How a Subcontractor Claim of Lien Works to Get You Paid | Handle

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How a Subcontractor Claim of Lien Works to Get You Paid

How a Subcontractor Claim of Lien Works to Get You Paid

March 22, 2020

Payment disputes and delays are quite common in the construction business. Fortunately, construction parties can file a mechanics lien to recover payment from delinquent clients.

A mechanics lien gets attached to a property’s public records so potential buyers and financiers can be notified about the outstanding debts related to the property. By filing a mechanics lien, construction parties are able to get leverage in payment negotiations, which encourages property owners to pay up.

For most parties, however, the thought of filing a mechanics lien can be very daunting. Subcontractors in particular may worry about filing a mechanics lien, simply because they are not aware of the processes and steps required to ensure that a mechanics lien is valid and enforceable.

This guide explains everything a subcontractor must know when filing a mechanics lien, from protecting their lien rights to completing their mechanics lien form.

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Do all subcontractors have lien rights?

Generally speaking, yes. Subcontractors from first- to third-tier ones generally have lien rights. There are, however, different circumstances and requirements which may qualify or disqualify you for having lien rights over a certain project.

You are, therefore, advised to research and familiarize yourself with the specific lien requirements of the state in which you work. These are some of the things that you might want to look out for:

1. Preliminary notice requirements

In most states, subcontractors will only be allowed to file a mechanics lien if they have served the required preliminary notice.

2. Project type and cost

Some states have specific lien requirements for specific project types and contract amounts. For instance, a preliminary notice may be required only for commercial projects or for owner-occupied residential units. Hitting a minimum contract amount may also be a requirement before a subcontractor can have lien rights.

3. Presence of written contract

Some states require a subcontractor to have a written contract before they can be allowed to exercise their lien rights.

Requirements for recording a mechanics lien

The preliminary notice is one of the key requirements for protecting one’s lien rights. In most states, subcontractors must file a valid preliminary notice before they can be allowed to record and enforce a mechanics lien.

When must a subcontractor serve a preliminary notice?

A preliminary notice is usually served early on in a project. Every state has different deadlines for serving a valid preliminary notice, but these deadlines generally range from 7 to 30 days of your first day of work. The first day of work corresponds to the day you first furnish labor or materials to a project.

Some states like Texas have a recurring preliminary notice requirement. This means that a subcontractor may be required to serve multiple preliminary notices during the course of a project. You are highly advised to familiarize yourself with the specific preliminary notice requirements in your state.

It is also best practice to serve a preliminary notice as early as possible. Once you close a project deal, gather as much information as you can so you can complete and serve the required preliminary notice right away.

What information is typically required to appear in a subcontractor preliminary notice?

The following details are usually required to be included in a subcontractor preliminary notice:

  • The subcontractor’s name and address
  • The name and address of the property owner(s)
  • The name and address of the general contractor
  • The name and address of the party who hired the subcontractor, if different from the general contractor
  • A general description of the services to be provided by the subcontractor
  • A description of the project property location sufficient for identification
  • The estimated total amount of the services to be provided by the subcontractor

Some states may require more information and specific legal statements to be included in a preliminary notice. Some states also have more specific requirements, such as writing down the legal property description of the project location instead of just a regular street address.

Where can you find the information required for a subcontractor preliminary notice?

Here are some tips on searching for the information that you may need to complete a subcontractor preliminary notice form:

1. Look for a Notice of Commencement in the project location

Some states require property owners or general contractors to post a Notice of Commencement in a conspicuous location in the project location. The Notice of Commencement can have important information, such as the legal property description and the names and addresses of the property owners.

2. Reach out to your general contractor

Serving a formal request for information on your general contractor should be sufficient to get you the details that you need. In some states, general contractors are required to respond to their subcontractors who issue a formal request for information.

3. Visit your local county clerk’s office

The local county clerk should have records with all the important information regarding a property, including its owners and legal address. This may be a good option if the methods above do not work.
Subcontractors should be proactive in seeking the information that they need to complete a preliminary notice. Keep in mind that in most cases, serving a valid preliminary notice form is key to protecting a subcontractor’s lien rights.

When must a subcontractor file a mechanics lien?

Just like serving a preliminary notice, filing a mechanics lien also has different recording depending on the state. Unlike a preliminary notice, however, deadlines for recording a mechanics lien typically occur after the project has been completed or after the subcontractor has finished their work on a project.

