When Does a Mechanic’s Lien Go Into Effect?

Kent B. Scott | Babcock Scott & Babcock

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).

Don’t do this When it Comes to Construction Liens

David Adelstein | Florida Construction Legal Updates

When it comes to preparing and recording a construction lien, this case is an example of what NOT TO DO!   I mean it — this exemplifies what NOT TO DO!  It is also a case study of why a party should always work with counsel in preparing a construction lien so that you can avoid the outcome in this case–your lien being deemed fraudulent.

In Witters Contracting Company v. West, 2020 WL 4030845 (Fla. 2d DCA 2020), homeowners hired a contractor to renovate their home under a cost-plus arrangement where the contractor was entitled to a 10% fee on construction costs.  The contract also required extra work to be agreed in writing between the owner and contractor.

During construction a dispute arose.  The contractor texted the owner that it will cancel the permit and record a $100,000 construction lien if the owner did not pay it $30,000.   Shortly thereafter, the contractor’s counsel sent the homeowners a demand for $59,706 with back-up documentation.  Less than a week later, the contractor recorded a construction lien for $75,000.  The owners initiated a lawsuit against the contractor that included a claim for fraudulent lien.  The contractor then amended its construction lien for $87,239.

The trial court found that the contractor’s claim of lien was fraudulent because it was compiled “with such gross negligence as to the amount claims therein to constitute willful exaggerations.”   A trial was held on damages and $87,239 was awarded as punitive damages against the contractor, plus attorney’s fees and costs, all of which were permissible when a lien is deemed to be a fraudulent lien.

Think about it.  The contractor asked for $30,000 under the threat it will record a $100,000 lien.  It then sent a demand letter for $59,706.  Then it recorded a construction lien for $75,000.  Then it amended the construction lien to $87,239.  This was all in a very short time period.  And, this is likely why the lien was deemed to have been compiled with such gross negligence as the contractor, evidently, had no clue what he was owed under the cost-plus contract or, if he did, he went about it incorrectly.  It is possible the contractor was owed something, but the manner in which he went about it created the wrong perception.  It is unclear whether his counsel was involved in preparing the lien or why the lien was different from the amount in the demand letter sent by counsel.  Nevertheless, clearly, this is the perception you want to avoid and why working with counsel in preparing a lien is vital.

Georgia Changes Lien Law

Jennifer Grippa | Miles Mediation & Arbitration

On August 5, 2020, Georgia Governor Brian Kemp signed a new law, Senate Bill 315, changing Georgia’s lien law statute, O.C.G.A. 44-14-366. The new statute, effective January 1, 2021, makes clear that lien waivers only waive lien or bond rights against the property and do not waive the right to file a lawsuit for non-payment.   

The change in the law resulted from a 2019 decision by the Georgia Court of Appeals in ALA Constr. Servs., LLC v. Controlled Access, Inc., 351 Ga. App. 841, 833 S.E.2d 570 (Ga. Ct. App. 2019). In ALA Construction, the contractor signed an interim lien waiver at the time it submitted its invoice. Although the contractor never received payment, it failed to timely record an affidavit of non-payment or a claim of lien. The contractor later filed suit for breach of contract for non-payment. The Georgia Court of Appeals held that the statutory form lien waiver waived more than just lien rights, the waiver was binding against the parties “for all purposes,” not just for the purpose of preserving the right to file a lien on the property. The contractor’s breach of contract claim for non-payment was summarily denied.  

Effective January 1, 2021, the statutory form language required for lien waivers will change. The new law makes clear that waivers and releases signed pursuant to O.C.G.A. 44-14-366 are limited to the release of lien and bond rights and shall not effect any other rights or remedies of the lien claimant. The law also extends the deadline to file an affidavit of non-payment from 60 days to 90 days.

Change in Georgia Lien Law

William P. Baucom, Jason D. McLarry, Alexandra C. Apple and Hailey Barnett | Troutman Pepper

On August 5, 2020, Governor Brian Kemp signed Georgia Senate Bill 315 into law. This new law, which is codified at Title 44, Chapter 14, Section 366 of the Official Code of Georgia Annotated, substantially changes the way Georgia interprets statutory interim and final lien waivers.

CHANGE IN LAW

Under prior law, as recently determined by the Georgia Court of Appeals, lien waivers were effective for “all purposes” and were deemed to release lien rights and any other rights or remedies available to a claimant. ALA Constr. Servs., LLC v. Controlled Access, Inc., 351 Ga. App. 841, 843, 833 S.E.2d 570, 572 (2019), cert. denied (Apr. 20, 2020). In other words, if a claimant submitted a lien waiver and failed to timely file a claim of lien or an affidavit of nonpayment thereafter, all debts allegedly owed to the claimant were deemed paid-in-full and all claims related thereto, including breach of contract, were eliminated.

