Manny A. Frade is the chair of Meltzer Lippe’s Construction practice group; over the years, he’s represented a wide array of clients in the construction industry, including developers, owners, contractors, and subcontractors. In this Q&A, Manny provides an overview of Mechanic’s Liens, an important legal recourse for contractors, subcontractors, and suppliers who are owed money for work performed in construction projects.
A mechanic’s lien is a security interest in a title to real estate for the benefit of those who have supplied materials and/or labor that improve the property. The filing of a lien where required tells the world of your claim for money owed for work that you’ve performed either for, or to improve, a piece of private real property. Not so in the case of public or government project. When you file a lien against a government project, you don’t file it against the actual property; you file it against the project or the funds earmarked for the project and thus represent a claim for lien against funds not land.
Mechanic’s liens usually arise when an owner fails to pay a contractor or likewise, when a contractor fails to pay a subcontractor. The decision to file a mechanic’s lien must be made within a prescribed time and is usually made beforehand when the claimant runs out of better options. In New York, on private projects, it’s eight months from when one last performed work; on public projects, it’s 30 days from the last day of the government’s acceptance of the work on the entire project, not just your part of the work.
Anyone who supplies labor or materials or both to improve a construction project can file a mechanic’s lien. Even those who don’t directly do so, for example, a subcontractor to a subcontractor, even a supplier to the contractor or subcontractor, can do so. At some point, however, one becomes too remote in process to be in the protected class. So, for example, if I have a general contractor who hired a subcontractor, who then buys materials from a supply house, that supply house is protected. But if that supply house then goes to its own supply house to acquire some specialty product, that second-tier supplier is not entitled to file a mechanic’s lien.
In New York, it would not be a surprise if at least one mechanic’s lien were filed on every single significant project constructed within the five boroughs of New York City. The construction industry in New York City is fragile and volatile. Owners/developers may run out of money while the project is ongoing for a number of reasons, some of which can be beyond their control. General Contractors can become insolvent. Though a General Contractor in New York City needs to pass a test to become licensed, she does not require a minimum of capital. Barriers to entry are low. Bureaucracy at every level from government to property management work to impede progress, “fly by night” operators abound, and these people may have limited capital or a cavalier attitude towards paying subcontractors and suppliers on time, or both.
The lien document itself for a private project is filed in the clerk’s office of the locality in which the property is located It is relatively straightforward, listing the name of the owner, the person who hired you, the first day you were on the job, the last day you were on the job, and how much you’re owed.
But lien claimants have to be careful that this document is defect-free. If there’s something wrong on the face of the lien, for example, the lienor has listed the wrong owner, or the wrong section, block, and lot and therefore you have the wrong description of the property, the lien will fail.
To avoid these pitfalls and to avoid filing time many lienors use lien service companies, who may or may not be diligent or qualified to comply with the requirements for filing the lien and properly serving it, which can also cause the lien to fail.
Many lienors with a lot of experience entrust this responsibility to their construction attorney, who is well aware of the filing requirements. Additionally if the lien fails and the lienor is then out of pocket, he/she is protected by the attorney’s malpractice insurance, which is not available to lien service companies.
The requirement that an owner/developer satisfy any mechanic’s liens filed against him is usually specified in the financing agreement between the owner/developer and its financier bank or other financial institution, so mechanic’s liens are powerful instruments that can give individuals and small companies significant leverage. Once a lien is filed and properly served on all interested parties, the banker will likely forthwith contact the owner/developer and says something like “hey, it looks like you’re not paying your bills. And if you want us to continue funding the project, you’d better take care of this lien.”
One might believe that having the leverage that a lender can provide is of universal value. But there are factors to consider when hiring a general contractor that may avoid ugly debtor problems at the outset. It’s that age old adage, “you get what you pay for”. So just finding the cheapest general contractor is probably not the right thing to do. Consider references, prior jobs etc. One of my clients always looks inside the GC’s truck or attends at their place of business to surmise their level of organization. If the truck is a mess, likely the job site will follow.
But I think the better part of due diligence happens while the contract is ongoing. Owners/developers are naturally going to focus on getting the work completes so that they can rent out the space or sell condos or whatever it is they’re doing. But they need to be equally vigilant about making sure that the general contractor is paying its bills while the work is ongoing.
The requirement to file a lien is aggravating and upsetting to our clients. And yet it provides me with some of my most satisfying work; that is helping hard working people get paid for the work that they’ve done. These people – contractors and subcontractors – are typically not wealthy . Even construction companies that do a significant amount of work annually — I have clients that do from between $20 and $50 million of work annually — are often run like mom and pop shops: the owner is at work every day, whether in the field or in the office — oftentimes more in the field than in the office.
Many of these businesses cannot support debtors in arrears. Construction contractors and subcontractors don’t have an easy life. They work hard. They are highly regulated. They are often required to personally guarantee their own bank indebtedness and performance bonds. The company’s liabilities are their liabilities. We are always dealing with real people and it is very, very personal. The consequences of being paid late, or not being paid at all, can be life-altering, and I find satisfaction in helping these people get the monies to which they’re entitled.
This blog posting is for informational and educational purposes only. It is general in nature and not person or circumstance specific. This blog posting is not intended nor should it be construed as rendering independent investment, legal or tax advice. It may but does not necessarily constitute attorney advertising.