of the intended benefits of this process include (1) earlier release of the lien encumbering owner’s title; (2) simplifying litigation; and (3) providing a source of cash recovery to a successful claimant.

But there are downsides to consider. First: the size of the claim and bond. The bond must, in addition to other requirements, be in an amount equal to at least 175% of the sum claimed. Often, the bond principal is a general contractor constructing improvements to the property for the owner’s benefit, bound by the terms of its contract to permit no liens by subcontractors or suppliers. Unless a private project is very large, the owner may not have required the contractor to post a payment bond up front. Once the dispute arises, the financial burden on the contractor/principal to obtain a bond in the proper amount may be substantial. The same is true for an owner/principal whose budget for the project did not contemplate the need for a bond.

Second: the principal is jointly and severally liable with the surety for any judgment awarded to the successful claimant – including some or all of the claimant’s attorneys’ fees. A prevailing party clause in the statute provides that if the claimant is awarded at least 75% of the amount claimed, it is entitled to recover reasonable attorneys’ fees up to the penal sum of the bond remaining after payment of the award plus interest. The bond principal, on the other hand, becomes the prevailing party only if the claimant is awarded less than 25% of its claim, in which case the principal may recover attorneys’ fees up to 50% of the claim – if it is collectible. Unless the principal is very sure of its position, challenging the claim presents material risk beyond its own legal expenses.

2. Title Insurance. As an alternative to statutory bonding and litigation, an owner/seller can try negotiating for a title policy insurance over the lien (depending on size and other factors), but title companies are under no obligation to offer such coverage and will typically require the seller’s personal undertaking for all related losses in an amount up to two-and-one-half times the size of the claim. Even where this is a viable option for the seller, it may not be acceptable to the buyer, who will generally prefer to take a clean title.

3. Negotiate a Release. Liens arise because the claimant hasn’t been paid. More often than not, the claimant will prefer cash in hand, even at a discount, over taking its chances in court. The tried and true method of making a deal to exchange cash for the claimant’s release is typically more cost-effective, less disruptive and less risky than litigation – for both sides.

The relative contributions of the parties to the bargain will depend on the circumstances. Did the owner satisfy its obligation to pay the contractor? Even if true, payment to the contractor is not necessarily a complete defense to the claims of subcontractors. If the claimant is a subcontractor, the owner may have the incentive to chip in to a settlement and pursue other remedies against the contractor. Did the contractor make errors that increased the cost of a subcontractor claimant’s work? In that case, the contractor may be taking a haircut. Did the claimant fail to fully perform? If so, a reduction of the claim is in order.

When settlement is reached, the owner benefits by clearing title to the property; the would-be bond principal, whether owner or contractor, will avoid costs for the bond; all parties will save legal expenses; everybody avoids judgment; and generally speaking, an outcome the parties agree on themselves is better than one imposed upon them by a court. So, when weighing the options, consider taking the practical approach: just deal with it.

Want to Foreclose a Mechanics Lien? Get Your Invoices Straight.

John Lande | Dickinson, Mackaman, Tyler & Hagen

Construction disputes can be complicated. There are often disputes between the parties about the quality of work and the amount that is due. Many contractors rely on mechanics’ liens as leverage to try to get their final payment. A case from the Iowa Court of Appeals suggests that contractors need to get their facts straight before they try to enforce a mechanics’ lien.

Olmstead Construction, Inc. v. Otter Creek Investments, LLC began as so many construction disputes do. The owner, Otter Creek Investments (“Otter Creek”), hired Olmstead Construction (“Olmstead”) to build a convenience store. The parties entered into a cost-plus contract, which required Otter Creek to pay Olmstead the actual costs of construction plus seven percent. A dispute arose at the end of the project between Otter Creek and Olmstead over the final amount due. In February 2016, Olmstead sent Otter Creek three different invoices that showed three different amounts due. In March 2016, Olmstead sent a final invoice with a fourth final amount due. Otter Creek requested backup support for the charges, but never received it.

Instead, Olmstead filed a mechanics’ lien and initiated a foreclosure. Otter Creek filed a counterclaim for defective construction. The District Court ultimately found in favor of Olmstead on its breach of contract claim, but denied Olmstead’s request to foreclose its mechanics’ lien. The district court explained:

[A] plaintiff should not be permitted to invoice a defendant for an unsubstantiated amount of money and then subsequently foreclose on the defendant’s property without providing the defendant with proof that the amount invoiced is actually valid.” . . . [Olmstead Construction] is largely responsible for creating this dispute due to their confusing and inaccurate billing. [Olmstead Construction] proposes foreclosure on the mechanic’s lien. If the Court granted such foreclosure, it would amount to an extremely inequitable solution to a problem that is largely of [Olmstead Construction]’s own making.

The Court of Appeals did not set aside the District Court’s rationale, instead noting that a mechanics’ lien foreclosure is an equitable remedy. This means courts ultimately have the discretion to determine whether a particular equitable remedy, like foreclosure, serves the interests of justice.

Olmstead did not get to foreclosure its lien because it sent four different payoff amounts to Otter Creek without providing any supporting documentation. Property owners should not, however, count on courts refusing to enforce mechanics’ liens because of inequitable conduct by the contractor. Most of the time, if a contractor meets the statutory requirements for foreclosing a mechanics’ lien courts will foreclose the lien. That being said, contractors should take time to make sure they know their costs and can support those costs before invoicing property owners. Having accurate invoices will reduce confusion and make it easier to get paid in a timely manner. In addition, having backup material organized will make it much easier for contractors to enforce their rights if they need to.