Original Contractor Claim of Lien: How to Recover Overdue Payments | Handle

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Original Contractor Claim of Lien: How to Recover Overdue Payments

Original Contractor Claim of Lien: How to Recover Overdue Payments

March 24, 2020

A claim of lien, or mechanics lien, is the most powerful tool an original contractor can use to recover payment from delinquent clients. Once a mechanics lien is recorded, potential buyers and financiers of a property will know about the outstanding debts related to it. Most property owners are therefore wary about dealing with a mechanics lien and would rather settle overdue payments.

Filing a mechanics lien is, however, not a simple process. There are specific requirements that a general contractor must fulfill and there are fixed deadlines that they must meet. This guide details everything a general contractor must know about protecting their lien rights and filing a mechanics lien.

File a mechanics lien in 60 seconds

File a mechanics lien in 60 seconds

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Do all original contractors have lien rights?

Yes, original contractors have lien rights by default. Some exceptions may occur depending on the type of project and the total amount of their services. But, generally speaking, if you are a contractor with a direct contractual relationship with the property owner, you are allowed to file a mechanics lien.

How general contractors can protect their lien rights

Every state has different requirements for general contractors when it comes to protecting their right to file a mechanics lien. General contractors are encouraged to familiarize themselves with these specific rules and requirements in the state in which they are working.

Generally, these are some of the things that they must do to ensure that they have their lien rights intact:

1. Serve the required preliminary notice

Most states do not require general contractors to serve a preliminary notice on the property owner, under the assumption that property owners already know who their general contractors are. However, there are also states that require all construction parties regardless of tier to serve a preliminary notice. General contractors must ensure which requirements apply to them.

2. Serve a Notice of Intent to Lien

A Notice of Intent to Lien is different from a preliminary notice. The former is sent when a payment dispute has already come up, while the latter is sent early on during a project. Some states require general contractors to notify property owners before they record a mechanics lien.

3. Ensure that a written contract is present

Some states allow general contractors to file a mechanics line even if there is no written contract with the property owner. In most cases, however, having a written contract is highly desirable especially when settling payment disputes. General contractors are encouraged to have detailed written contracts with their property owners.

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Requirements for general contractors who want to record a mechanics lien

As mentioned above, serving the required pre-lien notices is key to protecting a general contractor’s lien rights. Pre-lien notices are not always required, depending on the state, so general contractors must look into the specific state requirements that apply to them.

Other potential requirements are the following:

  • Filing a Notice of Commencement
  • Posting the building permit in the project location
  • Providing a list of subcontractors and their respective contract amounts to the property owner
  • Responding to written request for information from subcontractors

When a general contractor receives a request for information from their subcontractors, they are encouraged to respond with the requested information. There are states that require general contractors to respond within a specific number of days upon receiving the request, and it is also good business practice for them to communicate with their subcontractors the information that they can easily provide.

When to serve a preliminary notice

If a general contractor is mandated by state laws to serve a preliminary notice, they generally must do so early on in a project. Deadlines for serving valid preliminary notices vary between 7 to 30 days upon the first day of work. The first day of work is the day you first furnish labor or materials to a project.

General contractors must start preparing their preliminary notice as soon as they close a project deal. They should have all the required information to complete a preliminary notice form, and look into the specific formatting requirements of a state if such requirements exist.

Even if not required, general contractors can still serve a preliminary notice on the property owner. Serving a preliminary notice opens communication lines between them and the property owner, and it lets property owners know that they are fully aware of their lien rights and are willing to exercise them if they do not get paid for their hard work.

Information typically required to appear in a preliminary notice

The following pieces of information are usually required to be included in a preliminary notice for general contractors:

  • The general contractor’s name and address
  • The name and address of the property owner(s)
  • A general description of the services to be provided by the contractor
  • A description of the project property location sufficient for identification
  • The estimated total amount of the services to be provided by the contractor

Some states require preliminary notices to be in a specific format with specific legal statements. General contractors must abide by these requirements to ensure that their preliminary notices are valid.

How to find the information required for a preliminary notice and other requirements

General contractors may be expected to serve not just a preliminary notice but also other documents such as a detailed list of subcontractors and even a building permit. Here are good business practices that could help you fulfill these requirements:

1. Look for the required details in the contract

The contract should include all the necessary information such as the names and addresses of the property owners. It should also have the most reasonable estimated amount of your services, and ideally, it must also reflect the project’s legal property description or most accurate location.

