How to Determine Mechanic Lien Eligibility
Mechanic and materialmen's lien laws are a great tool to help contractors and subcontractors collect outstanding funds for work you’ve completed. Before you start exercising your lien rights, you need to know whether the work you’re performing is lienable. In other words, you need a system to determine a project’s lien eligibility.
A mechanic and materialmen’s lien system should make it easy to figure out whether you can - or should - file a lawsuit to foreclose a lien. In this article, we’ll share some information about how to determine your lien eligibility, plus examples of when you may or may not want to exercise your lien rights.
Decide Whether To File a Lien Statement
Your lien system should make it clear whether you can file a lien in the first place, but how do you decide if you should file a lien? Times when you may not want to file a lien are:
Inaccurate information
You need to have an accurate legal description to file a lien successfully. If the description you’re using is incorrect and you place the lien against the wrong property, the lien will be invalid, and you’ll need to spend your own money to clear the title of the other landowner. If you don’t have a system in place to collect accurate information, you put yourself at risk.
You missed your deadline
There are statutory requirements for when you must serve your pre-lien notice and file your mechanic lien, depending on your role in the project. Those dates are non-negotiable. If you miss either deadline, you can’t enforce a mechanic lien against anyone's property.
The consequences of serving or filing after your time limit has expired can be significant, so it’s best to not serve or file at all if you miss the deadline.
No equity in the property
Let’s say that there’s a $100,000 mortgage on the property, and the property is only worth $100,000. If the bank that holds the mortgage filed a claim before you, then their claim will be satisfied first. Once they sell the property and collect what they’re owed, there will be no equity left. In that case, it’s not worth the time and expense of filing a lien because there will be nothing left by the time it gets to your claim.
You’ve waived your lien rights
It’s common for general contractors to have their subcontractors sign a partial lien waiver when they distribute progress payments. Make sure that you review partial lien waivers carefully. Some lien waivers have language that removes a subcontractor’s lien rights beyond the date of the partial lien waiver. Make sure that you only sign a waiver for the work done to date, and not beyond.
Maybe you've thought hard and consulted your legal advisor about filing a mechanic lien. You’ve decided there's no way to move forward. Before you lose hope, remember that you can still file a civil suit against the party that owes you money. Liens are just one way to collect money you’re owed, but they aren’t the only option.
Use Relevant Project Info to Your Advantage
The second key to a mechanic and materialmen's lien system is to develop a system for collecting relevant, accurate information about every project. Without this information, you're simply gambling with your company's hard-earned funds and assets. General contractors who don't have accurate, relevant info can face slander of title lawsuits and, ultimately, no recovery of their money.
Collecting relevant project information lets your company:
Figure out the nature of your project to determine if original/subcontractor liens and pre-lien notices are necessary to submit
Identify, calculate and record time limits on a project
Determine the appropriate legal description for your lien statement
Name the parties who need to serve lien documents and foreclosure actions
You should vet your project information to make sure it's accurate, which is even easier with the help of legal counsel and team members who you can spare. A thorough review of your project information will ensure your lien is valid and clear the title of the other landowner.
Your lien system will also need relevant and accurate project information to function properly. For every potential lien statement you submit, you’ll need to furnish information such as:
Your contract's involved parties
The property landowner
What work you performed
The project’s legal description
The amount you're owed
And more
Without a standardized checklist, it would be extremely difficult to keep track of the information you need about each project. A standardized lien system eliminates any guesswork by helping you collect all of the relevant project info you would need to file a lien.
Double-Check Your Pre-Lien Notice Requirements
One perk of having a direct contract with a property landowner as a general contractor is that you don't have to submit a pre-lien notice. Some contractors in Oklahoma may assume that these same rules apply to their subcontractors and suppliers when they submit a lien on owner-occupied residential property. Unfortunately, making assumptions about when you do or don’t need to file a pre-lien notice is a surefire way to make mistakes and miss deadlines.
The reality of construction is that your whole chain of work needs to know who has a right to file a lien and why. If you let everyone working on a project know that you're on the job and are entitled to be paid for work that you've done, you raise your chances of collecting your money. This also makes it easier for people in your chain of work to make sure subcontractors and suppliers get paid and avoid dealing with a lien statement later on.
Keep Refining Your System
You know your company better than anyone else, so be proactive in tailoring your system to your team and its scope of operations. With the help of a qualified lawyer, accountant, and insurance agent to keep refining your system, you'll be able to successfully manage the risk of not getting paid and being sued as you scale your business.
If you're interested in building or refining your mechanic and materialmen's lien system, get in touch with Daffern Law Firm today.
How does your existing mechanic lien system measure up? Download our free Mechanic Lien System Survey to improve your system, increase your chances of getting paid, and reduce your risk of getting sued.