The deadlines for filing a mechanics lien usually range between 30 and 90 days after the subcontractor’s last day of work. The last day of work corresponds to the last day you furnish labor or materials to a project. Note that warranty work is usually not considered when calculating when your last day of work is.

Once a payment issue arises, the subcontractor must immediately consider filing a mechanics lien.

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How to file a subcontractor claim of lien

How to file a subcontractor claim of lien

1. Verify that you have lien rights

Subcontractors up to the third tier typically have lien rights, but most states require these subcontractors to serve valid pre-lien notices before they can file a mechanics lien. To verify that you have your lien rights intact, make sure that you have served the valid preliminary notices on time.

Another action to take is to make sure that you have fulfilled other pre-lien requirements. In some states, serving a Notice of Intent to Lien is another requirement that a subcontractor must fulfill. A Notice of Intent to Lien is different from a regular preliminary notice because it is sent when a payment dispute has already arisen and the subcontractor is already planning to serve a mechanics lien.

Note that serving a Notice of Intent to Lien even if it is not required could be enough to get you paid. Property owners are generally wary about dealing with a mechanics lien and they would rather settle the payment dispute instead of going against a mechanics lien in court.

Even if you have failed to protect your lien rights, you are encouraged to still serve the property owner a Notice of Intent to Lien. It can be enough to prompt them to pay up, although there is, of course, no guarantee that they will actually release the payment.

2. Prepare the subcontractor mechanics lien form

Once you have verified that you have lien rights, the next step is to complete the mechanics lien form. Be aware that different states have different requirements with regard to mechanics lien forms. Most states have specific mechanics lien form requirements, and you must make sure that you are completing the correct form before you record it.

These are typically the details that you will need to write on a mechanics lien form:

  • The subcontractor’s name and address
  • The name and address of the property owner(s)
  • The name and address of the general contractor
  • The name and address of the party who hired the subcontractor, if different from the general contractor
  • A general description of the services to be provided by the subcontractor
  • A description of the project property location sufficient for identification
  • The total amount being claimed

Again, remember that some states require a mechanics lien form to be in a specific format with specific legal statements. Do your due diligence and make sure that you are completing the correct mechanics lien form that applies to the state in which you are working.

Also, keep in mind that mechanics liens require correct and accurate details. A simple misspelling could invalidate a mechanics lien, so make sure that you double-check everything that is written in your mechanics lien. Some common mistakes include dropping the official business prefix of a company (e.g. Ltd. and Inc.) and misspelling the property address.

Make sure that you have all the required information in your subcontractor mechanics lien form and also ensure that these pieces of information are accurate and properly spelled.

3. Record the subcontractor mechanics lien

When the subcontractor notice of lien claim is ready, you have to file it in your local country clerk’s office where the project property is located. You may file a mechanics lien by either mailing your documents together with the lien fees, or by walking into the office and filing the mechanics lien in person.

The key thing to note here is the deadline – you cannot just file a mechanics lien at any time. Make sure that you file a subcontractor mechanics lien before the state’s deadline for recording a mechanics lien. Once you let this deadline pass, there will be no way that you can enforce a mechanics lien, which puts you at a great disadvantage when negotiating for payment.

File a mechanics lien before the deadline to avoid potential complications. Also, note that filing a mechanics lien is not free. When mailing your mechanics lien to the county clerk’s office, make sure that you include the exact amount for the lien fees. Calling the county clerk’s office beforehand to inquire about the total cost for recording a mechanics lien is good business practice.

Otherwise, just file a mechanics lien in person and make sure that you keep copies of the recorded mechanics lien. Having extra copies is required so you can complete the next step.

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

In most states, subcontractors are required to serve a copy of the recorded mechanics lien on higher-tier parties, including the property owner and the general contractor. Even when this step is not required, it is still considered good business practice to do so.

Serving copies of the filed mechanics lien allows a subcontractor to inform their superiors that a mechanics lien has been filed. It is one way to communicate to your clients that a mechanics lien has been recorded against their property and that they should release the payment if they want this lien to be released.

This step can be fulfilled by any of the following methods:

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

Note that some states do not allow in-person delivery, and some states require a third party to serve the copies of the filed mechanics lien. You must be aware of the specific service requirements in your state to avoid compliance issues.

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. This is another way to protect yourself in case your compliance with the requirements gets questioned.

Generally speaking, it is good business practice to keep copies of all lien-related documents in case you need them as evidence in court.

