In this article, International Finance Magazine explains what is a mechanic’s lien, how does it benefit the debtor, exemptions for payment of a mechanic’s lien and the most common mistakes while filing a mechanic’s lien.
6th September 2013
A mechanic’s lien is a debt collection method used in the court for guaranteeing payment for services which is either contracted or carried out by an external agency such as contractors, sub contractors and other outsourced agencies. Depending on the laws of a particular state, contractors, sub contractors and suppliers can file this lien within a certain amount of time after the work has been carried out and payment is still due. Until the debt is paid, the land owner will not have clear title on his property.
Investopedia defines Mechanic’s Lien as a guarantee of payment to builders, contractors and construction firms that build or repair structures. It also extends to suppliers or sub contractors and cover building repairs as well. The lien ensures that the workmen are paid before anyone else in the event of liquidation, for example: a contractor and a Bank are owed money by a homeowner; due to non payment of money within the stipulated period even after repeated remainders they sue the homeowner in the court. Both the parties file the suit and obtain judgements in their favour, however, the Bank obtains its judgement first and therefore has a better lien position and priority on payment, however, the mechanic’s lien changes this scenario and allows the contractor to obtain a lien and priority of payment over bank even before the contractor has obtained a judgement.
A bankrupt debtor can avoid certain types of lien in a process known as “lien stripping”, it is a practice permitted by the courts under which wholly under secured liens against real estate property may be removed or stripped, and the debt to which they relate treated as unsecured in a Chapter 13 plan of Reorganisation, however, liens cannot be stripped under Chapter 7 bankruptcy.
A Mechanic’s Lien cannot be used for labour or materials provided for a public purpose, such as schools, government buildings and other government projects. A Mechanic’s Lien can be used against the owner of a building if there is something in writing between the contractor and the owner.
The most common mistakes while filing a mechanic’s lien are:
- Failure by the contractor to properly identify the completion of work within the stipulated time- Mechanic’s lien statute requires a claimant to record its mechanic’s lien within 60 days of work on residential projects and 90 days for commercial and industrial projects.
- Failure to initiate Lien Foreclosure Litigation on time: The lawsuit to foreclose the lien should be filed with one year of recordation
- Overstating the amount of Lien: While recording a mechanic’s lien, a contractor shall not over state the amount of lien, a deliberate attempt to overstate the lien or a negligent overstatement of figures would invalidate the lien.
- Failure to identify the property to which Lien is attached: The creditor shall properly identify the property which has to be liened; a mechanic’s lien should include the legal description of the property along with name of the street, locality and other details of the property.
- Failure to identify the owner of the real property: A lien must list the exact legal name of the property owner, the mechanic’s lien statute requires the mechanic’s lien notice to include the name of the owner and his/her latest address as show in the county’s property tax records.
- Failure to give a proper pre-lien notice to the owner: The mechanic’s lien statute imposes requirements on residential properties, before liening a residential property, a subcontractor shall notify the owner in writing within 30 days of providing material or labour in case of an existing building and 60 days of providing materials or labour in case of a new building.
- Wrong party to stake claim: It must be note here that only the actual party can enforce a mechanic’s lien, in one case a contractor lost his lien as the court overruled the decision because he signed the contract as an individual rather than a corporate representative.