Construction Law History Lesson No. 1: What Do Thomas Jefferson and Mechanics Liens Have in Common?

David K. Taylor | Buildsmart

Construction law is NOT boring, at least that’s what I tell my daughters. In these series of posts, I will explore some of the VERY interesting historical facts about construction law that can be used at your next motion hearing, family gathering, social event or fellow lawyer meeting.  While these anecdotes may not keep your kids or significant others from rolling their eyes, hopefully they can provide a small respite from your (yes, I admit) sometimes boring life in construction law.

Fact: if there is anything state court judges hate more than discovery disputes, it’s dealing with mechanic’s liens. You see their judicial eyes roll up. How many times has an owner uttered sheer astonishment when their lawyer says that they may have to pay twice for materials or labor on a project?  How is that even possible in the good old U.S. of A? No matter what side you are on, to spice up a brief or oral argument when lien statutes are at issue, make a note to “get patriotic” by mentioning one of our founding fathers: our third president, Thomas Jefferson. Why? Because TJ, as he is affectionally called, actually is the founding father of United States lien law.

To encourage construction in the new capital city of Washington, the federal government, as well as the new state of Maryland, were trying to convince mechanics (back then that meant “laborers”) to do work and provide “credit” to get the new capital built. The history books show that TJ worked with the Maryland General Assembly to establish the United States’s (and the world’s) first set of unique construction lien laws. 

However, don’t go too far out on a lien limb because TJ, despite his many attributes, did not conceive the basic idea of a lien. There were already lien-like privileges in some civil law countries such as France (which TJ loved) and Spain, and some historians trace their roots to the mighty Roman Empire (please do not buy a lien history book for your favorite construction lawyer…if they even exist). Also, remember that despite the Louisiana purchase, since Louisiana had been controlled by both Spain and France, the French Napoleonic Code had been adopted.  With knowledge about some of these civil law concepts, what then occurred was the encouragement and colonial arm twisting of landowners (“thou must be joking…”) to pass legislation to provide to builders and suppliers rights against the land itself, along with their basic breach of contract rights against the entity that hired them to do the work. Pretty much all states eventually followed Maryland’s lead, and in Texas and California, mechanic’s liens are a constitutional right.

The result was the “builders” that built our great capital and our country know they have statutory legal rights even if the entity that hires them “takes the money and runs.” While these days debtors prisons are out, when payments for work do not properly “flow down,” like ants at a picnic, there are many claims and little opportunity to recover spent money and materials.  These rights have become even more important in these modern days when many commercial (and residential) prime contractors do not self-perform and subcontract out 100% of the actual work. As the great philosopher Tom Cruise famously said, “Show me the money!” 

Of course, since liens are against common law, most case law and judges agree that lien laws have to be strictly interpreted: 100% compliance is generally the rule versus the exception. While many states have attempted to update and modernize lien laws, the next time you pull out your state’s lien statutes, take a look at the legislative history of a few specific statutes and you will see references to the 1800s and case law from the early 1900s. It also goes without saying that lien laws differ in every state, so be very, very careful if you represent a client in a lien law issue in an unfamiliar state. Local counsel who knows the nuances and ins and outs of sometimes ambiguous lien laws is many times a must.      

So, what’s the bottom line and why refer to Thomas Jefferson in your next brief, at the dinner table or in front of a state court judge who may just want to move on and handle a discovery versus lien law dispute? You can, first of all, liven things up. When have you been able to — no matter what side of the lien table you are on — stand up and talk about the founding of our country and the laws that began in the early 1800s by one of the most revered presidents in United States history? If you represent a lien claimant, how dare the owner try to get out of paying a laborer/supplier? How unpatriotic and ashamed TJ would be. If you represent the owner, you can cite the common law and state that even TJ, also a renowned lawyer and landowner, made sure that the “t’s” and “i’s” of this purely unique statutory scheme must be enforced and followed. Either way, sometimes even judges need some entertainment in the middle of a long, tedious, and sometimes boring motion docket, and fathers need to know that sometimes their kids do not think that they are the most boring lawyers in the world.

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.

