A mechanics lien is a security interest in the title of real property placed by those who supplied the materials or provided the labor to build or improve the property. This particular remedy is typically used by contractors and subcontractors as a defense against the nonpayment or the imperfection of tender for a construction contract.
While a mechanics lien offers construction companies a way to secure their payments, construction companies and especially property owners want to avoid using this tool at all costs. Contractors, subcontractors, and material suppliers would rather get paid on time, move on to the next job, and avoid the hassle of filing a lien. On the other side, property owners want a job to go smoothly, minimize the costs of a project, and keep their titles clear. To avoid using a mechanics lien, each party involved in a construction project needs to vet the other parties on the job, practice good communication, and use proper documentation. Below is a list of steps that property owners can take to mitigate the chances that they will have a mechanics lien filed on their property.
How Property Owners Can Avoid Mechanics Liens
There are many steps property owners can and should take to avoid contractors, subcontractors, and material suppliers from using a mechanics lien. However, the one thing each of these steps has in common is that they each prioritize communication. Further, though some of the steps can lengthen the time it takes to complete the project and can add some additional upfront costs, in the long run, these steps can save property owners stress, money, and time.
Prequalify the General Contractor
One way to prevent contractors and subcontractors from needing to use a mechanics lien, is to prequalify general contractors.
The reason why prequalifying the general contractor is important is to ensure that they have good payment practices. Discuss the general contractor’s payment plans and what steps they will take to make sure all the subcontractors and material suppliers receive payment on time. By bringing these topics up, the property owner will also get an insight into the general contractor’s organizational skills—which plays a big part in a contractor’s ability to run a job site.
Require the General Contractor to Collect Preliminary Notices
In many cases, a property owner will receive a mechanics lien from an issue that they were not aware of. To avoid this occurrence, property owners should require that general contractors collect preliminary notices. These notices should be collected from every subcontractor and material supplier that is working on the job. Preliminary notices help the owner keep track of everyone involved in a job. Further, if any issues start to occur, the owner can directly pay an entity.
Require General Contractors to Collect Conditional Lien Waivers with Pay Applications
Another thing property owners should do is to require contractors to submit conditional lien waivers with their pay applications. Conditional lien waivers are useful for property owners as well as subcontractors and material suppliers. Conditional lien waivers only require construction companies to waive their lien rights when they receive payment in full. Additionally, a conditional lien waiver protects property owners from the threat of a mechanics lien once they pay the companies.
Protect Everyone By issuing Joint Checks
An easy way property owners can protect their finances is to utilize joint checks. Joint checks require that every party involved in the transaction need to endorse the check before the funds are disbursed. A common example where joint checks are useful is when a general contractor and material supplier need to receive payment. In this case, the property owner gives the general contractor a check they cannot cash until the material supplier signs. Joint checks go a long way to ensuring that subcontractors and material suppliers receive payment on time. Finally, another benefit of issuing joint checks is that property owners can avoid double payment.
Require the General Contractor to Secure a Payment Bond
Payment bonds work to protect property owners by shielding the property if a subcontractor or supplier submits a claim. When a property owner creates a payment bond, the unpaid companies make a claim on this instead of the property. Payment bonds stop mechanics liens before they could ever start. Thus, if an issues occurs, the construction project does not stop until the mechanics’ lien is removed from the property.
File a Notice of Completion
While only available in certain states, a notice of completion is another way property owners can protect themselves. A notice of completion states the mechanics’ lien rights of all parties after the completion of the project. Additionally, this notice shortens the deadline for unpaid parties to file a mechanics lien. Because of these two factors, in states that allow notice of completion, property owners can drastically lower the risk of having a mechanics lien put onto their property.
Pay on Time and in Full
Timely payment is the easiest and most important way for property owners to avoid mechanics liens. A mechanics lien is a tool that construction companies use when they do not receive payment. Thus, simply paying the companies will make it so they never have to even think about using a mechanics lien.
Final Thoughts
Everyone involved in a construction project plays a part in avoiding a mechanics lien. However, property owners that prioritize communication, detailed documentation, and paying on time goes a long way in ensuring that construction companies never use mechanics liens.
With over 20 years of experience, Antonoplos & Associates construction attorneys can help property owners, construction company owners, contractors, subcontractors, material suppliers, architects, and designers with a wide range of services before, during, and after a construction project in DC, Maryland, and Virginia.
Contact Our DC Law Office for More Information
Finally, for more on how property owners can avoid mechanics liens, contact us at 202-803-5676. You can also directly schedule a consultation with one of our skilled attorneys. Additionally, for general information regarding construction law, check out our blog.