When Does a Mechanics’ Lien Effect?

Kent B. Scott | Babcock Scott & Babcock | March 30, 2018

The Utah Mechanic’s Liens Act needed some clarification on when exactly a mechanic’s lien goes into effect. That clarification came in February 2015 from the Court of Appeals of Utah. In the case Pentalon Construction, Inc. v. Rymark Properties, LLC the court ruled that “nearly completed excavation constitutes ‘commencement’ under the Act because the excavation was sufficient ‘to put a prudent lender on notice that lienable work was under way.”[1]

What this means for contractors is that to make sure a mechanic’s lien has priority over other liens or mortgages, they need to file their lien with the recorders office and construction needs to be underway on the jobsite to a point where a “reasonable observer” can tell that a mechanic’s lien is sure to be in effect.

The court found that there are easy ways for a jobsite to pass the “work started” test. For example having large piles of dirt from excavation activities helps people know that a construction project is under way.[2] Heavy machinery operating on the jobsite also demonstrates the beginning of a construction project.[3] Adding in construction materials to the excavated portions of the jobsite, and a nearly completed foundation are the final examples from the court that place observers on notice that work has started.[4]

Contractors need to know that two previous rulings regarding preparatory work for a jobsite is still in effect. The ruling in Ketchum, Konkel, Barrett, Nickel & Austin v. Heritage Mountain Development Co. states that architectural work and other site preparation such as surveying, staking, and soil sampling does not always put the “reasonable observer” on notice that work has started on a jobsite.[5]

Similarly, “wetlands delineations, groundwater monitoring, geotechnical testing, and irrigation work” does not place a reasonable observer on notice because the work should demonstrate “impending or ongoing work.”[6]

The important thing to remember is that the more obvious it is to a reasonable observer that construction has started on a jobsite, the more likely that a filed mechanic’s lien has taken effect. A jobsite’s almost completed foundation, large piles of dirt accompanied by heavy machinery, and construction materials onsite provides more than adequate notice of a mechanic’s lien that is in effect.

[1] Pentalon Const., Inc. v. Rymark Properties, LLC, 344 P.3d 180, 186, 2015 UT App 29, ¶ 19 (Utah App., 2015).

[2] Id. at 183.

[3] Id.

[4] Id.

[5] Ketchum, Konkel, Barrett, Nickel & Austin v. Heritage Mountain Development Co., 784 P.2d 1217, 1228 (Utah App., 1989).

[6] EDSA/Cloward, LLC v. Klibanoff, 192 P.3d 296, 300, 2008 UT App 284, ¶ 10 (Utah App., 2008).

A Promise to Pay Doesn’t Extend Lien Deadlines

Stan Martin | Commonsense Construction Law | January 24, 2018

Mechanic’s lien rights arise from the laws of each state; there is no common-law right to unilaterally lien someone else’s property. As such, compliance with statutory requirements and deadlines is paramount. Thus, when an owner promised to pay a sub, and the sub elected not to pursue lien rights based on that promise, the sub lost out on its lien when it missed the statutory deadlines.

This case is in Massachusetts, but it is likely the same outcome would result in all other states. Equitable theories that might apply in other circumstances (e.g., equitable tolling of statutes of limitation when one forebears based on promises from another) do not apply when the underlying right is based on compliance with lien law standards and deadlines.

The sub was owed $196,500. It took the first two steps (out of three) under the Massachusetts lien law, to secure a mechanic’s lien. The third step was to file a lawsuit, but the sub didn’t file based on what it claimed were promises of payment. In the meantime, the deadline to file a lawsuit (90 days after the second step) came and went. When no payment was made, the sub tried to resurrect its lien rights by taking steps 1 and 2 again, but by now the deadline for those steps had passed under the lien law.

The sub argued that the lien law deadlines should be equitably extended, but the trial court, and then the Appeals Court, disagreed. “A mechanic’s lien is not a common-law right but a creature of statute, which ‘compels strict compliance in order to obtain relief.’” The sub’s lien rights had lapsed when the deadlines passed, regardless of any promises of payment that may have been made.

The lesson? Ignore lien law deadlines at your peril. The case is D5 Iron Works v. Danvers Fish & Game Club, 2018 Mass. App. Unpub. LEXIS 60 (Jan. 22, 2018).

