Senate Bill 49 Establishes Lien Rights for Registered Design Professionals

Rick W. Grady and Allen L Rutz | Vorys Sater Seymour & Pease

On July 1, 2021, Governor DeWine signed Senate Bill 49 giving lien rights to Ohio architects, landscape architects, professional engineers, and professional surveyors (design professionals) beginning September 30, 2021.  The lien rights are limited to:

  • Commercial real estate projects,
  • With a written contract signed by the design professional and project owner,
  • Only to the extent of the project owner’s interest in the property, and
  • Only in the amount due the design professional under the contract.

In addition, only the design professional named in the contract – whether an individual, partnership, corporation, or association – has lien rights.  Lien rights are not available to an employee or agent of the design professional and, unlike mechanics’ liens, lien rights are not available to lower tier design professionals not in privity with the project owner. 

The design professional’s lien is junior in priority to any other valid liens (regardless of recordation date) and all previously recorded mortgages and liens. Any person with an interest in the commercial real estate may substitute financial security (e.g., a bond or escrow account) for the lien, in the amount of the lien.

To perfect the lien, the design professional must file a notarized affidavit with the county recorder. The design professional must then serve the lien affidavit on the project owner and the property owner (if different) within 30 days. Failure to properly serve the lien affidavit may result in a court considering equitable remedies for the failure. Following perfection, the design professional must commence proceedings to enforce the lien within two years, or within 60 days of receiving a Demand to Commence Suit. Otherwise, the lien is extinguished by operation of law.

Once the lien is satisfied (i.e., paid in full) the design professional must record a written release within 30 days. When a claim is satisfied or extinguished, any person with an interest in the property may record an affidavit stating that the claim was satisfied or that the lien was released by operation of law. This is true regardless of whether the design professional records a release. However, the fact that the lien is satisfied or extinguished does not affect any other right or action by the design professional. For example, the design professional may still bring a claim for breach of contract.

Mechanic’s Liens: Five Things That Everyone Should Know

Deb Mackay and Carl Pebworth | Faegre Drinker Biddle & Reath

Anyone who works in construction and on construction projects will deal with mechanic’s liens. Sometimes referred to as construction liens or property liens, mechanic’s liens are typically statutory creations designed to protect contractors, subcontractors and suppliers that have not been paid for work performed or materials supplied relating to work performed on a piece of real property. Here are five things to keep in mind when dealing with mechanic’s liens.

Knowing your mechanic’s lien rights as a contractor, supplier or property owner is critical. Mechanic’s liens are created by statute in every state. That means that mechanic’s lien rights and practice can vary — sometimes dramatically — between jurisdictions. It is essential to know and understand how a given jurisdiction interprets, applies and enforces mechanic’s liens.

Mechanic’s lien rights can be lost if not properly perfected. As statutory creations, most jurisdictions insist upon strict compliance with rules necessary to create or “perfect” a mechanic’s lien. When a lien must be perfected — and where and how to do that — are important issues and concerns. Once a lien is properly perfected, many states require the lienholder to file a claim in court to enforce the lien within an expedited timeframe (often a one-year deadline) or a properly perfected lien can expire.

When properly perfected, mechanic’s liens are a powerful tool for lienholders. Assuming that a lien has been properly perfected, it can afford substantial and valuable leverage for a lienholder to get paid. Many states award mandatory attorney’s fees for mechanic’s lien claims, for example. Taken to a final conclusion in a worst case-scenario for property owners, mechanic’s liens can be foreclosed against the property. This ultimately results in a judicial sale of the property. Property owners and potential lien claimants therefore need to attend closely to lien claims.

Mechanic’s lien disputes can be substantively quite complicated for all parties concerned. Efforts to enforce a mechanic’s lien or to defend against a mechanic’s lien can be quite involved, particularly if a substantial amount is at stake. Who has lien rights? Has the lien been properly perfected? What is the amount of damage that may be collected in lien claims? Was the lien claim filed in time? These are just some of the issues that can be disputed.

Mechanic’s lien statutes and the rights and obligations that flow from these statutes can change in important and substantive ways. For example, Texas just enacted new legislation affecting mechanic’s, contractor’s and materialmen’s liens. As with many jurisdictions, Texas mechanic’s lien statutes were originally promulgated more than 100 years ago. The new legislation will “modernize” these statutes in ways that in several instances impact the rights and obligations surrounding mechanic’s liens.

Effectively enforcing and defending mechanic’s lien rights claims is essential in today’s commercial market. Understanding and reacting to circumstances where lien rights are an issue can be the difference between a timely completed and profitable project and a project that experiences time delays, cost overruns and revenue shortfalls.

