When payment issues arise, material suppliers can file mechanics liens. However, there are several rules that are unique to suppliers compared to the more commonly tackled procedures for contractors.
When payment issues arise, material suppliers can file mechanics liens to get paid. A mechanics lien allows a material supplier to have a security claim over a property, which consequently lets them recover payment through a property’s foreclosure sale.
Property owners are wary about dealing with a mechanics lien and they would rather pay their suppliers than contest a valid lien. However, filing a mechanics lien is no easy process for a supplier either. There are several rules that are unique to suppliers compared to the more commonly tackled procedures for contractors.
Here are eight things materials suppliers need to keep in mind when asserting their lien rights.
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- Materials suppliers are almost always required to send preliminary notices
- Suppliers must be able to prove that the materials are incorporated into the project
- Suppliers of specially fabricated materials may be covered by lien rights
- Suppliers to other suppliers do not have lien rights
- Materials suppliers must not waiver their lien rights before actually furnishing materials for a project
- Material suppliers must use statutory mechanics lien and waiver forms, if required
- Material suppliers must beat all the required notice and lien-related deadlines
- Material suppliers may be criminally liable for false claims in a mechanics lien
Materials suppliers are almost always required to send preliminary notices
Not all states require relevant parties to send preliminary notices. However, there are some states that require materials suppliers to send statutory notices even if they do not require other parties to do so. It’s also almost always a better idea to send a preliminary notice anyway for your records and to let all parties know that you’re aware of your lien rights.
The Preliminary Notice is required in nearly every state, from Texas to Oregon to Ohio. This implies that failure to submit a preliminary notice in almost all of the states will effectively void the contractors’ and subcontractors’ rights to file a mechanics lien and eventually pursue delinquent clients.
In general, when a state requires a notice to be sent, materials suppliers are always included in the group who are required to deliver a notice. When a state does not require a notice to be sent, materials suppliers are often singled out as the party who must deliver a notice. Thus, it is always good practice to send preliminary notices to ensure that the mechanics lien is enforceable.
Suppliers must be able to prove that the materials are incorporated into the project
The law is specific when it comes to a materials supplier’s lien rights. To be able to file a mechanics lien, the materials supplier must be able to prove that the materials they provided to a contractor are “incorporated” into the construction project.
Incorporation within the construction context means that the materials are physically joined to the property as part of the entire structure. If the materials are ordered but are still on a truck, in a warehouse, or even in the construction site but not yet used, then the supplier has no right to file a mechanics lien. Only the materials that are already incorporated in the property can be liened by the supplier.
This distinction is important especially in cases where the construction project has stopped due to bankruptcy, termination, or other special circumstances. Since the law requires incorporation of the materials to the project, the supplier does not have lien rights on the materials that are not used and still sitting on a slab in the construction site.
The legal challenge then to the materials supplier is to provide proof that the materials supplied were used in the property. However, most of the states have laws with a presumption that favors materials suppliers. This presumption states that as long as the materials supplier can prove that they delivered the materials to the job site, the court presumes that the materials were incorporated into the project.
If the materials supplier is able to prove the delivery, the burden of proof will fall to the other party who contracted the supplier. If they want to challenge the lien, they have to prove that the materials were not incorporated into the property.
Thus, if materials suppliers want to secure their lien rights, they should be able to prove that the materials were delivered to the construction site. This can be achieved with the use of a proof of delivery signed by key persons of the construction project. This signed proof of delivery will serve as protection in case the adversary challenges the lien rights of the materials supplier.
Suppliers of specially fabricated materials may be covered by lien rights
As mentioned in the previous item, materials supplied to a construction project must be incorporated into the property for the supplier to be eligible to file a mechanics lien. This rule is consistent across all states. As long as the supplier is able to prove the incorporation of the materials through a signed proof of delivery, there is no problem. However, some states have specific rules for specially fabricated materials.
Specially fabricated materials are materials that are not suited for a different project and are not immediately adaptable to another project. In essence, they are created specifically for that particular project, and thus cannot be reused for another project. These materials are usually those that are specially cut materials with specific dimensions unique to the project.
There will be situations where the materials supplied are not easily determined to be specially fabricated. In these cases, the court will consider two factors as their criteria. First, the court determines if the materials are made or manufactured specifically for the project. Next, they determine if the material can be used in another project.
For example, a contractor goes into a deal with a supplier to provide a specific type of tile made of ceramic. This material satisfies the first criterion, as it is material that is custom made for the project. However, it does not satisfy the second as it could be used for a different project.
In summary, as long as the material is specially fabricated for the project, the supplier may have lien rights even if they are not incorporated. It should be noted however that not all states have specific provisions for specially fabricated materials. Thus, it is important to refer to state laws when dealing with this type of material.
