January 3, 2018
Is Your Company Aware of Its Lien Rights?
All contractors recognize the importance of cash flow. Consequently, when there is a delay or disruption in cash flow, they will generally look upstream for relief, often to the general contractor. In this process, contractors recognize and rely upon the remedy of a lien as a tool to receive payment(s). What’s often not fully understood is how a lien is appropriately applied, and ultimately, that it is a separate and distinct claim against the owner.
The idea of a lien is to protect the provider of services and materials by holding the beneficiary (the land owner) responsible. The concept is believed to have started as early as the Roman Empire, and has been a much relied upon tool of contractors since nearly the beginning of United States history. Each state enacts its own lien laws, and from state to state they are varied and can be quite complex. They often require notice be provided to the owner prior to work commencing, within 90 days of having not been paid, or when work is completed on the project. At Faith Technologies, our risk department must maintain a working knowledge of the lien laws in the forty or more states that we regularly work in. In the event of nonpayment on a single project, the effort is well worth the time spent.
What is unique about a lien is that it creates an interest against the real property that the contractor has provided services or materials to. It creates a right to seek payment for the value provided by the contractor to the owner, even if there is no contract with the owner. This creates dual avenues for the contractor to seek payment: the first, and more obvious, is from the general contractor for breach of contract for nonpayment; the second claim is against the owner directly, who has a legal obligation arising from having received the value of the services or materials provided by the contractor.
A properly filed lien affords the contractor the right to commence litigation seeking payment from the owner, or risk having the property foreclosed upon. In the commercial setting, owners (often businesses) may use their land as collateral and are precluded by their financial institutions from allowing their property from going into foreclosure. The owner is thereby incentivized to pay the contractor in order to avoid foreclosure and the consequences it may have. The owner also has the ability to withhold funds from the general contractor for failing to pay the subcontractor(s).
Just as it is incumbent upon a contractor to understand how it will be paid pursuant to the contract, it is important to understand before the project commences how to protect lien rights in the event of nonpayment. Before setting foot on a project site, contractors should take the necessary steps to recognize when their obligations are triggered in order to protect their lien rights. Fortunately, Faith Technologies has had to file only a handful of liens over the years, but we recognize the importance of identifying the necessary steps to protect our lien rights. Is your business aware of its lien rights?