5. Release/enforce the mechanics lien

Once you have filed a mechanics lien and have served copies on the property owner and the general contractor – that’s it. You have successfully filed a mechanics lien. The next step for you is to wait. There are two things that could happen: either you get paid or you don’t.

Releasing a mechanics lien

Most of the time a subcontractor mechanics lien will be successful in getting you paid. The property owner(s) or the general contractors would want to get rid of the mechanics lien under the property’s records, so they will try their best to get the funds to settle the payment debt.

Once you receive the payment, you must then cancel or release the mechanics lien. Releasing or cancelling a lien means filing another record in the same county clerk’s office where you recorded the mechanics lien – this time, you are filing a cancellation of lien, which explicitly states that the mechanics lien has been satisfied.

In some states, canceling a mechanics lien is a requirement, but there are also states in which subcontractors are not obligated to formally release a mechanics lien. It is, however, best practice to cancel a mechanics lien once payment has been cleared. Canceling a mechanics lien acknowledges that the payment debt has been settled, and it releases the tension among all the stakeholders involved.

Keep in mind that you should not cancel a mechanics lien unless payment has been verified. Make sure that the payment cheque has been cleared in the bank or that the credit card transaction has not been rejected.

Bouncing cheques and rejected credit card transactions are common issues during payment exchange – you must absolutely not cancel a mechanics lien unless you know that you have the payment on hand.

Enforcing a mechanics lien

It is also possible for your clients to simply ignore the mechanics lien that you filed and not release any form of payment. When this happens, the next best course of action is to enforce a mechanics lien.
Enforcing a mechanics lien implies initiating a foreclosure lawsuit against the property. When the lawsuit is successful and the property is foreclosed, a subcontractor may then recover payment from the foreclosure sale of the property.

Remember that there is a deadline for enforcing a mechanics lien. Mechanics liens are not effective forever – once they expire, they will no longer be enforceable. An expired mechanics lien will no longer give you leverage during payment negotiations, so if you don’t think payment will arrive from your clients, you must enforce your mechanics lien right away.

Different states have different expiration dates for a mechanics lien. These dates usually range from 60 days to 1 year of the mechanics lien’s recordation date. Make sure that you enforce the mechanics lien before these deadlines so you are able to maximize your lien rights.

Note that enforcing a mechanics lien is best done with a legal counsel. Since you will be filing a lawsuit, it is best practice to work with a lawyer who specializes in mechanics liens to make sure that you are making a strong case.

One step that you can do before you enforce a mechanics lien is to serve a Notice of Intent to Foreclose on the property owner. This notice acts as the ultimatum which informs the property owner that if they do not release the payment soon, you will be filing a lawsuit against their property and they would run the risk of losing that property altogether.

Serving a Notice of Intent to Foreclose is typically not a requirement, but it can be effective in forcing property owners to finally release the payment instead of dealing with a lawsuit.

Best practices when filing a subcontractor mechanics lien

1. Serve a preliminary notice on time

Serving a valid preliminary notice is key to protecting a subcontractor’s lien rights. It is, therefore, best practice to serve a preliminary notice way before the deadline. Start preparing your preliminary notice as soon as you close the project deal and, if possible, serve the preliminary notice as early as your first day of work.

2. Serve a Notice of Intent to Lien even when not required

Serving a Notice of Intent to Lien can be enough to secure payment from your clients. A Notice of Intent to Lien may not be a requirement for all states, but serving it can have the same effect of giving your client a final warning before you file a mechanics lien. Most property owners are wary of dealing with a mechanics lien, so a Notice of Intent to Lien can encourage them to settle the payment debt.

3. File a mechanics lien before the deadline

Filing a subcontractor mechanics lien has a very specific deadline for each state. Failing to file a valid mechanics lien on or before this deadline will cause you to lose your lien rights, so make sure that you file a mechanics lien on time. As soon as a payment dispute arises, start working on completing your mechanics lien form and be ready to record it before the deadline.

4. Release a mechanics lien once payment has been satisfied

A mechanics lien will usually work to compel your client to pay you. Once you have received and verified that the payment is on hand, you must release the mechanics lien by filing a cancellation of lien in the county clerk’s office. Cancelling a mechanics lien is an official declaration that the mechanics lien has been satisfied. Even if this step is not necessarily mandatory, it is a good gesture to acknowledge your client who has duly paid you for the services you provided.

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