Utah Owners Cannot Simply Rely on Construction Lien Registry Search Results to Find Valid Preliminary Notices

Mark Morris and Tyson Prisbrey | Snell & Wilmer

In December 2020, the Utah Court of Appeals found that, because a contractor’s preliminary notice contained the statutorily required information, although in unconventional order, the notice was valid.

In Zion Village Resort, Pro Landscape U.S.A. performed work on a condominium development and filed preliminary notices with the Utah State Construction Registry pursuant to the state construction lien laws. Pursuant to Utah Code Ann. § 38-1a-501(1)(h)(i), a preliminary notice must include certain information, including the “name, address, telephone number, and email address of the person providing the construction work.” In Pro Landscape’s preliminary notices under the line “Person Furnishing Labor, Service, Equipment, or Material,” the Pro Landscape listed “Chad Hansen,” and provided an address, email address and telephone number. Under the line provided for “comments,” the notices stated that the “services [were] provided by Pro Curb USA LLC DBA Pro Landscape USA.” Pro Landscape later filed construction liens on various parts of the development.

Zion Village filed a petition to nullify the construction liens, arguing that the they were invalid because Pro Landscape failed to file valid preliminary notices as required by statute. The trial court concluded that the notices were filed by Chad Hansen, not Pro Landscape, and therefore the notices “neglected to include such basic information as the identity of the actual lien claimant.”

On appeal, Pro Landscape argued that the preliminary notices contained all the statutorily required information, including the name, address, telephone number and email address of the person providing the construction work. Zion Village argued that because Chad Hansen rather than Pro Landscape is listed on the line asking for identification of the “Person Furnishing Labor, Service, Equipment or Material,” the notices were deficient.

The court found that Pro Landscape, by identifying itself in the comments section of the preliminary notice, had substantially complied with the statute. “While Pro Landscape may have set forth the required information in an unconventional sequence, the preliminary notices it filed contained all statutorily required information.”

Zion Village argued that the court’s holding frustrated the practical functioning and purpose of the registry, which serves as a database that allows interested persons to search for preliminary notices on a property. When Zion Village searched the registry’s database for preliminary notices filed by Pro Landscape, none turned up in the result because “Chad Hansen” and not Pro Landscape was listed on its notices as the “Person Furnishing Labor, Service, Equipment or Material.” Zion Village asserted that interested persons should be able to rely on the search results without having to searching through all preliminary notices individually. The court was not persuaded, noting that the construction lien statute mandates the application of a “substantial compliance” standard, rather than a strict compliance standard.

The court’s holding in Zion Village stands as a warning to property owners that one cannot rely on the search results to determine whether a party has a preliminary notice on file. Given the “substantial compliance” standard, as long as a preliminary notice has the statutorily required information in the notices somewhere, it is valid.

Mechanic’s Liens and Leases Don’t Often Mix Well

Christopher G. Hill | Construction Law Musings

As those who read my “musings” here at this construction law blog are well aware, the topic of Virginia mechanic’s liens is one that is much discussed.  From the basic statutory requirements to the more technical aspects of these tricky beasts.  One aspect of mechanic’s liens that I have yet to discuss in detail it how these liens attach in the situation where the contractor does work for a lessee and not for the owner of the underlying fee interest in the property.

A recent case out of the Western District of Virginia federal court, McCarthy Building Companies Inc. v. TPE Virginia Land Holdings LLC,  discusses the interaction of Va. Code 43-20, work on a leasehold, and parties necessary to any litigation relating to a lien for the work on that leasehold. The basic facts, outlined more thoroughly in the linked opinion, are these.  MBC provided certain work to TPE Kentuck Solar, LLC on property leased from TPE Virginia Land Holdings, LLC.  The lease was for a fixed term and for a fixed amount regardless of the work performed at the property.  MBC was unpaid by the Kentuck entity and then recorded a lien on the property and then sued to enforce that lien and for unjust enrichment against TPE Land Holdings.  TPE Land Holding filed a motion to dismiss the mechanic’s lien and unjust enrichment counts.

The Court heard oral argument and then went into an analysis of the above-referenced statute and whether TPE Land Holdings was a necessary party that had any interest in the “property” subject to the lien.  The Court put the question as follows:

The question, therefore, is not who has an interest in the land generally; rather, the court must ask who has an interest in the “part” of the land that Kentuck possesses. Specifically: Who has an interest in Kentuck’s leasehold interest?

Upon review of the lease and the relationships among the parties, the Court determined that the only party with an interest in the leasehold was Kentuck and that no action on the lien could diminish the property interest in the underlying property owned by TPE Land Holdings.  In short, TPE Land Holdings gave up its interest in the leasehold when it leased the land to Kentuck.  Even in the event that the lien suit lead to foreclosure, the worst that could happen is a new tenant would take over the lease and TPE Land Holdings would have potentially worse luck enforcing the lease.  Even in this scenario title to the underlying land would not be affected by the lien or its enforcement.  Therefore, the Court stated, TPE Land Holdings is not a necessary party or even a proper party to the lien counts and must be dismissed.

