Do Liens Work?:  A Definitive Guide on How The Mechanics Lien Works to Get You Paid

Do Liens Work?: A Definitive Guide on How The Mechanics Lien Works to Get You Paid

April 27, 2019

To say that the mechanics lien is the most powerful tool in the construction industry is not an exaggeration. For over 200 years, the mechanics lien has been empowering materials suppliers, contractors, subcontractors, and other construction stakeholders with the most effective weapon they can wield against delinquent, non-paying clients.

Exercising your lien rights is the best course of action to take if you are looking to secure the money that you have duly earned. The process and the nitty-gritty behind preparing and filing the lien may seem daunting, but no other collection method can equal the power of the mechanics lien in getting you your due compensation in full and on time.

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What Does a Mechanics Lien Do?

1.     The mechanics lien burdens a property with a legal claim attached to its title.

Filing a mechanics lien is not done against the owner or the general contractor or whoever is responsible for paying you — the mechanics lien is filed against the property title. The lien is therefore reflected in all the records concerning the property-in-question, including land titles and property searches.

▧ How does this benefit the claimant?

No buyer or financier would be interested in taking over a property that has an outstanding payment dispute, and this makes the property difficult to sell. So, in practice, filing a lien against a project incentivizes the property owner — whether they’re directly responsible for they directly owe you or not — to get you the proper compensation.

2.     The mechanics lien sets a strict payment deadline.

Because the mechanics lien is a statutory right, all states have laws in place to govern the leveraging of this right. These laws set a strict deadline for the debtor to settle their debt with you, the claimant.

In effect, filing a lien solves the issue on dealing with clients who promise to pay you but never actually deliver. Once a lien has been filed, the date is set for them to finally shell out the money and resolve the payment dispute unless they want the lien to remain listed under their property records.

How Does a Mechanics Lien Get You Paid?

Aside from turning the property into a potential financial liability for the owner and setting a fixed payment deadline, the mechanics lien has other ways to get the collection gears going.

1. The mechanics lien nudges the attention of the paying party and other top-tier stakeholders.

Nobody wants to deal with a mechanics lien — not you, and most especially not the stakeholders that are at the top of the contracting chain.

Whether these stakeholders are directly accountable for paying you or not, they are equally as daunted at the idea of having to deal with a mechanics lien. When properly filed, the lien generally favors the claimant and puts the top-tier stakeholders at a higher financial risk.

Let us take a closer look at how a mechanics lien catches the attention — and causes the intervention — of a top-tier stakeholder.

how mechanics liens work

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▧ How the mechanics lien affects the lender

The lender is the party that funds and loans money to the project. Lenders have a security interest against the project to ensure that they get their money back, and they want this security interest to be the top priority when pay-time comes.
When a mechanics lien is filed against a project, the lender’s security interest is “interrupted.” This is because the laws in some states enable the lien to be the highest payment priority over the lender’s security claim.

In effect, lenders usually step in once a mechanics lien has been filed by a claimant. Lenders then demand the debtor to settle the lien by handing the claimant the payment as soon as possible.

▧ How the mechanics lien affects the property owner

The property owner is not always the party who directly owes you the payment. Still, property owners are always concerned whenever a mechanics lien is filed against their project.

Since liens are attached to the property title, an existing lien claim essentially makes the property hard to sell and to solicit funding for. A property has little to zero value to the owner if it cannot be sold on the market. The property owner will therefore try to do everything in their power to get the lien off the property records.

When the mechanics lien is not settled by, say, a contractor, this may lead to a mechanics lien foreclosure. Foreclosures can result in the property to be forcefully sold, but the proceeds will be handed to the claimant as payment. No owner would want to deal with a scenario in which they lose their property with no compensation whatsoever.

In effect, filing a lien gets the owner’s attention to force their general contractor or subcontractor to resolve the payment dispute right away.

