Construction Contract Tip – Subcontractors, Don’t Waive Your Right to a Lien

Sam DeBaltzo | Tonkon Torp

In the course of reviewing construction subcontracts, I’ve recently seen provisions similar to the following (simplified for convenience and confidentiality):

“The subcontractor shall reimburse the [Contractor and/or Owner] for any costs and expenses for any claim, obligation, or lien that arises from the performance of the work.”

“The subcontractor shall remove and discharge any lien, claim, security interest, or other encumbrance related to the subcontractor’s performance of the work.”

The provisions are often followed with boilerplate requirements for paying the third-party claimant, bonding, reimbursement of attorneys’ fees, indemnification responsibilities, or other ways of providing security to the owner or general contractor. 

The purpose of these types of provisions is clear: owners want their projects completed free of liens, and they want the person responsible for the work to make sure that happens. This is an understandable position, and it is reasonable for any construction contract to require lien waivers. The problem is that these provisions do not require payment prior to the waiver.

Yes, if a subcontractor is paid, it should agree to keep the project clear of liens and remove any liens filed by its respective subcontractors or suppliers. But, until payment has occurred, retaining the powerful lien right is essential for any prudent subcontractor. Whether intentional by the drafting party or not, these provisions suggest the subcontractor is agreeing to waive its lien rights even when the owner or contractor fails to pay. 

With these specific provisions, I find the solution is simple and relatively unobjectionable; I like to add the phrase “provided subcontractor has been paid for the work” at the beginning of the phrase. Subcontractors should be on the lookout for these and other potential pitfalls, and make sure they do not unwittingly leave themselves unprotected by accepting provisions that are inherently unfair.


When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Deciding Willful Exaggeration Of A Lien Before Trial

Randy J. Heller | Gallet Dreyer & Berkey

Filing a mechanic’s lien is easy. As those of my generation used to say, “all you need is a typewriter and a dream.” Just fill out a form, sign it, and walk it down to the County Clerk’s office and (for a small fee) you can file a lien on someone’s property (assuming you file it within certain time constraints).

There are penalties for misusing that right. A fraudulent lien is void. A willfully exaggerated lien is void and subjects the lienor to damages equal to the amount by which the lien was exaggerated.

For example, if a contractor/lienor was owed $75,000 but knowingly and willfully filed a lien for $125,000 against a property owner, the court could strike the lien and award $50,000 together with certain other costs including any premiums incurred to bond off the lien and certain legal fees.

The exaggerated lien claim can also be abused so it too has limits. There are often heated battles over (i) whether the lien amount was exaggerated; (ii) whether it was done “willfully”; and if so (iii) by how much. Courts therefore hold that issues involving an exaggerated lien should await a trial, and should not be ruled upon based on affidavits alone. All the evidence must be put forward. The parties must be subject to cross-examination under oath.

So established was this “wait for trial” principle that if a lienor, fearing he’d be found liable for willfully exaggerating his lien, withdrew his lien on the eve of trial, he could escape any punishment. Without a trial about the lien, there could be no finding of willful exaggeration.

A recent case found a mechanics lien willfully exaggerated without a trial. A fire damaged a building so severely that the New York City Department of Buildings ordered it demolished. The damaged building shared a party wall with a neighbor, so demolition had to be done carefully. The damaged building’s owner hired a contractor to do the careful demolition for “the fixed amount of any proceeds actually paid” by the fire damaged building’s insurance company. The contractor had to perform work on the party wall to protect the neighbor. The insurance proceeds were paid to the contractor. The contractor believed it was entitled to additional compensation, so it filed a lien for that amount against the hiring owner, and commenced a lien foreclosure action.

The owner answered. Disclosure was completed. The owner then moved on affidavits to strike the lien as being willfully exaggerated arguing that the contractor had no right to file any lien, given its agreement to do all the necessary work for the insurance proceeds. The owner asked the court to strike the lien and award damages without waiting for trial.

The court granted the motion, held the lien to be void and set the case down for an assessment of damages against the lienor. The court stated that while willful exaggeration “is ordinarily determined at the trial of the foreclosure action…a claim [of a willfully exaggerated lien]…is subject to summary disposition where, as here, the evidence that the amount of the lien was willfully exaggerated is conclusive.” Since the contract was clear that the “sole and total compensation due” was the insurance proceeds, the contractor should have known better and not filed a lien for more.

The takeaway is that there are some situations, where the evidence is conclusive) in which the determination of a willful exaggeration claim no longer need await a full-fledged trial.


When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Potential Changes on the Horizon to Ohio Lien Law

Aaron Evenchik and Tara Rose | Hahn Loeser & Parks

The Ohio General Assembly is considering a revision to Ohio private lien law to make it clearer when projects start and end and enable title to be clear on lien rights. Under 1311.04, a Notice of Commencement (NOC) is to be recorded before a project commences and remains in place for six years (1311.04(S)). That long time period made it more difficult for buyers and lenders, who purchased or refinanced property less than six years following the recording of an NOC, from knowing the impact of the NOC.

Proposed revisions to 1311.04 will:

  • Add to the NOC a “default” statement that it remains pending for three years (and not six)
  • Permit the NOC time statement to be modified, shorter or longer depending on the anticipated length of the project
  • Permit the owner to record an affidavit at the conclusion of the project, noting the project is over and notice of commencement is terminated

These potential changes will permit a title company to record a project-ending affidavit and require that the chain of title shows the Notice of Commencement is terminated. It will provide certainty where before there was a lingering issue, solved in different ways by different buyers, lenders, and title companies, and sometimes rejected by local recorders.