Statutory Update – New Protections Against Broad Waivers of Lien Rights

Brett Becker | Nexsen Pruet

Ensuring the language in lien waivers is conditional upon the actual receipt of payment and that the waiver is limited to the extent of payment received have long been the most crucial issues whenever presented with a lien waiver in North Carolina.  While due diligence is always expected when signing waivers, it appears that the North Carolina state legislature and Governor are working toward providing safeguards even if you fail to ensure conditional or limiting language is added.  On January 26, 2022, Governor Roy Cooper signed Session Law 2022-1, providing a new section to the General Statutes significantly limiting the enforceability of certain lien waivers.

Pursuant to new § 22B-5 in Article 1 of Chapter 22B of the General Statutes, “Provisions in lien waivers . . . purporting to require a promisor to submit a waiver or release of liens or claims as a condition of receiving interim or progress payments due from a promisee . . . are void and unenforceable unless limited to the specific interim or progress payment actually received by the promisor in exchange for the lien waiver.”  In short and depending upon how the courts review and interpret the new § 22B-5, a lien waiver is unenforceable unless the party waiving the lien rights actually receives payment for the amounts waived.  Not subject to being rendered unenforceable by § 22B-5 are the following two exceptions: (1) lien waivers for final payments, and (2) settlement agreements to resolve disputed claims after the claimant has identified the claim in writing, regardless of whether or not a lawsuit or arbitration was initiated.  The true application of § 22B-5 is limited to lien waivers sought in the course of routine progress payments, protecting the potential lien claimant from waiving lien rights for work subject to the progress payment but not yet paid, disputed claims, as well as for future lien rights not yet accrued. 

§ 22B-5 may be used to argue protection for a potential lien claimant’s existing claims for additional payment under disputed claims or change orders prior to the time of the waiver, even if the potential lien claimant explicitly waives all claims up through the date of the waiver / progress payment. This is because § 22B-5 makes void the waiver except to the extent of the payment actually made. However, the party obtaining the lien waiver that includes a general release of all claims through the date of the waiver may argue there was a settlement agreement resolving a dispute as to a claim previously made in writing. This scenario may present an issue for the courts in addressing whether and to what extent the second exception in § 22B-5 applies. 

Prior to the enactment of § 22B-5, North Carolina only invalidated lien waivers for future lien rights in anticipation of and in consideration of being awarded a construction contract.  At any point thereafter, a complete lien waiver was generally enforceable.  The new § 22B-5 goes a long way to protect the lien rights afforded contractors, subcontractors, and suppliers under Chapter 44A from being prospectively waived whether unintentionally or even coercively by the party seeking the waiver. 

While the party seeking a lien waiver should pay particular attention not to violate the statutory mandates of § 22B-5, it is equally important for those presented with lien waivers not to rely solely upon the new statutory protections afforded.  When § 22B-5 becomes effective March 1, 2022, it will not be a surprise to see a continued practice of upstream parties presenting final and broad unconditional lien waivers for interim payments, which may also include a general release of all claims. Without a firm grasp on how broad the courts will apply the new statute, particularly as lien waiver drafters attempt to circumvent the provisions of § 22B-5, it remains crucial to critically analyze each lien waiver presented to you on any project. It remains prudent that a party presented with a lien waiver ensure the language explicitly states the waiver is conditional upon the actual receipt of the amount owed on the progress payment. The practice of preserving lien rights is one of the most critical tools for the prudent contractor/supplier to ensure payment for labor, materials, or equipment furnished.

North Carolina’s enactment of § 22B-5 closes the gap on the protections that have long been afforded to parties in South Carolina who sign lien waivers.  South Carolina generally does not enforce agreements to waive lien rights unless payment substantially equal to the amount waived is actually made.  S.C. Code Ann. § 29-7-20(2).

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.

Virginia Mechanics’ Liens: What Contractors Need to Know

Jackson Nichols and Paul Felipe Williamson | Cohen Seglias Pallas Greenhall & Furman

Welcome to the DMV Construction Law Series, where each month we examine a different set of legal issues important to contractors. Our fourth installment briefly examines certain key parts of Virginia’s Mechanic’s Lien Law that contractors should be familiar with when undertaking a project in Virginia.

A mechanics’ lien is an encumbrance on real property or a leasehold that acts as security for unpaid labor, material or construction services that is typically available to contractors and subcontractors. Our first post gave an overview on lien law in the three DMV jurisdictions, including important timing mechanisms for recording liens in DC, Maryland and Virginia. In our second and third installments, we provided a more in-depth look at mechanic’s liens in DC and Maryland, respectively. Next up is Virginia, which comes with its own set of guidelines.