Washington Supreme Court Upholds Rule That Property Owner and General Contractor Are Not Indispensable Parties in a Lien Foreclosure Action Against the Surety of the Lien Release Bond

Jennifer McMillan Beyerlein | Lane Powell | January 18, 2018

Today, the Washington Supreme Court has clarified any misunderstanding about the necessary parties in a mechanic’s lien foreclosure action when a lien release bond has been posted. In Inland Empire Dry Wall Supply Co. v. Western Surety Co., the Court upheld a divided Court of Appeals by allowing a lien foreclosure action brought by a material supplier to proceed solely against the surety securing the lien release bond. Inland Empire Dry Wall Supply Company alleged that it was not paid for drywall supplied to an apartment complex in Richland, Washington. Inland Empire filed a pre-claim notice and a mechanic’s lien against the property. The general contractor, Fowler General Construction, obtained a lien release bond from Western Surety Company, which identified Fowler as the “Principal” and Western Surety as the “Surety.” Ultimately, Inland Empire filed a lien foreclosure action solely against Western Surety seeking to foreclose its lien claim against bond.

Western Surety sought dismissal of the action, arguing that Inland Empire failed to properly include Fowler as the principal on the bond as required under the mechanic’s lien statute. The trial court granted summary judgment against Inland Empire, finding that the material supplier was required by statute to bring its lien foreclosure action against both the surety and the purchaser of the bond, Fowler. The trial court held that because the bond was the subject of the claim of lien, in place of the apartment complex, that both Fowler and Western Surety were the “owners” of the bond — making both indispensable parties to the lien foreclosure action. Division III of the Court of Appeals, in a split decision, disagreed last January, holding that the only necessary party to a lien foreclosure action involving a lien release bond was the surety.

In reviewing the statutory history of mechanic’s liens in Washington, the Supreme Court noted that the owner of the real property is required to be named in actions where no lien release bond is filed. The Court noted that this makes sense given that forfeiture of the property would be required in order to enforce payment of amounts owed under a mechanic’s lien. When a lien release bond is obtained, however, the real property is released from the lien and becomes “unreachable” and the bond becomes the security for enforcement of payment. In strictly reading the mechanic’s lien statutes, the Court found that neither the real property owner nor the entity who purchased the lien release bond are necessary parties in any action to enforce the lien against the surety who posted the lien release bond. This is because the surety is substituted for the real property owner in the eyes of the mechanic’s lien statutes for purposes of enforcement.

Practice Tip: In dicta, the Court noted that when a property owner or other party to a lien foreclosure action obtains a lien release bond after a lien foreclosure action is initiated, the lien claimant should amend its pleadings to specifically seek to foreclose on the lien release bond to avoid a situation where there is a judgment in favor of the lien claimant, but no security to enforce the judgment.

Risky (Shifting) Business: Pay-if-Paid Provision Enforced to Subcontractor’s Detriment

Katherine e. Kohm | The Dispute Resolver | January 20, 2018

In Baker Concrete Const., Inc. v. A. Pappajohn Co., No. FSTCV166028187S, 2017 WL 4106383, at *1 (Conn. Super. Ct. 2017), at issue was the age-old dispute of non-payment for work performed.

The Baker Court first recounted the direct avenues for collecting on a construction project when payment is not made in the regular course: “[A] mechanic’s lien may be available, and in connection with public works projects, a payment bond is statutorily required given the unavailability of a mechanic’s lien in such projects.”   That said, “[d]epending upon the equity in the property . . . a mechanic’s lien may be insufficient (especially if a project has been financed with a mortgage placed on the property as a first lien).” Even with these direct avenues along with filing suit, insolvency of the parties in the project chain can thwart any collection efforts of the lower tier contractors.  In addition, contractual language, for example a pay-if-paid provision, too can arrest an unpaid party’s effort to be paid. The Baker Court considered the requirements for applying such provisions. In Baker, the general contractor-subcontractor contract stated, in pertinent part, that:

Progress payments to the Subcontractor for satisfactory performance of the Subcontractor’s Work shall be made only to the extent of and no later than ten (10) working days after the receipt by the Contractor of payment from the Owner for the Subcontractor’s Work. The Subcontractor agrees that the Contractor shall be under no obligation to pay the Subcontractor for any Work until the Contractor has been paidby the Owner . . . The Subcontractor expressly acknowledges and agrees that payments to it are contingent upon the Contractor receiving payments from the Owner.