Under the current law, lien waivers and releases are limited to “waivers and releases of lien and labor or material bond rights and shall not be deemed to affect any other rights or remedies of the claimant.” O.C.G.A. § 44-14-366(a). In short, where a claimant submits a lien waiver and fails to timely file a claim of lien or an affidavit of nonpayment thereafter, the claimant retains all other rights it may have with respect to amounts it is allegedly owed, including the right to bring suit for breach of contract.

Less significantly, the new law also extends the time for a claimant to file an affidavit of nonpayment from 60 to 90 days, and the timely filing of an affidavit of nonpayment is now the only way for a claimant to nullify a waiver and release. O.C.G.A. § 44-14-366(f)(2)(C).

IMPACT ON OWNERS AND DEVELOPERS

Owners and developers in Georgia can no longer rely on lien waivers to preclude all claims and rights of action with respect to debts allegedly owed. A lien waiver will do only that – waive liens against the subject property. Actions for breach of contract for failure of payment will survive.

In addition, in relation to the extension of the time for filing affidavits of nonpayment, owners and developers must now wait a full 90 days for lien waivers to become fully effective.

The Notice of Contract Mechanism: How Contractors Can Avoid Double Payment

Jason Strickland | Ward and Smith

As the economic crisis stemming from the coronavirus pandemic unfolds, it is ever more important that contractors and subcontractors protect their payment rights and avoid the risk of double payment; i.e., the risk of having to pay twice for the same work. 

On private projects in North Carolina, one of the most common methods for protecting payment rights and defending against double payment claims is the Notice of Contract mechanism.  The Notice of Contract mechanism is also one of the most frequently misunderstood mechanisms within our lien law.

Double Payment

Double payment arises from the “contracting-chain” nature of large construction projects (See Exhibit A).  Construction projects typically involve an owner retaining a general contractor or construction manager to perform the construction.  The general contractor typically does not perform the work itself but rather retains subcontractors to perform different scopes of the total construction package.  Those subcontractors retained directly by the general contractor are known as first-tier subcontractors.  Those first-tier subcontractors will typically retain subcontractors themselves, those subcontractors being known as second-tier subcontractors.  It is not uncommon to have subcontractors or suppliers as “remote” as the second or third-tier on large construction projects.

Construction projects with subcontractors (including suppliers) at the second and third-tier levels confront the risk of default by parties in the middle tiers, particularly default by first-tier subcontractors.  The default often occurs where a first-tier subcontractor is paid by the general contractor but does not flow payments down to its second-tier subcontractors.  This, in turn, creates an issue with who will bear the loss of a first-tier subcontractor’s default.  Put simply, if the second and third-tier subcontractors perform work for and through a first-tier subcontractor, the first-tier subcontractor is paid for that work, and the first-tier subcontractor then defaults (e.g., by going bankrupt or by leaving the country and making themselves “unavailable” to pay anything) who carries the risk of that loss, the general contractor or the second and third-tier subcontractors?  In North Carolina on private projects (i.e., projects not owned by the federal or state government), absent strict adherence to the Notice of Contract mechanism, the risk of loss is on the general contractor.

The Notice of Contract mechanism came about because of an ambiguity in North Carolina’s lien statute.  Generally speaking, contractors have rights to lien the real property; subcontractors have rights to lien the project funds.  However, in addition to their rights to lien project funds, subcontractors also have the right to step into the shoes of the general contractor and—through the magic of the legal mechanism known as “subrogation”—assert the general contractor’s lien on real property.  When subcontractors were given the right to assert this subrogation lien on real property, the vast majority of construction lawyers understood that the right to assert the lien on real property by second or third-tier subcontractors was limited by the subcontractor’s right to a lien upon funds.  If a first-tier subcontractor had been paid in full, then the second- and third-tier subcontractors working for it would have no lien on funds (because no funds were owed to the first-tier subcontractor).  Thus, the assumption was that because the second and third-tier subcontractors had no lien upon funds, they had no right to a subrogation lien on real property.

