Filing a lien does not automatically get you paid. Read about how to timely record a lien, how to enforce a lien, what to do if your lien is bonded off, what happens after you record a lien, and what to do if you receive a Notice of Contest of Lien and 20-Day Summons.
This blog comes from a webinar that was presented by SunRay Construction Solutions and Alex Barthet. Alex is a board-certified construction lawyer serving clients in Florida. We will talk about the steps that you need to follow so that you timely record your lien, and so that you understand the things you have to do after you record your lien so that you actually get paid.
We will be going over the following topics:
- What is a lien and how does it work?
- What happens after I record my lien?
- How do I get paid?
- What are some scenarios I may run into?
- My lien was “bonded off.” Now what?
- I received a Notice of Contest of Lien. Now what?
- I received a 20-Day Summons. Now what?
What Is A Lien?
A lien is an encumbrance on a real property. So, if there is a piece of property that you have done work on to improve, a lien is an encumbrance on it. This means that there will be a cloud on the legal title so your lien will prevent the sale of or refinancing of the property, because now it is like a mortgage. You are preventing other people from doing anything with respect to the property, because you have recorded the lien. It is a very powerful tool.
Additionally, under most mortgages that are likely recorded before you have recorded a lien – maybe it is a construction loan, maybe it is a conventional first or second mortgage on a piece of property including residential property – your lien constitutes a technical default.
So, one of the things we will talk about later is if you let the mortgage company know that you have recorded a lien, sometimes that gets people’s attention to get you paid, because now they are technically in default under their mortgage.
And it also may be a default under a prime construction contract, meaning if you are a subcontractor or supplier on a construction project and you record a lien, you may have caused the general contractor to be in default in his or her contract with the owner. Because most contracts between owners and general contractors say that if there is a lien on the property under your prime contract, then you, the prime contractor have to deal with it, resolve it, and it is a default. So again, your lien creates a lot of pressure to get paid.
Let us briefly review the steps that you need to follow in order to record a lien.
Remember that a lien is only available to you if you have done actual work that improves a property, and if that property is not government property. So, that does not include school boards, federal courthouses, or libraries. None of these public properties can be liened, so it is only for private property where you have a lien right.
On public property, you may have a right against a bond and there are many resources on the SunRay website that talk about how to get paid with respect to a job that may have a bond. But if you have lien rights, the rules are as follows:
1. Serve your Notice to Owner
You need to timely serve your Notice to Owner. It needs to be served and received in hand no later than 45 calendar days from the day you first work on the project. You should do it early so that it gets there on time. If you use SunRay and get your NTO to them early enough so that they mail it by the 40th day, then even if it never gets to the owner, it is considered timely served. So, using SunRay and getting it done early is very important. If you have a direct contract with an owner, you don’t need to serve a Notice to Owner. But it is recommended that you do so.
2. Record your lien
Next, you need to record your Claim of Lien no later than 90 days from your last work on the project. Remember that the Claim of Lien needs to be prepared, signed, and notarized. It needs to be either electronically recorded or physically brought to the clerk’s office. This takes time so you should not wait until the 89th day to record your lien. You should do it after about Day 60 from your last work. You should be well underway in discussing and planning how you are going to record your lien, so that you do not wait until the last minute.
3. File your lawsuit
The last step is, within one year of the recording date of the Claim of Lien, you need to file a lawsuit to foreclose on your Claim of Lien.
What Happens After A Lien Is Recorded?
- Many people think that they magically get paid. Unfortunately, absolutely nothing happens after you record the lien. You have to make something happen; nothing happens automatically. Now, your lien by itself may in fact cause the owner to want to pay you. But it is because they want to pay you, not because there is some legal mechanism that is forcing them to. The lien just sits there and acts as a cloud on the title. It does not cause the court to force the sale. You have to do that.
- So, unless it bothers the owner enough to pay, they may not pay you just because you record the lien.
How Do I Get Paid?
So, then the question is, if you have recorded a lien and you have not been paid, what do you do to get paid?
1. The lien only starts the process
If you are a developer, the people that get put in the front of the line to get paid are the folks who have liens. Everyone else gets pushed to the back of the line and may not get paid at all by the owner directly. So liening is a critical step in this process.
2. You are the one who needs to enforce your lien rights
It is up to you to enforce your lien rights and the way you do that is by filing a civil court action know as a foreclosure. This will sell the property out from under the owner so that any equity that may exist in the property will be given to you at a public sale if you win your case. That is what a foreclosure is.
3. The process is similar to any other court action in cost and time
However, people think that somehow it is expedited or sped up in some way. The reality is that it is just like any other court action in cost and time. Meaning that the owner whom you assert a foreclosure action against, could say they did not get all the materials you promised, so they are not going to pay you. If you say that you installed all of the product and you did it on time, but you did not, then you are in trouble, especially if you had to pay someone else to do it. So, the owner has valid defenses that they can assert, and you will have to deal with those in the court of law. So be aware of that as well.
4. You have one year from the recording date to file suit to foreclose
You have to file this lawsuit no later than one year from the recording date of the Claim of Lien. So, when you record it, you will see there is a little stamp up at the top or along the side. It will tell you when it is recorded. One year from that date, you absolutely have to file a lawsuit to foreclose. And we advise that you should not be waiting anywhere near a year to do it. But we will talk a little more about that later.
5. Practice the 60/60 rule
The people who get paid the most and the fastest, don’t wait. They proceed swiftly when it comes to enforcing their lien rights and they typically act in a time period that we call the 60/60 rule. Within 60 days from their last work on the property, the most successful individuals are already starting the process to record their lien. They are not waiting till the last minute or falling for the “Give me another week, I have a meeting with the owner” or “I’m waiting for the bank to finance this.” They may make concessions early on, but when they get to Day 60, they are well underway at proceeding with their lien rights.
