Contractor’s Guide to Mechanic Liens
As a contractor, you likely started your career out of a love for your craft. Being forced to become a debt collector due to a client not paying is a quick way to squash that love.
Many business owners simply accept the fact that unpaid debts are an inevitable part of owning a business, but there are protections against this! The Oklahoma legislature has given contractors and subcontractors an often untalked-about superpower: mechanic and materialmen’s liens.
This article will cover what a lien is, why contractors should take advantage of them, and how to implement a simple five-step system that can protect you and your organization.
What is a Mechanic and Materialmen’s Lien?
The Oklahoma legislature created mechanic and materialmen’s liens to help contractors and subcontractors collect money they’re owed for improving real property in the state.
Generally speaking, if a contractor works on or provides materials to real property in Oklahoma and is not paid for the work or materials, then he or she can file a mechanic and materialmen’s lien on the property. The contractor can then file a lawsuit to foreclose the mechanic lien. If the contractor wins, he/she can have the property sold to pay the debts, including the amount owed to him or her.
Mechanic lien laws, when used effectively, are a great tool to help you collect the money you’re owed. However, you can’t file a mechanic lien on every job because there are work and materials that are simply not lienable. Also, there may be technical reasons why you should not file a lien, such as being out of time to file or forgetting to file a pre-lien notice. There are also business considerations, such as if there is not enough equity in the property to pay off the amount you’re owed plus the cost of filing the lien.
4 Common Contractor Mistakes a Lien Can Help Avoid
After learning what a lien is, you may still be wondering why it is necessary in the first place. There are four major mistakes contractors make that can cause a loss of money and time:
Not using contracts with clients
No standard contract addendums
Missing lien deadlines
Lost opportunities for business reinvestment stemming from lost funds
Implementing a standardized, simple mechanic lien system can help address most of these issues before they occur. Not only does a lien system help your company avoid risks, but it gives you better chances of having enough revenue to reinvest and grow your business.
Benefits of a Mechanic Lien System
Mechanic lien systems serve two primary purposes:
To standardize your information collection and lien filing process so that you don’t miss the opportunity to file a lien and collect your money, and
To help you determine whether you can or should pursue such an action.
A good system helps you collect all of the information you need to determine whether you should pursue a lien, and then makes it easy to file, should you decide that it’s the right course of action.
Additionally, a simple lien system can offer benefits, such as deadline accountability, improvement in time management and work freedom, easier employee training, and the reinvestment of saved funds into the business.
Steps of an Effective Mechanic Lien System
Developing a mechanic lien system doesn’t need to be complicated or convoluted. A simple, five-step system is enough for most contractors and subcontractors.
1. Determine Whether You’re Entitled to a Mechanic Lien
There are a variety of reasons why you cannot or should not file a mechanic lien. For example, the work your company performed or the materials you used may not be lienable. Another reason not to file is if you waive your right to a mechanic lien in the contract or in the lien waivers when you picked up your progress payments.
Having a standard process for evaluating whether to file prevents you from wasting time filing when you are not entitled.
Determining lien eligibility should be the first step of your mechanic and materialmen’s lien system.
2. Gather Relevant and Accurate Information
Once you’ve determined that you should move forward with a mechanic lien, you need to gather specific information to file the notices and lien statements. Being able to collect accurate information is, arguably, one of the most important steps in your lien system.
Our mechanic lien course offers specific advice about where to find accurate information, as well as how to include some of it in your contract negotiation process.
3. Prepare and Serve the Correct Pre-Lien Notice
Certain contractors who do not have a contract directly with the owner of the property are required to give a pre-lien notice to the property owner. The purpose is to give the owner notice that your company has done work on the project and to notify them of your lien rights. The owner often knows that the general or original contractor has lien rights, but he/she may not know which subcontractors and suppliers worked on the property.
Pre-lien notices give the owner this information so that he/she has an opportunity to pay suppliers for their work and materials.
4. Preparing and Filing the Mechanic Lien Statement
The benefit of a standardized mechanic lean system becomes fully apparent when it’s time to file a lien statement. If your company has decided that filing a mechanic lien is the right course, has collected all of the relevant information, and has sent pre-lien notices, then the preparation and filing of the lien statement are easy.
5. Filing the Foreclosure Action
The mechanic and materialmen’s lien attaches to the property. In order to force the real property to be sold to satisfy the debts, you must file a suit to foreclose the mechanic lien within one year of filing the lien statement.
At this point, it’s best to bring your attorney into the process. Assuming you are successful, you will be able to sell the property to cover the cost of the property owner’s debt to you.
When Your Attorney Needs to Get Involved
If you miss a lien deadline, you can still work with an attorney to file a civil suit to collect outstanding debts. However, these suits are often expensive and time-consuming.
Faced with both attorney fees and lost time, many contractors choose to let the debt go and just accept the loss. However, a lien system can save you considerable time and money.
Typically, contractors and subcontractors only need to consult their attorney when it’s time to foreclose on the mechanic lien. However, there are four additional situations when you may want to bring in your attorney before the foreclosure:
There is a complicated property title
The owner files for bankruptcy
Issues arise filing a pre-lien notice
General legal problems requiring counseling
The five-step simple lien process described above helps contractors avoid many of the potential problems that could arise and reduces the need for an attorney until the end of the process. However, if unexpected problems present themselves, don’t hesitate to reach out to an attorney for assistance.
A Simple, Yet Effective System
Protecting your revenue and the integrity of your business should always be a priority as a contractor. If you would like to get in touch and discuss how to set up an effective mechanic and materialmen’s lien system for your organization, reach out to us here at Daffern Law Firm today. Alternatively, you can click the link below to get started on our online Mechanic Lien Course.