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.

Mechanic’s Liens For Design Professionals: A Powerful Payment Collection Tool

Christian Dewhurst and Timothy Fandrey | Gray Reed

In these unprecedented times, every bit of revenue is critical to the continued operation of nearly every business operating within the construction industry. Fortunately, there are a myriad of remedies to aide collection efforts. Perhaps the most commonly discussed remedy is the mechanic’s lien provided by Chapter 53 of the Texas Property Code Chapter.

Mechanic’s liens are most frequently used by contractors and suppliers to obtain payment security for the valuable labor and materials that they furnish to a construction project. In Texas, unlike many other states, design professionals are also given the right to lien for certain professional services that they perform for the project. In today’s uncertain climate where collection of money for valuable design services performed is a concern, the lien provides the design professional the opportunity to secure payment.

Like their contractor counterparts, design professionals must satisfy certain requirements to maintain and perfect a mechanic’s lien in Texas.

  1. The lien for professional services is limited to architects, engineers and surveyors.
  2. The types of professional services for which the property can be liened are limited to the preparation of a plan or plat in the case of architects and engineers, and the conducting of a survey in the case of a surveyor.
  3. The design professionals must be in privity of contract with the owner or the owner’s agent.

Thus, it appears that sub-consultants are unable to lien. Given the requirement of direct privity requirement, lien perfection is relatively straight-forward. The lien affidavit must simply be filed by the 15th day of the fourth month after the design contract is completed, terminated or abandoned.

Under many standard construction industry forms, including the American Institute of Architects and the Engineers Joint Contract Documents Committee, architects and engineers are required to perform construction administrative services, including review of submittals and change orders, and periodic inspections of the project site. These are no doubt valuable services, but cannot be liened unless there is a change to the plan or plat. Architects and engineers may, however, lien for construction supervision services because such services are considered “labor” and thus can be liened.

Despite the existence of this powerful, albeit somewhat limited, right to lien, engineers and architects do not file liens with the frequency of contractors and suppliers. One reason is that the cost of design services relative to the cost of construction is typically small. Accordingly, design professionals may not often find it necessary to secure payment through a lien. Relatedly, design professionals generally perform the bulk of their lienable services at the beginning of the project during a period before large amounts of project funds have been spent on other items, including construction and payment is therefore less frequently an issue. Further, design professionals that are able to lien have contractual privity with the project owner and merely use a lien as payment security. By contrast, subcontractors and suppliers typically do not have contracts with the project owner and can also be subject to a contingent payment clause in their contracts with the general contractor. A lien provides the subcontractor not only payment security, but also functions as a powerful method of extracting payment from the owner that has not made payment to the general contractor.

Given the changing payment landscape in the midst of the COVID-19 pandemic, architects, engineers and surveyors should consider giving their lien rights a first or second look. It is a powerful tool that can give the design professional security to perform work on credit to a project owner.

Litigation Privilege Saves the Day for Mechanic’s Liens

Stephen M. Tye and Lawrence S. Zucker II | Haight Brown & Bonesteel

In RGC Gaslamp v. Ehmcke Sheet Metal Co., the Fourth Appellate District held that a trial court properly granted an anti-SLAPP motion because the recording of a mechanic’s lien is protected by the litigation privilege.

In RGC Gaslamp, subcontractor Ehmcke Sheet Metal Company (“Ehmcke”) recorded a mechanic’s lien to recoup payment due for sheet metal fabrication and installation done at a luxury hotel project in downtown San Diego. Project owner RGC Gaslamp, LLC (“RGC”) recorded a release bond for the lien. Thereafter, Ehmcke recorded three successive mechanic’s liens identical to the first, prompting RGC to sue it for quiet title, slander of title, and declaratory and injunctive relief. After retaining California counsel, Ehmcke then released its liens and advised it did not intend to record any more. Ehmcke then filed a special motion to strike under the anti-SLAPP statute (Code Civ. Proc. § 425.16.) which was granted.

In considering Ehmcke’s motion to strike, the trial court found Ehmcke met its moving burden because the recording of even an invalid lien is protected petitioning activity. Thereafter, RGC failed to make a prima facie showing that its sole remaining cause of action for slander of title could withstand application of the litigation privilege. RGC’s appeal followed, arguing the duplicative filing of mechanic’s lien after recording of a release bond is not a protected activity.

After extensively reviewing the mechanic’s lien statutory scheme and the anti-SLAPP motions two-prong process, the Court of Appeal affirmed.

First, the Court of Appeal examined and determined that RGC’s claims arose from a protected activity. In doing so, the Court of Appeal determined recording a mechanic’s lien, including an invalid or unlawful mechanic’s lien, is protected by the litigation privilege (Civil Code §47(b)) because the act of recording a mechanic’s lien is a prerequisite to a foreclosure action and the anti-SLAPP.

The Court of Appeal argued that A.F. Brown Electrical Contractor, Inc. v. Rhino Electric Supply, Inc. (2006) 137 Cal.App.4th 1118, which held serving a stop notice was only protected under the anti-SLAPP statute if done when a lawsuit related to that act was contemplated in good faith and given serious consideration, was wrongly decided because the A.F. Brown court improperly applied the anti-SLAPP analysis by requiring good faith and serious consideration when the California Supreme Court had made clear that a plaintiff is only required to make a prima facie showing of protected activity in the first prong.