To the surprise of many of these construction lawyers in 1991, in the case of Electric Supply Co. of Durham, Inc. v Swain Electrical Co., Inc., 328 N.C. 651, 403 S.E.2d 291 (1991), the Supreme Court of North Carolina held that based on ambiguous wording in the lien statute, a second and third-tier subcontractor’s right to a subrogation lien on real property was limited only by the amounts owed from the owner to the general contractor without regard to what, if anything, was owed to the first-tier subcontractor from the general contractor.  This rule created the risk of double payment on the part of the general contractor on private projects in North Carolina.

The double payment risk arises when a general contractor pays a first-tier subcontractor for work performed by second or third-tier subcontractors working for the first-tier subcontractor.  If the first-tier subcontractor defaults (or makes itself unavailable by flying off to Tahiti with the money), the second and third-tier subcontractors’ lien on funds rights are limited by the amount owing to the first-tier.  In this example, that amount is $0 or nothing since the first-tier subcontractor has been paid in full.  However, the second and third-tier subcontractors can also assert a subrogation lien on real property so long as money is owed from the owner to the general contractor.

This is the double payment problem on private projects: The second and third-tier subcontractors can recover through enforcement of their subrogation lien on real property, without regard to the amount, if any, owed from the general contractor to the first-tier subcontractor.  Because the general contractor already paid the first-tier subcontractor for the work at issue, the general contractor is effectively compelled to pay twice for the same work.  Put another way, the second and third-tier subcontractors can recover, through the subrogation lien on real property, without regard to the fact that the general contractor has already paid the first-tier subcontractor for the work and that the general contractor owes the first-tier subcontractor nothing further.  The owner will not be at risk of double payment. The general contractor will be forced to either pay the second and third-tier subcontractors or have their subrogation lien on real property enforced up to the amounts otherwise owed from the owner to the general contractor.  In simplest terms, the general contractor suffers a loss in the amount of the claims of the second and third-tier subcontractors, limited only by the amount owed from the owner to the general contractor at the time the subrogation lien is asserted.

In response to this double payment problem, the General Assembly, as is often the case with our lien law, did not directly overturn the Supreme Court. Instead, it added a new section to the lien law that allows the general contractor to utilize the Notice of Contract mechanism to shift the risk of loss from first-tier subcontractor defaults onto second and third-tier subcontractors.  This allows the general contractor to avoid the double payment.

How Notice of Contract Works

Step 1: General Contractor Plays First Card with Notice of Contract

Under the Notice of Contract mechanism, set forth in N.C. Gen. Stat. § 44A-23, a general contractor wishing to protect itself from double payment on a private project, will first post and file a Notice of Contract.  A Notice of Contract contains the following items:

  1. Name and address of the general contractor.
  2. Name and address of the owner of the real property at the time the Notice of Contract is recorded.
  3. General description of the real property to be improved.
  4. Name and address of the person, firm, or corporation filing the Notice of Contract.

A sample is shown in Exhibit B.  The Notice of Contract must be both posted at a visible location on the job site and filed with the clerk of court for the county in which the project is located.  This must be done within 30 days of the latter of i) the building permit issuing, or ii) full execution of the contract between the owner and the general contractor.

Posting the Notice of Contract inside the jobsite trailer will probably not count as a visible location because the jobsite trailer is not always accessible.  A good rule of thumb is to post the Notice of Contract in a location where a material delivery truck driver could easily hop out, locate the Notice of Contract with little or no inquiry, and take a photo of the Notice of Contract without hassle.    Further, although the statute does not require it, it is recommended that the general contractor take date-stamped photos of the Notice of Contract posted at the visible location at the job site.  This will help prove that the Notice of Contract was, in fact, posted where and when it was required. 

Step 2: Subcontractor Responds with Notice of Subcontract

Any second or third-tier contractor who wishes to protect itself from the risk of a first-tier’s default in response to the Notice of Contract must serve a Notice of Subcontract on the general contractor. The Notice of Subcontract must be served in the same manner as a complaint, i.e., FedEx, UPS, or registered mail with receipt confirmation or by personal delivery by a sheriff’s deputy.  The Notice of Subcontract must contain the following information:

  1. Name and address of the subcontractor.
  2. General description of the real property to be improved.
  3. General description of the subcontractor’s contract, including the names of the parties thereto; and a general description of the labor and material performed and furnished thereunder.
  4. A statement of the following: “Request is hereby made by the undersigned subcontractor that he be notified in writing by the contractor of, and within five days following, each subsequent payment by the contractor to the first tier subcontractor for labor performed or material furnished at the improved real property within the above descriptions of such in paragraph (2) and subparagraph (3)(ii), respectively, the date payment was made and the period for which payment is made.”

