Managing Payment Risks

For the contractors, subcontractors, suppliers, and owners involved in construction projects in more than one jurisdiction, the navigation of the lien laws in those “foreign” states presents a significant challenge.

Even the lien laws in your company’s home state can be laced with procedural requirements which must be followed strictly and in a timely manner.

Lien law requirements are frequently confusing; nonetheless, failure to precisely meet these requirements can be fatal to a company’s lien rights.

So, for those firms involved in construction projects in more than one jurisdiction, here are five rules for the successful navigation of the lien law maze.

Rule No. 1: Pre-construction knowledge of lien law peculiarities is essential.

Far too often, contractors (as well as owners) first think about investigating the lien law requirements in a particular jurisdiction only when there is an immediate need to file a claim of lien or, from the owner’s perspective, after the lien has been filed.

In a number of jurisdictions, this decision to wait until the last minute to understand the lien law requirements can result in a catastrophic loss of the protections afforded by lien laws.

In too many jurisdictions, if steps are not taken very early in the project to either preserve lien rights or, in the case of the owner, to limit lien obligations, those rights will be lost forever.

In some states, actions must be taken before the project even begins or lien rights may be lost. So, while the project participants still are enjoying the “honeymoon” that follows the awarding of contracts (and before there is reason to suspect that payment problems or lien filings are in the project’s future), lien rights may be silently evaporating

Following are several examples of states in which some action must be taken to preserve lien rights before the first spade of dirt is turned:

  • In Florida, South Carolina, and Georgia, an owner or general contractor (GC) who files a “Notice of Commencement” at the front-end of a project may be able to limit or eliminate lien filing rights for remote lien claimants (any contractor or supplier who does not have a direct contract relationship with the GC or the owner).
  • In Alabama, a “full price” lien (as opposed to a lien on just the unpaid balance of the owner/GC contract) is only available to those who have a direct contract with the owner or to materialmen who give notice to the owner prior to furnishing materials. Also in Alabama, an owner receiving a “Notice to Owner” from a material supplier may avoid responsibility for the supplier’s materials altogether by giving a “Pre-Delivery Notice” back to the supplier stating that the owner will not be responsible for the price of the materials being furnished.
  • In Texas, subcontractor lien claims for retainage must be protected by either periodic notice letters during the course of performance or by a single pre-work notice from a subcontractor to the owner.
  • In Indiana, the owner’s public recording of a “no lien” contract within five days of the execution of the contract may be used to bar all lien claims by contractors, subcontractors, or suppliers in connection with defined residential projects and certain public utility projects.

In other jurisdictions, lien rights may survive the start of construction, but are quickly in jeopardy if some action is not taken very soon after starting work. Consider these examples:

  • In Michigan, within 20 days after first furnishing labor or materials to a construction project (and if a “Notice of Commencement” has been filed and properly posted by the owner), a subcontractor or supplier wishing to preserve its lien rights must serve a “Notice of Furnishing” on the GC and on the owner’s designated recipient of project notices.

In addition, a “Notice of Commencement” must have been filed and properly posted by the owner.

  • In Missouri, a prime contractor will forever lose its lien rights if it does not provide a special statutory notice to the owner prior to the receipt of any payment in connection with the project.

This notice must be given at one of the following: a) the execution of the contract, b) when materials are first delivered, c) when the work is begun, or d) with the first invoice.

  • In Florida, subcontractors, sub-subcontractors, and materialmen must serve the owner with a “Notice to Owner” within 45 days of first furnishing labor or material at the site.

In addition, sub-subcontractors and materialmen not in privity with the prime contractor must serve a “Notice to Contractor” on the prime contractor within that same 45-day time frame.

  • In Oregon, a supplier or contractor without a direct contract with the owner is required to send a “Notice of Right of Lien” within eight days after the first delivery of labor or materials in order to fully protect its payment rights.

The notice can be sent later, but only those materials delivered or labor performed eight days prior to the notice (and thereafter) are protected.

  • In Connecticut, a lien claimant is entitled to a lien only to the extent that the amount of the general contract has not been paid out by the owner at the time of the receipt of a “Notice of Intent to Claim a Mechanics Lien.”

Thus, a delay in providing the owner with notice of the intended lien claim may result in a complete forfeiture of lien rights. Each of these examples presents specific state approaches to conditioning the lien rights of contractors, suppliers, and owners on the required filing of certain notices (or on the required taking of other actions) very early in a construction project.

So, the lesson to be learned from these example states (as well as some others we haven’t mentioned) is this:

If your company waits until a problem arises to learn the nuances of a state’s lien laws, it is extremely likely that it will have already lost some (and perhaps all) of the protection available under that state’s laws.

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