Second, the Court of Appeal determined RGC could not establish slander of title because there was no reasonable expectation any further liens would be recorded. The Court of Appeal held the recording of an invalid mechanic’s lien was absolutely privileged because recording a mechanic’s lien is a communication made as part of a judicial proceeding, Ehmcke filed and recorded its liens while improperly advised regarding California’s mechanic’s liens statutes and then withdrew the liens after retaining California counsel.

RGC Gaslamp is important for two reasons. First, there is now case law holding that recording a mechanic’s lien, even if invalid or unlawful, is protected by the litigation privilege. Second, A.F. Brown, supra, has been questioned and service of a stop payment notice may be protected by the litigation privilege because service of a stop payment notice is a required prerequisite to a stop payment notice action.

This document is intended to provide you with information about construction law related developments. The contents of this document are not intended to provide specific legal advice. If you have questions about the contents of this alert, please contact the authors. This communication may be considered advertising in some jurisdictions.

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).

Georgia Legislature Significantly Changes Effect and Requirements for Lien Waivers

S. Gregory Joy | Smith Currie

Both Houses of the Georgia Legislature have approved Senate Bill 315, which is designed to change the outcome of a 2019 Georgia Court of Appeals decision that interpreted the existing law in a way that surprised and alarmed many construction industry participants. Presuming the Bill is not vetoed by Governor Kemp (which is not expected), it will significantly revise the Georgia mechanics’ and materialmen’s lien and payment bond waiver procedures found at Official Code of Georgia § 44-14-366, and limit the effects of waivers to only lien and payment bond rights.

Georgia has one of the most specifically defined lien and payment bond waiver procedures in the country. The lien waiver statute presently allows contractors, subcontractors, and suppliers to provide interim lien waivers (generally applicable to progress payments) and final lien and payment bond waivers (applicable to final payment) prior to receiving payment, and to withdraw these waivers within 60 days of signing the waivers if the corresponding anticipated payment is not received. Presently, the waivers can be withdrawn by filing an affidavit of nonpayment or a claim of lien in the property record of the county where the project is located.

The lien waiver and release forms presumably were intended to address only the waiver of lien and payment bond rights. However, in 2019, the Georgia Court of Appeals, in ALA Construction Services, LLC v. Controlled Access, Inc., 351 Ga. App. 841, 833 S.E.2d 570 (2019), held that statutory lien waivers and releases can also waive breach of contract claims. In that case, a subcontractor executed two statutory interim lien waivers and releases, but did not receive payment from the contractor within 60 days.  The subcontractor did not file an affidavit of nonpayment or claim of lien to withdraw the waivers within 60 days of signing the waivers as required by statute and the prescribed waiver forms. The Georgia Court of Appeals held that wording in the waiver statute that “you shall be conclusively deemed to have been paid in full the amount stated above, even if you have not actually received such payment, 60 days after the date stated” meant that the failure to withdraw the waiver within 60 days constituted legal acknowledgement that the payment had been made for all purposes, not just for purposes of the party’s lien and bond rights, even if the payment had not been made. That broader effect was contrary to the understanding of many in the construction industry of the more limited intended effect of the statutory lien/bond waivers and releases.

Senate Bill 315 reverses that expanded effect of the statutory waivers and releases declared by this 2019 Georgia Court of Appeals decision. The Bill revises Georgia Code § 44-14-366 to state specifically that the statutory waivers and releases only relate to waiver of lien and labor or material bond rights, not any other rights or remedies of the lien claimant. The Bill also revises the title of the interim and final waivers to clarify that the forms relate only to lien and payment bond rights.

Presuming the Bill is not vetoed by Governor Kemp, it will make other significant changes regarding waivers:

  • The time for a claimant to file an affidavit of nonpayment to withdraw the waiver would be increased from 60 days to 90 days in recognition that payments can take more than 60 days and to be consistent with the length of time allowed for filing a claim of lien.
  • The filing and mailing of an affidavit of nonpayment would be the only way to withdraw a waiver and release. The filing of a claim of lien would no longer withdraw a waiver and release.
  • The waiver and release forms would no longer need to be in boldface capital letters. The law would still require waiver and release forms to be in 12-point font. This change eliminates a common complaint about the requirement for boldface, capitalized formatting of waivers and releases.

Senate Bill 315 will become law if not vetoed within 40 days of the end of the Legislative session. If not vetoed, it is anticipated that the changes will become effective on January 1, 2021. Until then, the existing waiver and release forms and law will remain in effect. Therefore, owners, general contractors, subcontractors, and suppliers should continue to follow the existing law, as interpreted by the Georgia Court of Appeals in ALA Construction Services, throughout 2020. All of these entities should also be prepared to update their interim and final lien waiver and release forms to comply with the new requirements that presumably will become effective January 1, 2021. The authors or other Smith Currie attorneys can provide templates for the revised forms and/or assist with any questions or concerns you may have.