A sample Notice of Subcontract is shown in Exhibit C.

Step 3: General Contractor Plays Last Card with Continuing Notices of Payment

If the general contractor posts Notice of Contract and the second and third-tier subcontractors provide Notice of Subcontract, then the general contractor is put back in the position it was in had it never posted Notice of Contract.  In order to retain the benefit of the Notice of Contract mechanism, the general contractor must play the last card.  The general contractor must, each time it pays the first-tier subcontractor, provide a Notice of Payment to each and every second and third-tier subcontractor who has provided a Notice of Subcontract.  The Notice of Payment must be sent within five (5) days of the payment and must be sent via FedEx, UPS, or registered mail with receipt confirmation or by personal delivery by a sheriff’s deputy.  A sample Notice of Payment is shown in Exhibit D.

If all of these listed steps above occur, then the second and third-tier subcontractors are prohibited from asserting a subrogation lien on real property.  This effectively shifts the risk of a first-tier subcontractor default from the general contractor to the second or third-tier subcontractors and eliminates the general contractor’s double payment risk.  The second and third-tier subcontractors must protect themselves by using the information provided through the Notices of Payment.  As soon as they receive notice of a payment to the first-tier, they should immediately lien funds if they do not receive a corresponding payment.

Note that the owner is never at risk of double payment, and the Notice of Contract mechanism does not interfere with the payment rights of the subcontractors against the first-tier subcontractor.  Note also that the first-tier subcontractor is never implicated in the Notice of Contract mechanism, at least for purposes of providing notices.  Note also that in the case of a private payment bond, the Notice of Contract mechanism will not alter the obligations under that bond.

Frequently Asked Questions

Question:  I am the general contractor.  What if I post the Notice of Contract at the jobsite and fail to file it with the clerk of court?

Answer:  You have failed to comply with the requirements of the statute and therefore, will not have the protection provided by N.C. Gen. Stat. § 44A-23.  Posting without filing is of no effect.  Similarly, filing without posting is of no effect.  Both must occur.

Question:  I posted Notice of Contract, and after making several payments to the first-tier subcontractor, received a Notice of Subcontract from one of its second-tier subcontractors.  Should I provide those second-tiers with Notice of Payment when I make further payments, and have I lost the benefit of a Notice of Contract because I already paid the first-tier?

Answer:  You should provide Notice of Payment to the subcontractors each time you pay the first-tier subcontractor subsequent to receiving the Notice of Subcontract.  You have not lost the benefit of the Notice of Contract mechanism, although the statute is not explicit on this point.  A close reading of this statute suggests that the Notice of Payment obligation is triggered only after receiving the Notice of Subcontract.  You cannot practically be obligated to file a Notice of Payment to a second or third-tier subcontractor who has not provided Notice of Subcontract.  However, if the Notice of Subcontract is provided at any point subsequent to the Notice of Contract being provided, then any subsequent payments to the first-tier subcontractor must have Notice of Payments sent within five days to the second or third-tier subcontractors.

Question:  I have one contract with the owner, but it is for separate buildings, each of which has its own permit.  Do I need separate notices of subcontract?

Answer:  Ideally, the permit would follow the contract, and thus you would have one permit per contract with the owner.  In this situation, however, it would probably be best to follow the subcontracts.  If there are different subcontracts relating to each permit, then you should have a separate Notice of Contract for each permit.  However, if you will have one subcontract with each first-tier subcontractor for the entire project, it probably makes sense only to have one Notice of Contract posted and filed.

Question:  I provided notice to the lien agent.  Doesn’t that do the same thing as Notice of Contract or Notice of Subcontract?

Answer:  No, the two mechanisms are totally different.  You should certainly provide notice to lien agent, but doing so protects other aspects of your own lien rights—it does not satisfy the requirement to post Notice of Contract if you are a general contractor or to provide Notice of Subcontract if you are a second or third-tier subcontractor.

Question:  I’m a first-tier subcontractor and was paid in full by the general contractor.  The general contractor didn’t post the Notice of Contract.  Does that mean I’m off the hook and can make the general contractor pay my subcontractors?

Answer:  No.  As a first-tier subcontractor, you remain liable for your obligations.  Notice of Contract is not for your benefit. Its purpose is to help general contractors and second and third-tier subcontractors manage the risk of your default.  You will be required to pay your subcontractors what you owe them, or the general contractor will be entitled to recover from you what it had to pay them to address their claims, which you wrongfully failed to pay.