The Court dismissed the unjust enrichment count as well.  The Court stated that due to the fixed nature of the lease payments along with the fact that MBC failed to plead the requisite elements of an unjust enrichment claim, key among them that TPE Land Holdings was aware it may have to pay for the work performed under the contract with Kentuck.  Aside from MBC’s failure to plead all of the elements of such a claim, the Court stated that nothing MBC did affected the value of the leasehold from the perspective of TPE Land Holdings given the way the lease was drafted such that the work at the property would not affect the lease payments or other lease aspects that were set long before the work was performed.

My take?  Aside from the usual advice to read the opinion in full and to consult an experienced Virginia construction attorney, this case is a good primer on the interaction of leases and Virginia mechanic’s liens.  I recommend it to your reading.

Using Lien and Bond Claims to Secure Project Payments

Jonathan Cheatham | Construction Executive

While suing in court for payment on a construction project is nothing new, the very notion of non-payment tends evokes images of hard-working contractors and subcontractors, working with tight margins, owed payment for services rendered and materials. Fortunately, for general contractors and subcontractors in the construction industry, there are better remedies for securing payment on a project before it becomes a bigger issue.

Construction projects, especially large public ones, usually include a dizzying array of general contractors, subcontractors and independent contractors, sometimes numbering more than a hundred entities. The inter-connected groups of companies working toward the goal of project completion require competent construction management in order to stay on time and on budget for completion. One of the project owner’s key tools used to ensure the process runs smoothly is the use of payment bonds and surety bonds.  

PAYMENT BONDS

Payment bonds ensure that contractors and subcontractors get paid for work performed in accordance with contract conditions. Disputes can occur before, during and even after the completion of work. Injunctive lawsuits, which contemplate the stoppage of work, would be detrimental to completing a public or private construction project of substantial size. Rather than having such minor disputes derail the entire project, the aggrieved party’s remedy is to file a claim against the payment bond, which offers a solution designed to keep the issue separate from the project’s completion. The payment bond also allows the project owner to transfer risk.

Payment bonds also act to vet contractors and subcontractors to project owners. Likewise, they also protect subcontractors from non-payment by the general contractor, thereby ensuring the timely completion of large construction projects. They also have the added value of increasing a contractor or subcontractor’s reputation over time, leading to better credit and increasing the likelihood of involvement of future construction projects.

LIENS

As a contractor or subcontractor, what are options if and when non-payment becomes an issue? On owner-funded construction projects, the subcontractor generally has two remedies available; filing a mechanic’s lien and making a claim against the payment bond. A mechanic’s lien is a secured interest in real property that ensures payments to a party who has improved the real estate with labor, materials or supplies. The mechanic’s lien creates a security interest in the improved real estate for the amount due and owed. Another advantage is that they are simple to file and easy to perfect. The liens are effective, inasmuch as they make it difficult for an owner to obtain continued project financing or a certificate of occupancy upon the completion of a project. 

A mechanic’s lien is ineffective, however, on a public project, where laws involving mechanic’s liens don’t apply and filing against the payment bond is usually the only remedy. Use of a mechanic’s lien is therefore generally effective for private construction projects. It’s important in many jurisdictions that the subcontractor filing a mechanic’s lien have some type of identifiable “contract” with the property owner, which forms the basis of eligibility to file a mechanic’s lien.

SURETY BOND CLAIMS

The second remedy is a claim filed against the project’s payment bond, especially used in situations involving large public projects. Payment bonds provide an underwritten payment guarantee for work performed and the specific amount due to any subcontractors. The payment bond creates a contractual obligation to pay the subcontractor, per the terms of the payment bond contract. A claim against the payment bond may be the exclusive remedy on large public projects. The procedure for filing a claim is contained within the language of the payment bond. 

FILING DEADLINES

Subcontractors should always be aware of the filing deadlines for both a mechanic’s lien and a claim against a payment bond. A failure to timely file and perfect a claim or lien is often a waiver, and therefore disqualifying to subcontractors seeking payment. A majority of jurisdictions have timetables for the timely filings of mechanic’s liens or claims against a payment bond that vary. 

It’s highly recommended to seek the advice of an attorney who specializes in construction law to determine the deadlines in the jurisdiction where the subcontractor has completed the work, but still seeks payment. These deadlines are typically set from the date of the last work performed by the subcontractor, so the completion date is important to document. Deadlines are generally between 90 days to one year following the last date of work.

Knowing legal remedies in the performance of unpaid work is crucial to the ongoing business practices of any contractor or subcontractor. Disputes will invariably arise, so protecting the company and business interests through the use of mechanic’s liens and claims against payment bonds ensure that rights are protected, remedies for non-payment exist and that they are enforceable.