2. Organize your contracts with subcontractors

Keeping your paperwork organized will benefit you when it comes to fulfilling lien-related requirements. If required to provide a list of all subcontractors, make sure that you include all subcontractors under your wing and you indicate their accurate contract amounts. You must do your due diligence in making sure that you list all subcontractors to ensure that their lien rights are also protected.

3. Communicate with the property owners regularly

Maintaining an open communication line with the property owner is a good way to settle initial disputes, especially with regard to work expectations. It is better to settle payment disputes when you are all on the same page.

General contractors must be proactive in making sure that their lien rights are intact. Once payment issues arise and communication with clients is no longer effective, you must exercise your lien rights to ensure that you can recover the payment that you deserve.

When to file a mechanics lien

A mechanics lien is usually filed after a project has been completed or the general contractor’s work on the project is all done. Each state has different mechanics lien deadlines, which usually range between 30 and 90 days after project completion or after the general contractor’s last day of work.

Once a payment dispute arises, general contractors must start preparing their documents for filing a mechanics lien. The deadlines for filing a mechanics lien are not flexible – you are not allowed to file a mechanics lien when the deadline has passed.

A mechanics lien is arguably the best weapon that they can use to encourage property owners to pay up, so general contractors must familiarize themselves with the specific mechanics lien deadline in the state in which they work.

How to file a general contractor mechanics lien

How to file an original contractor mechanics lien

1. Verify that you have lien rights

General contractors have lien rights, but they are typically expected to fulfill certain pre-lien requirements before they can file a mechanics lien. You must ensure that you have filed a valid preliminary notice, if applicable, and you have complied with other obligations to the property owners.

General contractors may also be asked to serve a Notice of Intent to Lien on the property owner before they can file a mechanics lien. Even if this step is not required, you are still encouraged to notify a property owner if you intend to file a mechanics lien. This is because serving a Notice of Intent to Lien can be enough to encourage property owners to release payments.

2. Prepare the mechanics lien form

Different states have different requirements with regard to mechanics lien forms. Some states only specify that required details that must be reflected on the mechanics lien form, while other states have specific wording and formatting requirements for their mechanics liens. General contractors must be aware of the specific rules in their state.

These are typically the pieces of information that you will need to provide in your a mechanics lien:

  • Your name and address
  • The name and address of the property owner(s)
  • A general description of the services to be provided
  • A description of the project property location sufficient for identification
  • The total amount being claimed
  • The date of your first day of work
  • The date of your last day of work

Make sure that you are completing the correct mechanics lien form that applies to the state where you work. Do not simply trust mechanics lien forms that you see online as there is no single template that applies to every state.

Also, keep in mind that a valid mechanics lien requires accurate information. A simple misspelling could invalidate a mechanics lien, so always verify that every detail in your mechanics lien is correct and properly written. Common mistakes include dropping the official business prefix of a company (e.g. Ltd. and Inc.) and failing to provide a legal property description when required.

3. Record the mechanics lien

Once your mechanics lien form is all set, the next step is to record it in the local county clerk’s office where the property is located. Recording a mechanics lien can be done by mailing your documents together with the lien fees, or by walking into the office and filing the document in person.

Note that filing a mechanics lien is not free, so you will have to pay the necessary recording fees. If you decide to mail your mechanics lien to the county clerk’s office, attach the exact amount required to cover the lien fees. To know how much filing a mechanics lien costs, you should call the local county clerk’s office where you intend to file the mechanics lien.

Another key thing to note is the deadline for filing a mechanics lien. Be aware that this deadline is not flexible – missing the deadline for filing a mechanics lien is basically waiving your lien rights. Make sure that you file a mechanics lien before the deadline that applies to your state.

4. Serve the mechanics lien on the property owner and general contractor

Most states require mechanics lien claimants to furnish copies of the recorded mechanics lien to their clients. General contractors are typically required to serve copies of the mechanics lien on the property owners.

Even if not required, serving a copy of the mechanics lien on the property owner is a good way to notify them that a mechanics lien has been recorded under their property. Most property owners would want to get rid of this mechanics lien record as soon as possible, so notifying them is one way to fast-track the payment process.