Distinctive Virginia Features

As we noted previously, Virginia law requires contractors to file mechanics’ liens in the land records office of the county where the project is located either within 90 days of the last supply of labor or materials (if the project is completed), or within 90 days of the last day of the month in which the contractor last performed labor or supplied materials, if the project is ongoing.

Virginia also has a unique additional timing requirement known as the 150-Day Rule. As noted above for the lien filing deadline, a contractor must count forward from the last day it performed work or supplied materials to a project. Under the 150-Day Rule, the contractor must also count 150 days backwards from that last day of work to determine how much labor and/or materials can be included in its lien. Essentially, contractors liening a Virginia project may only lien in 150‑calendar day chunks of time. Because of this rule, contractors may need to file multiple liens on a Virginia project to capture all of the labor/material they provided to that project, and for longer duration projects they may need to begin recording liens before the project is completed. This requirement is very strictly construed – exceeding this time period, such as by filing a lien for 151 days of work, can invalidate the entire lien. Claimants should be careful in determining what day any work was performed (or materials delivered) that underlie the lien claim.

Another distinct feature of Virginia lien law is the unusual priority it gives to lien claimants. Virginia liens enjoy the highest priority of any liens in the DMV, and perhaps in the country. Once established by recording the lien, Virginia liens can have priority over (i.e., the claimant must be paid before) a construction loan held by any banks funding the project. They also survive foreclosure sales or other sales of the property. Virginia mechanics’ liens can even survive the bankruptcy of the owner. This means that mechanics’ liens have priority over deeds of trust or other such property encumbrances even if the lien was filed in the land records office after them. Perhaps because of the unusual priority given mechanics’ liens, Virginia courts tend to strictly construe most requirements in the lien statute.

Who Can Get a Lien

Virginia permits any entity in the contract chain on a construction project to file a lien. This is unlike other jurisdictions such as DC, which limits lien claimants to general contractors or their direct subcontractors or suppliers. In Virginia, any company can lien a project so long as it supplied labor or materials to the property. Thus, third-tier subcontractors, second-tier suppliers, and even architects or design professionals can lien a project if they supplied materials or performed work on site.

What Must be Included

Virginia has provided a statutory form to follow for the Memorandum of Mechanic’s Lien that must be filed in the land records office. Required information includes the name and address of the owner, the name and address of the claimant, the type of materials/services furnished to the project, the amount claimed, and a brief description and location of the property sought to be liened. The claimant also must certify the accuracy of the above information.

However, notwithstanding Virginia’s strict interpretation of many of its requirements, no inaccuracy in the lien memorandum, including the description of the property, will invalidate the lien if the claimant substantially complied with the statute. For instance, if the property can be reasonably identified by the description in the lien memorandum, and the memorandum conforms substantially to the statutory form without willfully providing false information, the lien can still be upheld. Since accurately describing the property and its owner is one of the most important aspects of the lien claim, it is recommended that prospective claimants perform a title search on the property to ensure that information is correct.

Contractors also must make sure they are licensed in Virginia before seeking to record a lien. If they are not licensed, they must certify in the lien memorandum that a Virginia license was not required for the work performed.

Owner’s Defense of Payment

Like DC, Virginia law expressly recognizes an owner’s defense of payment. That is, if an owner has paid the general contractor in full, and in good faith, a subcontractor will not be entitled to a lien on the owner’s property. Once a subcontractor or supplier serves an owner with a notice of mechanic’s lien (or even a less formal notice of amounts that have not been paid), subsequent payments by the owner to the general contractor are deemed to have been made in bad faith. Subcontractors or suppliers should serve to record their lien as early as possible to avoid the owner invalidating potential lien rights.

The provisions described above are but a few of Virginia’s mechanics’ lien statute. It is important that contractors understand these lien requirements when commencing work on a project in the commonwealth. While liens can be powerful tools to help a contractor obtain payment, failure to observe the statute’s requirements can invalidate any lien rights. Contractors should consult legal counsel to make sure they are taking full advantage of Virginia’s lien statute.

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.