Question:  I work for a general contractor, and I handle the checks.  Sending out certified letters each time I pay a first-tier subcontractor is expensive and time-consuming.  This doesn’t seem like something that is worth it?

Answer:  Yes, it is.  It will only take one instance of your employer having to double-pay a five-figure (or even six-figure) amount, plus attorneys’ fees, for them to quickly determine that it is “worth it.”

Question:  I’m a fourth-tier supplier on a large construction project.  One of my deliverymen found a Notice of Contract posted at the jobsite.  Should I send in a Notice of Subcontract?

Answer:  No.  While there is no harm from doing so, there is also very little benefit.  Fourth-tier and more remote subcontractors and suppliers do not have a right to assert a subrogation lien on real property and therefore, cannot force double payment in the same way that a second or third-tier subcontract can.  You should be vigilant about getting paid timely, asserting a lien upon funds, and asserting a payment bond claim.

Question:  Is the Notice of Subcontract the same thing as the Notice of Public Subcontract?  If not, what’s the difference?

Answer:  Not exactly.  Notice of Subcontract is used on private (nongovernment owned projects).  There is a mechanism on state-owned projects in North Carolina that is similar to but different from the Notice of Contract mechanism.  On state-owned projects, the second-tier and more remote subcontractors must provide a Notice of Public Subcontract to protect their bond rights.

Question:  I’m a first-tier subcontractor.  Should I provide a Notice of Subcontract in response to the posting of a Notice of Contract?

Answer:  No.  As a first-tier subcontractor, you cannot force double payment from a general contractor—the general contractor already having paid you is a defense to your payment claim.  Similarly, the general contractor already knows you’re there, so there is no need to “wave that flag.”

Question:  I’m the project owner.  Should I be using the Notice of Contract mechanism and, if so, why?

Answer:  Yes. The statute allows you to post Notice of Contract.  Although you are not technically at risk of having to pay twice for the same work, you will want a lien-free project at the end of the construction work.  Having another tool to thwart or defend against subcontractor liens against the real property is, therefore, beneficial.  It is recommended that the owner include a provision in the contract with the general contractor requiring the general contractor to post and file Notice of Contract and to follow the Notice of Contract process otherwise.

Question:  If there is a payment bond on the project, does the Notice of Contract affect claims against that bond, and, if so, how?

Answer:  No, the Notice of Contract mechanism or following it will have no effect on claims against the bond or defenses thereto.  Claims against the bond and defenses thereto will be governed by the terms of the bond itself (a slightly different rule applies on government projects, which includes a requirement that the bond be obtained).

Question:  I’m a second-tier subcontractor.  I sent in a Notice of Subcontract when I saw the Notice of Contract posted at the jobsite.  But, I never received any notices of payment when the general contractor paid the first-tier subcontractor for whom I was working.  I asserted a subrogation lien on real property, but the general contractor is now saying that they were paid in full by the owner and that the general contractor provided a final lien waiver to the owner, both before I filed my subrogation lien on real property.  Based on what you said above, should I still be able to recover since the Notice of Contract process wasn’t complied with by the general contractor?

Answer:  No.  Although the general contractor did not strictly comply with the Notice of Contract process, such failure just puts the general contractor back in the position they would have been if they had never posted Notice of Contract.  If what the general contractor is telling you is true, your claim fails for two reasons:  1) as noted above, your subrogation claim is still limited by the amounts owed from the owner to the general contractor which, under these facts, is $0; and 2) the Notice of Contract statute also contains a provision that says the general contractor can waive both its lien rights and your subrogation lien rights at any point prior to you fully perfecting your subrogation lien.  (Note, for this reason, subcontractors should, regardless of whether Notice of Contract is posted, still assert their lien upon funds and their subrogation lien on real property as soon as possible after completing their work).

Question:  I’m a subcontractor.  I thought I could lien funds at any time and that I had 120 days from the last furnishing to assert a lien on real property.  Why do I need to be in a hurry?

Answer:  As noted in the previous response, payment from the owner to the general contractor is a defense to a lien upon funds. Similarly, there is no right to a subrogation lien if the owner has paid the general contractor in full or if the general contractor has provided the owner with a final lien waiver.

Conclusion

If you, as a general contractor, do not file a Notice of Contract mechanism on private projects, then you are at risk of double payment.  You should be like Nike, and just “do it.”  As a subcontractor, if you do not provide Notice of Subcontract on private projects where Notice of Contract is posted and filed, then you are at risk of being left with the proverbial bag in the case of a first-tier subcontractor default.