▧ How the mechanics lien affects the general contractor

Contracts in the construction industry generally require the prime contractor to defend the owner in the event that a mechanics lien is filed against the property.

By “defending” the owner, the contractors may have to indemnify or repay them, which makes the contractors liable for possible attorney expenses and other financial damages related to the mechanics lien against the project.

In effect, general contractors will try to avoid causing further conflict by immediately settling their debt, or by forcing the debtors under their contracting chain to pay up.

▧ How the mechanics lien affects other construction stakeholders

Construction projects typically involve more than just one contractor and one subcontractor. Multiple contracts are signed by multiple parties and it is very common for these contracts to stipulate that all parties — from subcontractors to sub-subcontractors to sub-suppliers — must keep the property free of liens.

If a mechanics lien is filed against a property, the debtor essentially breaches these contracts. Resolving breaches of contract may cost more legal fees for the debtor.

The lien, in effect, forces the debtor to pay their debt. Failing to do so may cause them to be in a bigger financial trouble, which is far from the ideal scenario.

2.     The mechanics lien increases pressure for the debtor to pay up.

Catching the attention of the lenders, the property owners, or the general contractors is one way to pressure the paying party to settle the debt. But on top of that, there are other ways that can further convince the debtor to fold and pay their dues. These are some of the ways that reinforces the power of the mechanics lien.

▧  Project fund cash flow may cease when a lien is on the table.

If a mechanics lien is attached to a property, financiers will logically hesitate to put in more money into the project. Without cash flow, the project may effectively pause operations. This will affect all project stakeholders and will pressure the debtor to settle their debt with you.

▧ Challenging a lien will cost a considerable amount of money for the debtor.

When properly filed, a mechanics lien is definitely very difficult to invalidate. The debtor will have to invest money on a good attorney if they want to disprove a successful lien claim. A well-prepared lien is virtually unbeatable in the eyes of the law, so the debtor will likely prefer to pay up instead of spending even more money on litigation costs.

▧ Filing a lien puts the lien claim on top of a debtor’s payment priority.

Sometimes the owner or the contractor deal with way too many subcontractors or suppliers that they lose track of the paperwork. A mechanics lien clears up their confusion and pressures them to put you on top of their payment priority chain. Filing a lien essentially sends a message to the debtor that you are serious about getting paid for all your hard work.

▧ The contractor’s surety bond may be affected when a mechanics lien is filed on a project.

The surety or construction bond acts as insurance for contractors in the event that they don’t finish a project on time or they default on a job. Most bonding company will question the integrity of a contractor when a mechanics lien gets into the picture, which in turn pressures the contractor in paying up.

▧ The mechanics lien causes conflict among construction stakeholders.

Since the construction business requires dealing with multiple parties and stakeholders, all the people involved are expected to be cordial with one another. The mechanics lien causes tension among these parties, and nobody wants to work in a negative environment. The owing party will therefore want to settle the lien as soon as they can.

3.     The mechanics lien is able to exhaust other means of payment.

The danger with payment disputes isn’t always about the difficulty in getting the debtor to pay up — sometimes they really have no money to spare. The mechanics lien is powerful enough to navigate around this sticky situation. Even if the debtor is going through a financial struggle, there are other ways the mechanics lien can secure the payment for the claimant.

▧ Payment from real estate auction sale

When an owner just doesn’t have the means to pay and have already filed for bankruptcy, the most common resort is to sell the real estate at an auction. If you have a mechanics lien filed against this property, you are entitled to receive the earnings from the auction sale of the project.

▧ Payment via joint check agreement

Failure to clear a lien can mean multiple breaches of contract, and no construction stakeholder would like to deal with the cost of resolving these breaches.

So if, for example, a subcontractor fails to pay a supplier, other parties like the owner and the general contractor may group together to sign a joint check agreement just so they can pay you back and eventually get the lien released.