Suppliers to other suppliers do not have lien rights
Almost all 50 states prohibit “suppliers to suppliers” from asserting their rights through a mechanics lien. But what does it mean to be a supplier to suppliers?
For clarity, a “materials supplier” provides construction materials to a contractor, who in turn incorporates these materials to a specific construction project. A “supplier to suppliers” then is a supplier who sells construction materials to another supplier, who then sells these materials to a contractor, who in turn incorporates these materials to a specific construction project.
This rule encompasses all types of construction projects, from residential, commercial, and industrial projects to state, county, and federal projects. As long as the supplier provided materials to another supplier, they will not be able to file a mechanics lien.
There are several situations in the construction industry where a supplier sells materials to another supplier, but the most common scenario is when a supplier runs out of stock of a particular material and buys from another supplier. Because of this, it is crucial that a supplier determine if they are supplying materials to a contractor or another supplier, especially if they haven’t secured the payment for the materials they provided.
The fastest way to determine if a company is a supplier to another supplier is by asking the client if they provide labor to a construction site. If they don’t, then they are most probably a supplier, too.
Materials suppliers must not waiver their lien rights before actually furnishing materials for a project
Any construction professional who has lien rights is allowed to waive their right to file a mechanics lien. This is usually done as a condition of payment from a client. A property owner may, for example, require a material supplier to waive their lien rights in order for payment to be released.
If you’re a material supplier and you find yourself in a similar situation, keep in mind that you may only waive your lien rights over the materials that have already been furnished for a project. You are not allowed by any law in any state to waive your lien rights in advance.
Keep an eye out for provisions in a contract that state anything about your revoking your lien rights. A lien waiver that relinquishes a material supplier’s lien rights over materials that are yet to be furnished will not be enforceable.
Consequently, if materials have already been delivered and a client requires a lien release waiver before releasing payment, always sign a “conditional” lien waiver. A conditional lien waiver typically contains a notice on top of the document stating that the waiver will only be enforceable if payment has been cleared.
A conditional lien waiver ensures that a material supplier will get paid before their lien rights are waived. An unconditional lien waiver, on the other hand, may result in your signing away your lien rights without any guarantee that payment will be made.
Material suppliers must use statutory mechanics lien and waiver forms, if required
When preparing a mechanics lien form, material suppliers must know if they are working in a state that requires the usage of specific lien forms.
Most states require material suppliers and other lien claimants to add certain statements to their mechanics lien for the document to be considered valid by the courts. All states also have specific details that they ask to be included in a mechanics lien. Material suppliers must know what details they must provide in their lien forms.
The required forms do not always apply to an actual mechanics lien, as some states have statutory requirements even for other lien-related documents. California requires its claimants to use specific lien waiver forms; using a customized lien waiver form in California is not allowed.
Deadlines are of utmost importance to all claimants who want to file a mechanics lien. After all, missing a deadline can lead to an unenforceable mechanics lien. But out of all parties in a construction project, materials suppliers have the most challenge.
Since materials suppliers are not usually present in the construction site, they do not have enough information about the status of the construction project. They will not be able to know immediately if the construction is delayed or even terminated. If there are financial problems, they are usually the last to know and by then, it can be too late.
This particular situation also poses a challenge when it comes to the filing of a mechanics lien. In some states, the mechanics lien filing deadline depends on the date the construction project ended. Since they are usually late to be informed, they are more than likely to miss deadlines and lose their lien rights.
For example, in Nevada, the deadline of filing mechanics liens for material suppliers is 90 days after the last day of delivering materials while in Utah, you have 180 days after the last day of delivery OR 90 days after the owner has sent a notice of completion.
Asserting lien rights is a huge challenge for materials suppliers. To protect their lien rights, materials suppliers should be familiar with specific state laws regarding materials suppliers, document delivery to the construction project, and be diligent in obtaining signatures and paper trails if necessary for proof. By following these guidelines, a materials supplier will be assured protection through the mechanics lien.
Material suppliers may be criminally liable for false claims in a mechanics lien
A mechanics lien can be very powerful in forcing property owners to settle outstanding debts with their material suppliers. The trade-off is that a material supplier may be criminally liable or may be made to pay hefty fines if they knowingly claim a false amount or if they include misleading information in their mechanics lien.
When claiming a payment with a mechanics lien, material suppliers must stick to the amount related to the materials and supplies that they provided for a project. Lien and attorney fees and other miscellaneous expenses must not be included in a mechanics lien amount. The amount must be a reasonable estimate, and there must be documented proof of its basis (e.g. invoices, a formal contract, etc.).
Note that attorney fees and other lien-related costs may be recovered if a property has been foreclosed and a material supplier has a valid mechanics lien on it. Keep this in mind to make sure that you only stick with materials-related amounts when you file a mechanics lien against a property.