This blog is from a webinar that was presented by SunRay Construction Solutions and Alex Barthet. Alex is a board-certified construction lawyer serving clients in Florida. In this blog we will discuss the top three lien release mistakes that you cannot afford to make to ensure that you collect all the money you deserve.
Let us start with the fundamentals.
What Is a Lien and How Does It Work?
Understand that Florida law and the law in most states has a well-developed construction lien law.
a. Definition of a mechanic’s lien
Florida lien law says that if you provide labor or materials for the improvement of a piece of real property in the state of Florida, you have a right to sell that property to recover your money.
If there is any equity in the property, that equity in the sale will be used to pay you what you are owed. The way you secure that right is with a construction lien.
b. Subject to proper notices, a lien encumbers real property equal to the value of the improvements provided
It requires exacting performance on your part to comply with all of the rules of the construction law. That will be discussed as well so that there is no misunderstanding of what they are. Your lien will attach to the real property to the extent that you are doing work and the property owner of the property requested that work.
But at the same time, if you do work for a tenant and maybe you are a subcontractor or supplier who has a contract with the contractor or who has a contract with the tenant, you can also have a lien on the lease. So if you are doing a buildout in a shopping mall for a restaurant and you do not get paid, it is not that you do not have any lien. You may only have a lien on the leasehold interest, but not on the property.
If you have questions about liens on leases or real property, you can go back through our archived SunRay webinars. We did an entire webinar on liening leasehold interest. So if that is something that is important to you, you can go do a search for notices in the webinar section and find that webinar, or you can search for the webinar from our YouTube channel.
c. Through the legal process, the property can be sold to satisfy the lien
Once you properly secure your lien by timely serving a notice and record the lien, then the process of executing on that is a formal lawsuit called the lien foreclosure action. Then the property is sold. In the old days, it used to literally entail that everyone show up a courthouse. Now, for many years, the process has been online.
So there are bidders not only from within the country, but from all across the world who can bid on the property at the foreclosure sale which is online. That property will be sold. Any prior encumbrances like for example, a construction loan that may have priority over your lien are going to get paid first.
But any excess or equity in the property will be used to pay you the amount of your lien or up to the amount of your lien. This will possibly also include interest costs and legal fees.
So that is the foreclosure process. That is how the liens work.
d. If not in privity with the owner, the Notice to Owner must be served
Now we will talk about the timeline so that everyone is on the same page about what you need to do in order to secure your lien rights. If you do not have a direct contract with the owner of the property – so you are probably a subcontractor or a supplier on a project, you need to serve a Notice to Owner no later than 45 calendar days from your first work on the property or first delivery of materials.
The sooner you serve it, the better. You cannot serve it sooner than you have a contract to do the work. But you do not actually have to wait until you deliver the materials or provide work. So if you are a plumber, you are a subcontractor, and you sign a contract today to do work on a construction project, you can notice that job today, even if you may not show up for two months.
So using a service like SunRay makes the process very easy to secure your rights with that Notice to Owner.
Again, 45 days is the absolute last day it must be received via certified mail by the owner and the contractor. So if you are waiting until the 43rd day, you are probably going to lose your lien rights because it is going to take longer than that to process the notice and get it in the mail to be sent via certified mail.
That is Step 1.
e. Claim of Lien must be recorded after last work or last furnishing of materials
Step 2 is to record a Claim of Lien no later than 90 calendar days from your last work or last furnishing of the materials on the project. SunRay can handle your Claim of Lien as well.
Again, the 90 days is the absolute last day to record the lien. We strongly encourage that you should not wait past about Day 60, which is 60 calendar days from the last day you did work on the project to start contemplating putting this lien together.
When you hit 60 days do not think about what you are going to do and how you are going to get paid. Start getting your documents together, call a construction lawyer, and get with a service like SunRay so that you can put a lien on the property. Do not wait until the 80th day or 85th day.
It takes time to prepare the lien, you are going to have to sign it under oath, and it has to be recorded. Many recording offices that handle electronic recording take a few days to process.