Serving copies of the mechanics lien may be fulfilled through any of the following methods:

  • Certified mail with return receipt requested
  • Registered mail
  • First-class mail
  • In-person delivery

Note that not all states accept first-class mail or in-person delivery as valid service methods. It is still best practice to know the specific requirements in the state where you are working.

Whichever method you choose, you must make sure that you keep copies of the service documents, including mailing receipts of signed acknowledgment of receipt forms. You may be asked to provide proof that you have served copies of the mechanics lien on the property owner, so ensure that you have documents to show if that day comes.

5. Release/enforce the mechanics lien

Once you have filed a mechanics lien and have served the necessary copies on the property owner and the general contractor, the next step is to simply wait. Either you will get paid or you won’t, but most of the time, a mechanics lien should be successful in compelling the owner to give you the payment you deserve.

Releasing a mechanics lien

When a mechanics lien works and the property owner eventually pays up, you are expected to cancel or release the mechanics lien. Releasing or cancelling a lien is essentially filing another record in the same county clerk’s office where the mechanics lien was recorded. This second record is a note that says the associated mechanics lien has been duly satisfied.

Not all states require general contractors to formally release a mechanics lien. However, it is still best business practice to release a mechanics lien once you have received and cleared the payment from your client. Canceling a mechanics lien acknowledges your client’s efforts in satisfying the mechanics lien and finally giving you the payment.

However, always remember that you must not cancel a mechanics lien unless you have verified that the payment is on hand. Always make sure that payment cheques have been cleared or credit card transactions have been approved.
You do not want to deal with bouncing cheques and rejected credit card transactions after you have already canceled a mechanics lien. You must in no way cancel a mechanics lien until you are certain that you have the full payment.

Enforcing a mechanics lien

Sometimes a mechanics lien will fail to work, especially when your clients are also struggling to come up with funds to settle the payment. When this happens, you must enforce the mechanics lien so you will still be able to get the payment that you worked hard for.

Enforcing a mechanics lien means initiating a foreclosure action against the property. When you win the lawsuit, the property will be foreclosed and you will be able to recover payment from the foreclosure sale of the property.

Note that a mechanics lien must be enforced before the lien expires. Unfortunately, mechanics liens are not effective forever and they also have an expiration date. Once a mechanics lien expires, it can no longer be enforced so it no longer holds power over a property.

The expiration dates for mechanics liens vary per state. These dates usually range from 60 days to 1 year of the mechanics lien’s recordation date, so ensure that you enforce the mechanics lien on or before the deadline.

Before enforcing a mechanics lien, you may want to notify a property owner by serving a Notice of Intent to Foreclose. This step is not necessarily a requirement, but notifying property owners is one way to send them a final ultimatum before you launch a full lawsuit against the property.

In some cases, serving a Notice of Intent to Foreclose on a property owner is enough to get them to release the payment. This is because a Notice of Intent to Foreclose could encourage property owners to settle the debt instead of having to deal with a potentially more expensive foreclosure lawsuit.

Best practices when filing an original contractor mechanics lien

1. Serve a preliminary notice, even if not required

General contractors may not be required to serve a preliminary notice in certain states, but doing so is still considered good business practice. Serving a preliminary notice opens communication lines between clients and the general contractor. It also informs clients that you are aware of your lien rights and you are willing to enforce a mechanics lien if you do not get paid for your work.

2. Serve a Notice of Intent to Lien

A Notice of Intent to Lien may be enough to encourage property owners to pay up. Property owners do not want to deal with a mechanics lien, and most of them would rather settle an outstanding payment instead of contesting a lien. Serving a Notice of Intent therefore warns a property owner, and this warning may be sufficient to get them to release the payment.

3. File a mechanics lien on time

Mechanics lien deadlines are not flexible – when the deadline has passed, you will no longer be allowed to record a valid mechanics lien against a property. This is why keeping track of the mechanics lien deadline in your state is very important. When a payment dispute arises, begin preparing your mechanics lien form and be ready to record that mechanics lien before the deadline passes.

4. Release a mechanics lien when payment has been satisfied

When your mechanics lien works in getting a property owner to pay up, you are encouraged to release the mechanics lien to bury the hatchet and clear the property of any records of delinquency. This is considered good business practice that should ease the tension among all the stakeholders of the project. Since you already received your payment, the mechanics lien should be duly cancelled.

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