By its plain language, this pay-if-paid provision appeared to foist all risk of the owner’s potential insolvency onto the subcontractor.  For its part, the subcontractor argued that “the provision is a timing issue (or should be interpreted and applied as such) rather than a risk-shifting provision.” In other words, notwithstanding that the general contractor was not paid by the owner in a reasonable period of time after the work was performed by the subcontractor, the subcontractor was still entitled to be paid.  The court disagreed.

After disposing of a burden of proof argument raised by the subcontractor, the Baker Court resolved the contract interpretation question. It examined the caselaw and observed that where the provision does not explicitly “creat[e] a condition precedent to payment” the courts will construe the provision as “setting the time of payment” rather than establishing a defense to payment. However here, the contingency was explicit and moreover the contract provision also put the risk of insolvency explicitly onto the subcontractor: “The Subcontractor expressly accepts the risk that it will not be paid for the Work performed by it if the Contractor, for whatever reason, is not paid by the owner for such Work. The Subcontractor states that it relies primarily for payment for Work performed on the credit and ability to pay off the Owner and not of the Contractor[.]”

In light of the foregoing the Baker Court held that there was no ambiguity in the terms and therefore the contract’s pay-if-paid provision would be enforced as written.  The court summed up the reality of working in the construction industry (and frankly any industry): “It is clear that the defendant [contractor] took advantage of its superior bargaining position in this contract; the plaintiff [subcontractor], however, seemingly made a conscious decision to [get the job by] sign[ing] a contract containing this risk-assumption provision which, in these unfortunate circumstances, has come into play.”

As an aside, observe that Connecticut’s statutory prompt payment provisions do not preclude contractual pay-if-paid clauses. See Conn. Stat. 42-158i et seq.

A Primer for Contractors: Getting paid — Fact or Fiction?

Blake R. Nelson | Hellmuth & Johnson | July 27, 2017

As a contractor, getting paid for work completed isn’t always as easy as collecting onsite or sending an invoice. Hellmuth & Johnson construction law attorney Blake Nelson answers fact or fiction when it comes to collections, interest and liens and Minnesota state law.

It is legal to charge 18% per annum (or 1.5% per month) interest to all customers on past due balances.

Fiction. When contracting with an individual (as opposed to an entity), the maximum interest that may be charged on past-due accounts is 8% per annum if you have a written contract.  Business to business contracts may call for a higher rate of interest. However, unless you have a contract with the property owner calling for higher amount, mechanic’s lien claims allow for a lower interest rate based on Minnesota state law, which is currently 4% per annum.

As subcontractor, if a project requires a pre-lien notice and I serve one within 45 days of my first date of work, my lien rights will always be protected.

Fiction. While in most cases this is true, the longer you wait to serve a pre-lien, the more you risk losing your lien rights. If the property owner pays the general contractor for your services before receiving your pre-lien notice, your lien rights are extinguished. It is always smart to send your pre-lien immediately after you begin work.

As a subcontractor, if I do not preserve my lien rights I can still sue the property owner if I am not paid.

Fiction. Unless your contract was directly with the property owner, your only recourse against the property or the property owner is a mechanic’s lien. If you do not preserve those lien rights, you may then only pursue the party that hired you.

Engineers, land surveyors and architects may enforce mechanic’s liens for non-payment.

Fact. Engineers and land surveyors gained the protection of mechanic’s liens through statutory amendments in 1973 and 1974. Architects may enforce mechanic’s liens if their contributions ultimately play some role in the improvements to the real estate in question. The fact that an architect’s contribution is not actually visible on site does not defeat its lien.

If I do not have any lien rights there is no way to collect my money.

Fiction. While a mechanic’s lien is a great collection tool, it is not the exclusive remedy. You may sue the entity that hired you for breach of contract, regardless of any lien rights.

Not all types of work are lienable.

Fact. Minnesota law requires that the work actually constitute an improvement to the real estate and not simply ordinary repairs. An “improvement” is defined as “a permanent addition or betterment of real property that enhances its capital value and that involves the expenditure of labor or money and is designed to make the property more useful or valuable, as distinguished from ordinary repairs.” In other words, installing a new HVAC system is lienable, but simply repairing an existing system might not be.