In this blog, presented by SunRay Construction Solutions, you will learn how liens, bonds and contracts can help you resolve your nonpayment issues quickly and efficiently.
Let’s talk about liens first.
- In the state of Minnesota, liens are a statutory right which means that it is not a right created by a contract or by the court system, rather it is created by a statute.
- One key aspect to remember about liens is that it is strictly construed on procedure. What this means is that you need to precisely follow the rules that are set forth in the statute, on the procedure preserving and enforcing your lien rights, or you will lose the lien rights.
- Who can have lien rights? Anyone performing engineering or land surveying as well as anyone who is contributing to the improvement of real estate by performing labor or furnishing skill, material, or machinery.
- As a construction professional, if you are required to have a license, then you must hold the required license in order to have enforceable lien rights.
- Liens can be only asserted on private real estate projects and not on public projects. If you are working on a public project, then you will leverage bonds.
- Another key item to remember is with regards to homesteads. Typically, in a foreclosure process, where a bank is foreclosing on a property, there are some exceptions that you cannot foreclose on someone’s homestead. What you need to bear in mind is that these exceptions are not related to mechanics liens. So, if you do work, and you preserve your lien rights on a residential project that's someone's homestead, you do have the ability to put a lien on someone's homestead.
Here are some of the procedural requirements that you need to adhere to while dealing with liens.
- If you are a general contractor, then you need to give a pre-lien notice. There are two ways to do this:
- If you have a written agreement with the project owner, then the pre-lien notice should be included in your written contract.
- If you do not use a written agreement, then you need to give a pre-lien notice separately within 10 days after the work is agreed upon. Take note that it is not 10 days after the work has begun, but rather 10 days after the work is agreed upon.
- If you are a subcontractor or a materials supplier, then you also need to give a pre-lien notice. You will need to give this notice either via personal delivery or through certified email within 45 days after your first contribution to the improvement on the real estate property.
- It is very important to follow the formatting requirements, such as what font to use, size of the font, what language to use, etc.
- If you do not give the pre-line notice in the required format and within the required timeframe, then you will lose your lien rights.
Let’s say that you have given your pre-lien notice, performed the job, but you have not got paid yet and want to enforce your lien right. What do you do?
- Whether you are a general contractor, subcontractor, or materials supplier, you will need to use a document called Mechanics Lien Statement. This document should be provided within 120 days after your last contribution to the improvement.
- In Minnesota, there is something called the screen door doctrine. What was happening was some contractors/subcontractors realized that they needed to file a lien, but they are past the 120-day deadline. So, they would go back and try to make some minor changes to the project to resurrect their lien rights.
- However, the Court did not want this to happen, so they included the screen door doctrine which means that if you are past the 120-day deadline, then your lien will expire even if you go back and perform minor changes.
- This is why it is very important to calculate the correct date and also reach out to your lawyer at least 3-4 days before the deadline ends so that they have enough time to prepare your mechanics lien statement.
Now that you have your mechanics lien statement ready, what’s the next step?
- The next step is to file it with the County Recorder in the county where the real estate is located.
- Next, you have to serve it to the owner via personal delivery or certified mail.
- As mentioned earlier, these procedural requirements are strictly construed and if you do not adhere to them, you will lose your lien rights.
- Another very important point to remember is that never overstate your lien amount. If you overstate it and the project owner proves that you overstated the amount, then:
- Your lien will be deemed invalid; and
- You will also have to pay attorneys’ fees that the project owner will seek from you.
Finally, you have filed and recorded your lien and served your mechanics lien statement. The next step is:
- You will enforce your lien by filing a lawsuit which is like a foreclosure action.
- When you file a lawsuit, you will need to consider the priority aspect. What this means is that if there's a bank that already has a mortgage on the property, or there are other people who have liens on the project that were recorded before you, they will have priority in line to get paid before you do.
- This is why you should be prompt when dealing with liens because priority is considered when the payment is made.
Moving on to bonds – let’s find out how you can leverage bonds to get paid faster and successfully.
- The first and foremost point to remember is that you cannot lien a public project and this is where bonds come into the picture.
- In Minnesota, any public project in excess of $75,000 should have two bonds – performance bond and payment bond. These bonds are considered as a protection for the government as well as the subcontractors and materials suppliers.
- General contractors are not protected by these bonds because the assumption is that if you are a general contractor doing a project for a government entity, because the requirements for municipalities and governments to pay a general contractor to a project require the money to be there, you're not going to have a problem getting paid as a general.
A performance bond states that if the general contractor fails to get the work done for the municipality, then the bond company will have this bond which is like a pot of money that will fund the completion of the project.
A payment bond on the other hand protects the government as well. For example, if for some reason the general contractor cannot get the work done, and a subcontractor or materials supplier comes up and says that we have not been paid, the payment bond helps the government to resolve the payment issue. The payment bond is again a pot of money from a bond company that says you can come get paid out of this bond if the general contractor for some reason has failed to pay the subs/materials suppliers.
Finally, let’s find out how your contract rights can help you in resolving your nonpayment issues. Let’s say you have lost your lien rights for some reason and since it is a private project, there are no bonds involved, what do you do?
- Well, you can still file a lawsuit for breach of contract. If you are a subcontractor and have a contract with the general contractor or are the general contractor and have a contract with the owner and you haven’t been paid. You can always assert a claim for breach of contract.
- What this means is that you are letting them know that we had this written agreement stating that you will perform work in return for an agreed amount but since you haven’t been paid, you are suing them for breach of contract.
- Although a lawsuit is involved here as well, the difference is that when you file a lawsuit to foreclose on your lien, you have the right to the real estate property which you can sell and take the proceeds from the sale. However, in your breach of contract lawsuit, you are suing only for damages.
- The reason why a breach of contract lawsuit is not favorable is because if they don’t have the money that is owed to you, then it becomes an unsecured claim. Whereas if you have a lien claim and the property has value, then you can still sell the property and get your money.
- Another reason why this is not an attractive option is because you will lose your right to automatic attorneys’ fees. If your contract has an attorneys’ fees provision, then you can potentially obtain attorneys' fees and connect it with a breach of contract claim.
- However, as per the lien statute, if you are asserting your lien, then you automatically have the right to receive your attorneys’ fees (if you prevail), irrespective of whether or not there is a provision for it in your contract.
Let’s assume that you don’t have your lien rights, there is no bond, and you also don’t have a contract in place. Does this mean that you cannot get paid? Well, you still have one last option.
- You can ask your lawyer to assert a claim which is referred to in the law as Unjust Enrichment, Promissory Estoppel, or Quantum Meruit.
- These three claims basically mean the same thing, which is we had a relationship, even though there was no written agreement, we still had a relationship where the project owner consented to you coming and working on their property.
- Even though you may have not agreed on all the specifics, you did show up and perform the work. Now before you performed the work, let’s say the value of the property was zero but after your work it, it has a value of $100.
- Now, if the owner does not pay this $100, then they will be unjustly enriched which is not the kind of unfairness that the law allows. So, you end up filing a lawsuit but remember this is again an unsecured claim with no right to seek attorneys’ fees.
- Although it is not as attractive as having a lien claim, it is still a last option if you are out of all your other options (liens, bonds, and contracts).
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