Miami-Dade in Florida is notoriously the worst. It can take as long as 10 full calendar days for them to receive a document and record it. So you do not want to wait until the last minute to submit your Claim of Lien for recording.
f. Serve Claim of Lien
Then you have to serve the Claim of Lien via certified mail to all the people listed in the Florida Notice of Commencement.
If you use SunRay to do your Claim of Lien, you will mail it out to everyone that needs to get it.
g. If in privity with the owner, serve a Contractor’s Final Affidavit
Step 3 is if you are in direct privity or have a direct contract with the owner, there is an additional document you need to serve. It is called the Contractor’s Final Affidavit. It needs to be served on the owner no later than five days before you file the lawsuit to foreclose on your Claim of Lien.
So, if you are a general contractor and have a contract with the owner, you have not been paid, and you record your Claim of Lien. You are now thinking you are going to file your lawsuit to foreclose on the Claim of Lien. You need to make sure that you get that Contractor’s Final Affidavit prepared, signed, notarized, and mailed via certified mail.
This needs to be done at least five days before you file that lawsuit to foreclose on the lien. So keep in mind that that is an additional step that you will have to follow.
h. File lawsuit to foreclose on the Claim of Lien
The last step is you have to file a lawsuit to foreclose on the Claim of Lien no later than one calendar year from the recording date of the Claim of Lien. We strongly encourage you not to wait until 11 months and two weeks to decide that now you need to file a lawsuit to foreclose on your Claim of Lien.
Our general advice to people is that within 60 to 90 days of recording a Claim of Lien, and your other efforts to try to get paid if you still have not been paid in that period of time, that is when you should consider moving forward to foreclose on your Claim of Lien again. Waiting until the last few weeks is a bad idea.
One question that construction attorneys get every once in a while, is that they do not want to spend the money on a lawyer to foreclose. They want to re-record the lien. Re-recording the lien is not a thing that does not exist, your lien expires one year from the recording date of the Claim of Lien.
Preparing a new lien and recording that new lien does not extend the time on your lien. What you have now done is you have lost your lien rights on your first lien, and your second line is now what is called a fraudulent lien. You may be liable for damages for doing that.
Again, the only way to keep your lien claim alive is to file that lawsuit no later than one year from the recording date of the Claim of Lien.
What Does ‘Bonding Off a Lien’ Mean?
Without this background, what does ‘bonding off my lien’ mean?
a. Sometimes the owner, contractor, and subcontractor have to keep property free of liens
Know that sometimes, the owner, contractors, and sometimes even the subcontractor may have a legal or contractual obligation to keep the property free and clear of liens. Understand that this concept of bonding off a lien is different than having a claim against a surety payment bond that is typically posted at the time the job commences.
So on public projects, the contractor typically has a bond. On larger private projects, the owner will require the contractor to get a payment bond. That surety bond Florida secures your right to be paid in lieu of a lien. Bonding off your lien means you still have lien rights because there was no payment bond prepared and recorded at the time the project started.
But now because your lien on the property is creating a problem, someone can take your lien that attaches to the project and set it aside. They can then put it against a security instrument. So this bond is like cash that is set aside to secure your lien. So it takes it off the property and puts it on that cash.
b. Need for contractor or owner to keep property free and clear of liens
Some examples of a need for a contractor or owner to keep the property free and clear of liens is:
Maybe there is a loan on a property. Your lien becomes a technical default on that loan and the owner has to bond off your lien or the owner tells the contractor you need to bond off the lien.
Typically, the lease on tenant buildout work between the landlord and the tenant says that the property must be free and clear of liens. So when you record a lien, the tenant may be obligated to post a lien transfer bond bonding off your lien so that they do not violate the terms of the lease.
iii. Prime or subcontract terms
Many subcontractors say that you as the contracting party have to keep the property free and clear of liens. So if someone below you (a subcontractor or supplier) puts a lien on the property. It may be your obligation to bond it off.
iv. Different from a Payment and Performance Bond
As mentioned before, this transfer bond is different from a payment and performance bond. That is typically prepared and recorded at the time the project starts.