There is, however, the potential for abuse if an Owner records the termination affidavit before all lien time frames have run, for example before 75 days from last work. In that instance, if the notice of commencement was terminated, under the existing statute lien claimants work would relate back to first visible work rather than the Notice of Commencement recording. Contractors would also need to consider filing amended NOCs to keep the project protected in the event the work remains active past the time frame stated in the original NOC.


When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Lien Claims And The All-Important Lis Pendens

Samuel D. Gregory | Butler Snow

There are specific statutory rules governing liens. In Mississippi, for example, construction liens must be filed within 90 days of when work was last performed or labor, material, or services were provided. Then, a payment action to enforce the lien must be filed within 180 days or else the lien is void. What can sometimes be overlooked is that a lis pendens must also be filed with the payment action. The Mississippi Supreme Court recently held that timely filing a lis pendens is necessary to enforce a lien. And despite introducing legislation during the 2022 session to curtail the harshness of the Supreme Court’s decision, the bill never made it out of committee. Thus, a lis pendens remains vitally important. And since many states have similar statutory lien schemes, knowing one state’s interpretation can benefit practitioners elsewhere.

Why is a lis pendens important?

The purpose of a lis pendens is to put the world on constructive notice that there is a pending claim that could impact or impair the title to property. Mississippi construction liens are required to state in all caps: “THIS CLAIM OF LIEN EXPIRES AND IS VOID ONE HUNDRED EIGHTY (180) DAYS FROM THE DATE OF FILING OF THE CLAIM OF LIEN IF A PAYMENT ACTION IS NOT FILED BY THE CLAIMANT WITHIN THAT TIME PERIOD.” Thus, without a lis pendens advising that a payment action had been filed, a third party could check the land records and believe a lien had expired on its terms. And if the third party took some action in reliance on that belief, such as purchasing or taking a security interest in the property, there would be a huge mess to untangle if the payment action was later successful.

When should a lis pendens be filed?

Mississippi’s lien statute says that a “lis pendens notice shall be filed with the commencement of the [payment] action with a copy to the owner and contractor.” Miss. Code. Ann. § 85-7-405(1)(c)(i). Last fall, the Mississippi Supreme Court interpreted the word “with” literally and reversed and rendered judgment in favor of two property owners because the lis pendeses were filed a few months after the payment actions. See KD Oak Grove, LLC v. Warren & Warren Asphalt Paving, LLC, 324 So. 3d 1134, 1136 (Miss. 2021).

Some viewed the holding in KD Oak Grove to be overly harsh because there was no evidence that anyone was injured as a result of the lis pendens being untimely. Again, the purpose of a lis pendens is to put the world on notice of the pending claim. No third parties were affected by the lack of a lis pendens and the owners in KD Oak Grove were necessarily aware of the payment actions because they were parties. Thus, the lien claims were dismissed based on a technicality.

In response to KD Oak Grove, the Mississippi legislature proposed an amendment to Section 85-7-405(1)(c)(i) that would require a lis pendens to be filed within 90 days of filing a payment action. See 2022 Miss. S.B. No. 2465. Further, the proposed amendment would have specifically said that failure to file the lis pendens “shall not invalidate the claim of lien.” Id. Senate Bill 2465 never came to fruition, however, because it died in committee.

Takeaways

Following KD Oak Grove, the rule in Mississippi (absent a future statutory amendment) is that a lis pendens must be filed “with” a payment action or else the lien will become invalid. The KD Oak Grove opinion is also notable because it is at least the second case where the Mississippi Supreme Court adopted a strict and literal interpretation of Mississippi’s lien statutes that were enacted in 2014. See Land Holdings I, LLC v. GSI Servs., LLC, 265 So. 3d 147, 151 (Miss. 2019) (interpreting “work” to mean any work, including warranty work). Thus, anyone who is confronted with a lien issue would do well to take a close and literal look at the statutory language.


When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.


Construction Contract Tip – Subcontractors, Don’t Waive Your Right to a Lien

Sam DeBaltzo | Tonkon Torp

In the course of reviewing construction subcontracts, I’ve recently seen provisions similar to the following (simplified for convenience and confidentiality):

“The subcontractor shall reimburse the [Contractor and/or Owner] for any costs and expenses for any claim, obligation, or lien that arises from the performance of the work.”

“The subcontractor shall remove and discharge any lien, claim, security interest, or other encumbrance related to the subcontractor’s performance of the Work.”

The provisions are often followed with boilerplate requirements for paying the third-party claimant, bonding, reimbursement of attorneys’ fees, indemnification responsibilities, or other ways of providing security to the owner or general contractor. 

The purpose of these types of provisions is clear: owners want their projects completed free of liens, and they want the person responsible for the work to make sure that happens. This is an understandable position, and it is reasonable for any construction contract to require lien waivers. The problem is that these provisions do not require payment prior to the waiver.

Yes, if a subcontractor is paid, it should agree to keep the project clear of liens and remove any liens filed by its respective subcontractors or suppliers. But, until payment has occurred, retaining the powerful lien right is essential for any prudent subcontractor. Whether intentional by the drafting party or not, these provisions suggest the subcontractor is agreeing to waive its lien rights even when the owner or contractor fails to pay. 

With these specific provisions, I find the solution is simple and relatively unobjectionable; I like to add the phrase “provided subcontractor has been paid for the work” at the beginning of the phrase. Subcontractors should be on the lookout for these and other potential pitfalls, and make sure they do not unwittingly leave themselves unprotected by accepting provisions that are inherently unfair.


When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.