Thursday, June 09, 2011

Primer on Liens

If you're going to be in this industry, you need to know about liens. They are a powerful tool for suppliers and contractors and yet there are still a number of risk management procedures that owners can take to shield themselves from unnecessary liability. 
A lien is defined as a legal claim of one person upon the property of another person to secure the payment of a debt or the satisfaction of an obligation and are often filed by vendors, suppliers, and contractors. These are typically the people who provide goods or services to a project although they do not have a contract with the property Owner. Think about a typical construction project… a plumbing subcontractor signs a contract with the General Contractor or a window supplier will have a contract with the General Contractor or a subcontractor. These parties do not have a contract with the source of funds, but liens make it easier for these parties to collect payment.

Process
Now that we've discussed the basics, let's review the process of how liens are initiated…
1.    At the beginning of a project, contractors and vendors should issue a pre-lien notice. In essence, this allows a contractor to be 'eligible' to file a lien if needed and the contractor/vendor should issue this notice within 20 days of first service or first delivery. Regardless of whether a vendor makes a single delivery or 100, he only needs to issue one pre-lien notice. However, he also needs to have proper 'proof-of-service' to confirm owner's receipt. Use Certified Mail to achieve this verification. Lastly, contractors & vendors are encouraged to file a pre-lien notice with the county recorder where the property is located. This ensures that the contractor will be notified if and when an owner files a 'Notice of Completion' with the county. If you are an owner and begin to receive Pre-Lien Notices, do not worry…it is standard process.

2.    Once a PRIME CONTRACTOR has completed work or has furnished products AND  the owner does not file a Notice of Completion, the contractor has 90 days to file a Claim of Lien. If the Owner files a Notice of Completion, the lien window is narrowed down to only 60 days. Therefore, it behooves the owner to file a Notice of Completion.

3.    Once a SUBCONTRACTOR OR VENDOR has completed work or has furnished products AND the owner does not file a Notice of Completion, the contractor has 90 days to file a Claim of Lien. If the Owner files a Notice of Completion, the lien window is narrowed down to only 30 days. Therefore, it again serves the owner’s best interests to file a Notice of Completion.
If an owner objects an pre-lien notice because he is not responsible for payment, he can post a Notice of Non-Responsibility in a public place on the property within 10 days of learning of the proposed improvements. This will typically happen when a leasing tenant engages a contractor for tenant improvements. In this case, the owner is completely removed and needs to shelter himself from unnecessary risk. In this case, it is the tenant who is responsible for making sure that all contractors and vendors are paid, not the building owner.
I should also note that liens are only for private projects only and are filed against the actual property; not against a person, firm, or business. Liens are not used on Public Works projects. On pubic jobs, the Stop Notice is used instead. Stop Notices are essentially a lien upon the construction funds.

How to Clear a Lien
  1. Once a lien is recorded, there is a window of time for the two parties to work out a solution.
  2. Once a solution has been developed and appropriate payments made, the lienholder must file a 'Release of Lien'.
  3. In some drastic situations, the property must be sold in order to provide liquidity for payment to clear the lien.
Design Professional Liens
Engineers and Architects can also file a design professional lien with the county recorder if they perform work under a written agreement during the planning phase of a project. As always, the lien is on the property and not on the owner or owner's company. 
The unique aspect of design liens is that the designer must wait to file the lien until a building permit is issued. However, the design professional only has a small window in which to file this lien. On one hand, he must wait 10 days to file the lien after he issues a written request for payment to the owner. On the other hand, if he learns that the owner does not intend to commence with construction, the professional only has 90 days to file the lien.
The design professional lien can expire if the owner commences with construction OR if 90 days passes once the professional files the lien. Once the lien expires, the design professional can file a standard Mechanics Lien.
Design professional liens cannot be used on jobs with construction costs under $100,000. Design liens are reserved for licensed professionals only. No license = No lien rights.

Alternates
  1. If a lien has been filed and is about to expire, the filing party can issue credit to the party who has not paid. This then works as an outstanding loan.
  2. If a property has been leined, the owner can have his surety bond the lien. Bonding can provide the owner with flexibility and is best used when the lien is encumbering a process such as the sale of the asset. However, this can be quite expensive and the owner will also need additional assets to collateralize the bond.
  3. Litigation should be a last resort.

Owners
  1. If you have a tenant who will soon be commencing with a TI project, make sure that you post a 'Notice of Non-Responsibility' on the property within 10 days of learning of the proposed improvements. You also need to file the Notice of Non-Responsibility with the county recorder.
  2. Require all Applications for Payment to include a Conditional Lien Release.
  3. When you issue progress payments, require that the contractor provide Unconditional Len Releases within 7 calendar days. Do not approve or process any Payment Applications unless the contractor is current on lien releases.
  4. When work is complete, file a Notice of Completion and narrow the lien window down from 90 days to 30 days.
  5. Recognize that subcontractors can still file liens even if you pay the General/Prime Contractor. Require that the general contractor provide subcontractor lien releases with Payment Applications.
Contractors
  1. Protect your lien rights! File a Pre-Lien notice when you begin work.
  2. File the pre-lien notice with the county recorder. You need to know when the clock starts ticking.
  3. Do not perform any additional work once the Owner files a Notice of Completion.
Architect's / CM's
  1. Take note of when contractors or subs complete work and demobilize. Set up 90 day reminders to note when a lien window closes. Convey this to your client and they will thank you for looking out for their interests.
Reading Between the Lines
  1. While liens seem like an easy way to recover costs, think of the potential unintended consequences from filing a lien. Filing a lien is one of the best ways to quickly sour a healthy client relationship. You may want to consider whether attempting to collect an overdue $500 is worth jeopardizing $5,000,000 of future work.

Additional Reading
Google: California Civil Code § 3112
Google: Lis Pendens
Disclaimer: I am not an attorney. This is not legal advice. Seek legal counsel if you are involved with a lien.