▧ Direct payment from other project stakeholders

Filing a mechanics lien opens up the opportunity for you to get your earnings from other project stakeholders. Without a mechanics lien, your only option is to negotiate with the party directly in charge of paying you. You can file a lawsuit against this party or you can repeatedly call them until they fold and pay up.

But with the mechanics lien, you are able to tap into the interconnected contracts and implore other parties to settle the debt.

4.     The mechanics lien raises your leverage in payment negotiations.

Settling payment disputes may require hours and hours of negotiation, but filing a lien significantly shifts the lever to tip in your favor.  Using the mechanics lien as leverage is one of the best ways you can do to ensure that you get paid for the services you have rendered. Sometimes it is simply easier for the debtor to give in and resolve the payment dispute.

▧ Removing a lien from property records is very difficult to do.

Once a mechanics lien is successfully filed in the county recorder’s office, it is highly impossible to have it revoked without resolving the claimant’s payment issue. With a lien claim under a property’s record, the project is essentially unsellable and the owner has no use of it.

So unless the owner decides to challenge your lien claim, they have little option but to get you paid.

▧ If a debtor challenges a claim and fails to win, they may have to shoulder the claimant’s attorney fees.

In some states like Washington, filing a lawsuit to remove a construction lien from the county records spells a greater financial risk for the owner / debtor. If the mechanics lien is declared valid and not frivolous, the owner will be obligated by the law to pay for the claimant’s attorney fees.

This implies that the debtor — whether it be the property owner or the general contractor — must have a very good case against the claimant’s mechanics lien before they consider challenging it in the court. Otherwise, the claimant will not only walk away with payment but also with free legal fees.

▧ Filing for bankruptcy protection still assures the claimant other ways to collect payment from the debtor.

A debtor may resort to filing for bankruptcy protection to prevent themselves from further sinking down the financial drain. The bankruptcy protection makes settling the debt more difficult for claimant. With the mechanics lien, however, the claimant can still (i) file a lawsuit to pursue payment while bankruptcy is still pending, and (ii) be considered a payment priority during a bankruptcy.

How Likely is it for a Mechanics Lien to Guarantee Payment?

It is highly likely that the mechanical lien will work to get you paid. Other collection methods like promissory notes, settlement agreements, or issuance of post-dated checks do not command the same power as the mechanics lien.

Three Ways The Mechanics Lien is More Powerful Than Other Collection Methods

1. The mechanics lien is a legal claim enforced by statutory laws. Other methods are not governed by legal statutes and are therefore flimsy and easier to navigate around. Post-dated checks may bounce, for example, and verbal promises give little assurance of getting you paid.

2. The mechanics lien is recorded under a property title and is difficult to get rid of, usually only revocable via a lien cancellation. Other methods have no clout over the property title of a project. Promissory notes can be considered admissible evidence in court but they do not encumber a property.

3. The mechanics lien is cheaper than court litigation. Liens are highly effective in securing payment from the debtor without costing too much money for the claimant. The key, of course, is for the mechanics lien to be properly prepared and filed.

how mechanics liens work

Key Points

In summary, let us take a look at the key points that make the mechanics lien the most potent weapon you must use while working in the construction industry:

i.          Liens are difficult to challenge if correctly filed. Laws are in place for a properly-filed lien to go in the claimant’s favor. Once a mechanics lien is on the table, it is in the best interest of the debtor — and other parties in contract with them — to resolve the outstanding payment disputes.

ii.         Liens are able to get a delinquent customer to fold and pay up. Liens are powerful enough to pressure the debtor in giving you the money, from freezing funding to their project all the way to escalating payment concerns to the stakeholders up in the contracting chain.

iii.        Liens are legal claims attached to a property. A mechanics lien can render a property unsellable and may force it to be sold at an auction if the debt is not settled on time. Every owner would like to avoid this scenario, so they will very likely want to end the dispute by finally paying you.

Your lien rights are granted exclusive to construction professionals by the law. If you are in a pickle and are considering filing a mechanics lien, it is highly recommended that you exercise this right.