The timeframes that are indicated for the 45-day notice and the 90-day lien are the outside dates that you have to follow. There is nothing that prevents you, with respect to a lien from recording the lien on the third day after you finish work, or even just to the surprise of many folks as you are working. If you are doing work and you are going to finish the job, either because you have a moral or contractual obligation to do so, you want to create more pressure. Liens are routinely recorded for clients as they are working on the job. So, don’t think you have to wait until it is over.
6. For the next 60 days, hassle your customer and the owner for payment
Once you record your lien, use the next 30 to 60 days to hassle the customer and the owner for payment. Do it by mail, they are sending emails, they are making phone calls, they are on top of it like white on rice to try to get paid for the next month or two. They use every trick in the book to try to get their money. There are folks that will visit clients and just sit in their office saying, “I am here, I need to get my check, and I am not leaving until I do.”
So, just know that your effort to try to get paid is very important even after you record the lien. The clients that we see who typically do the worse in collections, are those clients that record a lien and think that you have recorded your lien and that you are just going to wait to get paid. That is a mistake.
After the 60 days from when you have recorded your lien, if you have not been able to get paid, that is when you need to consider retaining a construction attorney to help with the collection of the claim. And except for business reasons, do not delay in any of these timeframes. So maybe it is a small amount on one job, you have three other jobs with this client, and you think that you are going to just let this one sit because you are okay waiting. Well that is a valid business that you have made a decision on and that is fine. But if you do not have a good reason to wait, then it is suggested that you don’t wait.
My Lien Was “Bonded Off.” Now What?
Now we will talk about some of the things that may change how you react to a situation after you have liened. So, what happens if your lien is bonded off, if either the contractor or the owner says, “Do whatever you want, I am just going to bond off your lien?” Or you get no information and just get what is called a Certificate of Transfer in the mail indicating that your lien has been bonded off.
What should you do? You should celebrate! And the reason that you should celebrate is because now instead of your lien being on the property subject to a foreclosure process subject to there being any equity in the property. And maybe there is not. It is possible that you could conduct an entire foreclosure sale on your $100,000 lien, but the property is upside down. No one bids on the property and you get nothing.
So, if someone bonds it off, what are they doing? They are going to take your lien, your money, and then they are going to set money aside. Roughly speaking, 150 percent of the lien amount. They are going to take that, and they are going to set it aside. Then they are going to secure your lien with this money.
For example, you have a $100,000 lien and the owner has decided to bond it off. The formula is not exactly 150 percent, but it almost always works out to be 150 percent. The owner is going to take $150,000 roughly, to the clerk’s office, and say “Here is $150,000, here is my Certificate of Transfer, please take the lien that is on my property, and put it on this Certificate of Transfer. Now you have $150,000 in cash sitting there, waiting for you when you conduct your foreclosure process. They can also get a surety bond to do it. Either way, it is now off the property which means they can sell it, or they can refinance it. But now you have been securitized with a designated amount of money that if you win, will be able to collect.
The only reason you should be a little concerned about a lien that is bonded off, is that you need to be prepared to fight. Anyone who wants to bond off your lien rather than pick up the phone and negotiate a resolution, means that more likely than not, they are going to want to fight you. They are going to want to assert defenses in the litigation with respect to your lien. So, while now you have a designated amount of money sitting there, if you win you are probably going to have to fight about it.
I Received a Notice of Contest of Lien. Now What?
What you should do is file your lawsuit. Once you receive this document, you should not wait. You should file a lawsuit to foreclose immediately. As discussed above, the rule is that you need to file your legal action to foreclose on your lien within one year of recording.
The exception to that rule is if you receive a Notice of Contest of Lien, the lien shall be extinguished automatically unless the lienor institutes a suit to enforce his or her lien within 60 days. You are going to get this Certificate of Notice of Contest of Lien, and you will receive it by certified mail at your address. And if you don’t file your Action to Foreclose this lien by the 60th day, then your lien will automatically be extinguished.
So, if you receive a Notice of Contest of lien, it will be titled “Notice of Contest of Lien.” You will get it via certified mail, and you need to file your lawsuit to foreclose immediately. Because if you don’t do it by the 60th day, you will lose your lien rights.
I Received a 20 Day Summons. Now What?
Now there are other ways for an owner or contractor to shorten that time even more in what is called a 20-day summons to show cause. So, what should you do if you get one? Again, file your lawsuit to foreclose immediately. This shortens the time even more.
You will get a 20-day summons from the processor. So, the 60-day notice, you are going to get via certified mail. The 20-day summons is going to be served upon you like any other court paper via a process sever or the sheriff. And they will physically hand this legal action to either you if you happen to be an individual, to your registered agent, or an officer of your company if you are a business. And you need to file your lawsuit within 20 days of that date.
Because if you don’t, you will lose your lien right in the 21st day. There is no exception to the 60-day rule or the 20-day rule. Barring some exceptional circumstances or temporary orders that occasionally get issued by the chief judge in Florida of the Supreme Court which extends some deadlines. Barring that, you have to file these lawsuits on time.
THE INFORMATION ON THIS WEBPAGE IS NOT THE SAME AS LEGAL ADVICE. SUNRAY CONSTRUCTION SOLUTIONS, LLC IS NOT AN ATTORNEY OR A LAW FIRM. WE RECOMMEND THAT YOU CONSULT WITH AN ATTORNEY.