c. Complex formula for lien transfer bond, but roughly 150% of the lien amount
How is this lien transfer bond prepared and what the value of it? There is a formula in the lien statute, but generally speaking, this formula works out to be about 150% of the lien. So if you record a lien for $100,000, if the owner or contractor want to bond it off, they are going to have to come up with a lien transfer bond of about $150,000.
d. Extra to cover legal fees, costs, and interest
That extra money, which is that extra 50%, is intended to cover the legal fees that are accrued, costs, and interests. So that is why it is not the exact amount of the bond or the lien, or the amount of the claim. But it is about $150,000 more than that. There are about two types of bonds that can be used when bonding off a lien.
e. Can use cash or a transfer bond (surety)
One is cash, so if you use the example of the $100,000 lien on the property, the owner can go to the clerk’s office with $100,000 and in round numbers $150,000 worth of cash. So a cashier's check for example, the clerk will accept that deposit, and issue a cash lien transfer bond.
Then you will get something in the mail called a Certificate of Transfer, and where it lists the surety is going to say the word ‘cash.’ That is how you know that the cash was used as the transfer bond security. The other way to do it is to go get a transfer bond from a surety.
So whether that is Traveler’s, Liberty, CNA, or Hartford, what they do is charge a premium. Then they have the person/principal that is issuing the transfer bond post collateral. Then you sign an indemnity agreement, pay a premium, then they will issue that bond.
That bond is a negotiable instrument. It is taken to the clerk’s office, the clerk will hold that original bond, and issue a certificate of transfer which you as the lienor will receive in the mail. In the spot where it says ‘surety,’ it is going to say that whoever was the transfer bond surety. In the example above, maybe it is those companies.
So that is the process.
My Lien Was Bonded Off, Now What?
Now, you have liened a project, you are told it is going to be bonded off or you receive a Certificate of Transfer in the mail. What do you do, how do you get paid?
Before that, you should celebrate. Your lien now is no longer subject to any of the issues associated with the sale of the property.
g. Your lien is now backed by cash instead of the property
You still have to foreclose on your lien, except now, and for example, having a lien transfer bond is a reason to celebrate. Lets us say you are doing work and you write $100,000 on a property that has a million-dollar, $10 million loan, or a $15 million construction loan. When you foreclose on your lien, you are typically going to be behind that construction lender.
When they bond off your lien, they have now set aside a pot of the money just for you, and just for your lien that is unrelated to any other liens or mortgages. So you have this segregated amount of money that you are going to fight over. And if you prevail in your lien foreclosure case, they are going to liquidate that bond and pay you, so you do not have to worry about any other encumbrances like liens or mortgages that could affect your ability to get paid.
h. Get ready to fight
So while you should celebrate because now you know that you’re fully secured, you need to get ready to fight. The reason for this is because anyone who takes the time, effort, and money to bond off your lien rather than picking up the phone, or sending you an email to work things out, means they do not want to pay you.
So if they are threatening to bond off your lien, or if you received a Certificate of Transfer in the mail, just know you are probably going to have to file suit. So when you get something in the mail and it is titled the Certificate of Transfer, what does this mean and what do you do? You need to file your lawsuit right away.
i. Do not delay in retaining legal counsel to start the foreclosure
The other side does not want to pay you. That is why they spent the time and money to bond off your lien. If you want to get paid, you need to file that lawsuit to foreclose right away. The legal process that you have to follow is the identical process that we spoke about for foreclosing on a lien, except in the legal paperwork where it says sell the property to pay your lien, it would say to liquidate the lien transfer bond to pay the lien.
So you still have to prove everything that you would normally have to prove in a lien transfer bond case that you complied with the lien law, that the work was done, and that your materials and work were incorporated. Except the difference now is at the end that if you prevail, they liquidate the lien transfer bond and that is how you get paid.
j. This date can be shortened
Remember that this has to be done no later than one year from the recording date of your Claim of Lien. There are ways that that date can be shortened. So just be aware that this is why, you receive a lien transfer bond or a Certificate of Transfer in the mail, it is at that moment you should really be seeking legal assistance to foreclose on your lien. You should not be waiting.