Notice of Mechanics’ Lien Filing? Take These Five Steps

George F. Ritchie | Gordon Feinblatt

While common in the construction world, the anxiety and stress of mechanics’ lien filings never get easier with time. By its nature, mechanics’ lien litigation is expensive, often rushed, and fraught with a number of procedural complications that a party litigating a normal contract claim would not face. In Maryland, assuming the claimant has provided a timely notice of mechanics’ lien filing (a requirement for subcontractors and vendors) and otherwise filed its lawsuit within the statutory period (for example, a subcontractor must provide the Notice of Intention to Claim a Lien within 120 days of completion after last providing labor or services, and all mechanics’ lien plaintiffs must file their lawsuits within 180 days of the same date), it is common for a state court to schedule a show cause hearing on claimant’s mechanics’ lien claims within 45 to 60 days of filing. Although it is somewhat uncommon for a court to establish a final lien at the conclusion of the show cause hearing, even an interlocutory lien can cause headache and pain for an owner of a large construction project.

Most worrisome to an owner is the potential breach of loan covenants that might be caused by the establishment of a mechanics’ lien. Construction loans often contain negative covenants that prohibit the borrower from allowing mechanics’ liens to be placed on the project during construction. Breach of these covenants can trigger default remedies and place the owner at the mercy of its lender even though the owner has done nothing wrong in terms of payment on the project.

While all issues relating to the defense and successful resolution of a mechanics’ lien matter are beyond the purview of this article, here are five steps every owner should take immediately if served with a Notice of Intention to Claim a Mechanics’ Lien (NOI) or a mechanics’ lien lawsuit.

1. Check Construction Loan Covenants and Follow Notice Requirements

Mechanics’ lien litigation can begin by mailing an NOI to the owner of the project (by subcontractors or vendors), or by the filing of a Petition to Establish a Mechanics’ Lien (by the general contractor). Some lenders will insist that they control the flow of money on the construction project, while others leave it to the project owners to do so. In either event, the lender is unlikely to be aware if a subcontractor or vendor has not been paid. Upon receipt of a mechanics’ lien filing or NOI, an owner should immediately consult its construction loan agreement and follow the procedures for placing the lender on notice of the situation. The mere filing of a petition or mailing of an NOI is not tantamount to establishment of the lien, but a failure to timely notify the lender of such a development could, in and of itself, be a breach of the loan agreement and may cause difficulties with the lender down the road when attempting to resolve the situation.

2. Have a Plan in Place to Defend

While prompt notice to the lender is critical, it is also important to outline your game plan for investigating and defending against the establishment of the lien and communicating that plan to the lender as soon as is practical. All plaintiffs in mechanics’ lien law actions must meet a strict set of statutory requirements in order to prevail on their claims, which include rigid procedural deadlines and substantive proof requirements. Mechanics’ lien litigation moves faster at the interlocutory stage than other civil litigation, so the owner must evaluate all factual and legal defenses as quickly as possible. Some of these defenses may be easier to establish than others. Consider the complexity of the “15%” value defense. In Maryland, a project for improvement of an existing property cannot be liened unless the improvements comprise at least 15% of the value of the property which is being improved. The valuation of a large, industrial property and the related improvements can be a complex exercise, requiring expert witness testimony and sufficient time to develop expert opinions. Lost time at the front end of a mechanics’ lien issue can be costly in developing this defense.

3. Review General Contractor Payment Bond

Although the mechanics’ lien process may provide some attractive leverage to a subcontractor who is looking for payment for labor and materials provided, a prudent owner will have required its general contractor to procure a payment bond against which claims by unpaid subcontractors can be made. Resolution of claims against a payment bond can be even more streamlined than the mechanics’ lien process and will result in payment to the claimant, rather than just perfected lien rights. An owner should check to ensure that such a bond exists and determine whether and how a claimant could make a claim against such a bond, potentially bypassing expensive lien litigation.

4. Be Prepared to ‘Bond Off’ Lien Claims

An owner may “bond off” a mechanics’ lien claim even in advance of the show cause hearing on the petition for the establishment of the lien. While an owner has the right to contest the amount of the bond necessary to protect against the establishment of a lien, it may be prudent for an owner to bond off the potential lien in the amount sought by a plaintiff even as the owner contests the merits of the lien petition. Such a move will allow an owner to file a motion to dismiss any lien that is later established at the show cause hearing, thus reducing a risk of loan covenant defaults and other potential consequences of a lien on the property.

5. Seek an Early Meeting with All Affected Parties

Litigation is an expensive and distracting process for businesses, and an owner should always seek to find an early resolution of any mechanics’ lien dispute. While formal mediation has become commonplace in Maryland state and federal courts, these mediations are typically scheduled well after interlocutory proceedings on the lien claim. At a minimum, an early meeting between the owner, the general contractor and the subcontractor can yield clarity on the parties’ respective legal and factual positions, which can sometimes get obscured in the litigation “fog of war.”

There are, of course, some mechanics’ lien issues that require a court resolution. Our law firm was recently involved in a multimillion-dollar matter, which raised the novel issue of whether solar panels and related solar equipment constituted “property” that could be subject to a lien under Maryland law. With the help of experienced counsel, however, the vast majority of lien claims can and should be resolved short of 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.

New Mechanic’s Lien Opinion Shows Need for Additional Care When Drafting Construction Contracts

Mark Bloom, Laurel LaMontagne and Andrew Ross | Arent Fox

Those in the DC metro area construction industry should take heed of a recent District of Columbia Court of Appeals opinion that sheds additional light on the District’s mechanic’s lien statute – King Carpentry Inc. v. 1345 K Street LLC, ADI Construction of Virginia, LLC, and Great American Insurance Company. It demonstrates the importance of carefully reviewing forum selection clauses.

The Project

The property owner and developer, 1345 King Street SE, hired ADI Construction of Virginia (ADI) as its general contractor on a condominium project. ADI, in turn, hired King Carpentry as one of its subcontractors. Their subcontract contained a forum selection clause stating that the parties “consent[ed] to personal jurisdiction and venue, for any action arising out of breach or threatened breach of this Agreement in the Circuit Court in and for Fairfax County, Virginia.”  

The Mechanic’s Lien

Due to a payment dispute, King Carpentry filed a Notice of Mechanic’s Lien against the Project with the DC Recorder of Deeds pursuant to DC Code § 40-303.03. In response, 1345 K Street and ADI filed a consent petition to replace the lien with an undertaking and bond, pursuant to DC Code § 40-303.17.  

The Litigation

King Carpentry subsequently started litigation in the Superior Court of the District of Columbia (1) for breach of contract against ADI and (2) to enforce the mechanic’s lien against the undertaking as to ADI, 1345 K Street, and the surety.  

In response, ADI filed a motion to dismiss the complaint, arguing that (1) Fairfax County, Virginia was the proper forum for the contract claim and that (2) King Carpentry had failed to follow the procedural requirements of the lien statute by failing to file a notice of lis pendens within ten days of filing suit under DC Code § 40-303.13.  

The trial court agreed with ADI and dismissed the complaint.  

The Appeal

On appeal, King Carpentry argued that the trial court erred in determining that (1) the forum selection clause was mandatory rather than permissive, and that (2) a lis pendens was necessary even where a mechanic’s lien has been replaced by an undertaking and bond.  

The District of Columbia Court of Appeals agreed, noting that the forum selection clause did not state that litigation “shall” be brought in Fairfax County, but rather that the parties “consented to” venue in Fairfax County. This language was permissive and not mandatory – it did not preclude litigation in other venues.  

The Court of Appeals also determined that King Carpentry was not required to file a notice of lis pendens – at the time it filed its complaint, it was not a “person with a lien” as referenced in DC Code § 40-303.13(a)(1)(B). The lien had already been replaced by an undertaking and bond, transforming the cause of action from a proceeding against the property to a proceeding against the property owner and surety.

Considerations

This case highlights a few important considerations for property owners and general contractors.

1. Be careful in drafting a forum selection clause. If you want to limit suit to a certain venue, ensure the language is mandatory rather than permissive.

2. Owners need to think beyond the general contract with the general contractor and consider whether to require the general contractor to include a forum selection clause in its subcontract that mirrors any forum selection clause in the general contract. Had the forum selection clause in the King Carpentry case been mandatory, the subcontractor would have been precluded from bringing the complaint related to the mechanic’s lien against the owner (which must be filed in the county in which the property is located) and the complaint about a breach of contract against the general contractor (which would have been Fairfax County, VA) in the same court.

3. Evaluate litigation strategy before obtaining an undertaking and bond. Some subcontractors are not aware of the need to file a lis pendens within 10 days of filing suit. Owners can use the failure to obtain a lis pendens as a basis for seeking dismissal of an action on a mechanic’s lien. By replacing a lien with an undertaking and bond prior to suit, the subcontractor is no longer required to file a lis pendens.