In this blog, presented by SunRay Construction Solutions and Leslie A. Boe, Shareholder/Director, Dysart Taylor, you will learn about these key points that should be taken into consideration by lien claimants to ensure that they get successfully paid after they record their lien.
Enforcing a Mechanics Lien
As a construction professional, you must be already aware about how powerful a mechanics lien can be even though you may have never filed for one. A major reason why it is considered such an effective tool is an encumbrance on the real property which means that it will get the owner of the project involved immediately.
a. The owner will not be happy about the encumbrance on their real property and in turn will put pressure on the general contractor to get you paid. In short, filing a mechanics lien will raise some flags across the board in terms of the higher-ups.
b. When you have a lien on the property, it puts pressure on all these other parties like the lender on the project, the mortgage holder, leasehold owner if it is a tenant finish work, etc., to get the lien released which means that you have a powerful negotiation tool in your hands.
Some people may stick to their guns and get paid in full while some may be ready to take less and settle the claim. Irrespective of which category you fall under, it is always a good option to have your lien on file because it puts you in a better negotiation position.
c. The end result is that you can get the property sold to satisfy the lien.
Often there are situations where the pressure to make the payment intensifies and everybody feels this pressure at different points in time. Some people do it when you send them an invoice, some may need a demand letter, for some you may have to get lawyers involved whereas for some people filing the lien will put pressure on you. So, in most situations, you might get paid before the property gets sold.
Three Steps to Successfully Establishing and Enforcing a Mechanics Lien
There are three main steps that help in successfully establishing and enforcing a mechanics lien: attachment, perfection, and enforcement.
a. Attachment – One of the advantages of a mechanics lien is that the date of your priority with all the other encumbrances on the property will be from the first day of work. In Kansas, it is the first day of any unpaid lien claimant’s work. This means that everybody will relate back to the earliest unpaid lien claimant.
In Kansas, there is one issue that you should be aware of. Since it is all related to the earliest unpaid lien claimant, the owner/bank could pay off an early lien filing claimant and gain priority. For example, one of the earliest contractors is already facing payment issues which gives other pretty good dates priority. But a lender whose mortgage wasn’t recorded until that work had started can pay off the earliest lien claimant and gain priority.
b. Perfection – Perfection is the filing of the lien.
c. Enforcement – Enforcement is the filing of a lawsuit to enforce and foreclose on your lien, resulting in a foreclosure sale.
To proceed to enforcement, your lien must be perfected. This means that you must take the below points into consideration.
a. You are a proper lien claimant and you have made a claim for all lienable items. In Kansas, lien rights do not go on forever, so you need to have a discussion with whoever is filing your lien to understand where you are in the contractual chain to ensure that you can file a lien. For example, if you are a supplier to a supplier, then you may face some trouble in getting lien rights.
b. You must ensure that all your Notices have been served properly and timely. In Kansas, you need to serve different types of Notices for different types of liens. For example, residential properties have some special Notices.
c. You also need to ensure that the lien is properly filed which means that the lien contains everything that it should and that it is filed in a timely manner. In Kansas, as a subcontractor, you must file your lien within three months of your last working day while the general contractor needs to file it within four months.
For commercial projects, the timelines can be extended to five months, but you will need to file a special notice of extension with your original deadline.
Again, you must ensure that you are following these deadlines diligently because if you are late by even one day, then you lose your lien rights. Another key point to take note of is that in Kansas, you can amend a lien, but you cannot cure it.
Filing Suit to Enforce and Foreclose on the Lien
If you have everything in place, you can start the enforcement process which begins by filing a lawsuit to enforce and foreclose on your lien. Here are some key points to take into consideration.
a. In Kansas, you have one year from the date of your lien filing to file your lawsuit and this is definitely a lot of time in the life of a construction project. So, it is recommended that if you are getting paid within a month or two of filing your lien, then go ahead and enforce it. One good thing about this long period is that it gives you enough time to negotiate without having to incur the expense of filing a lawsuit. So, if the reason you are not getting paid is because of someone higher-up in the chain, then you have some time to wait for the resolution before going ahead and filing the suit.
But you also need to remember that if you pass this deadline of one year, then your lien is no longer effective. Also, don’t wait until the end to get in touch with your attorney and file your lawsuit on the last day.
b. You must name all the parties in the lawsuit whose interests will be impacted by your claim. So, all the lien claimants, mortgages, other encumbrances on the property that are secondary to yours, etc. Ideally, everybody who has a stake in the property should be involved and could litigate the validity and priority liens.
The reason why priority matters is because at the end of the day when the property is sold, the order in which people get paid depends on the priority. So, for example, if there is a large mortgage on the property, then you should ideally be higher up I that priority chain, so that your claim gets paid first.
c. As mentioned earlier, you can amend your lien even after the lawsuit is filed. As per the statute, you can do it only to increase the amount claimed but as per the case law, there are various reasons for amending your lien.
Lien Enforcement – Alternatives
There are some alternatives to your traditional lien enforcements.
a. In Kansas, there is a statute that allows an owner or the general contractor to bond the lien which can be done without the permission of the lien claimant. So, you may have filed your lien and then you may receive a Notice in your mail that the lien has been bonded. The plus point here is that you no longer must worry whether the property is going to be sold for the right amount as the surety will have the money. The con is that you might lose some of the interested parties who might have been putting the pressure on the parties to get paid as bonding the lien takes off the pressure from the owner or the lender from being concerned about your lien.
b. Assignment of lien is another alternative to consider. For example, there are two or three subs who have filed a lien and the general contractor can negotiate some sort of settlement with them and then take the assignment of their liens and prosecute the claim in their name as the assignee. So, if there is a really large amount of claim which the general contractor cannot pay in full, then you can negotiate a substantial upfront payment with a percentage payment based on what they ultimately collect.
Your lien enforcement action will proceed like any other litigation. So, you will have a lawsuit filed with all the defendants named, discovery process where documents will be exchanged, etc. If the payment issue is due to someone else, then you can simply go with the flow; however, if you are one of the reasons why the payment was not made, then the discovery process may extend, and the litigation might turn expensive.
If you are one of the parties and there is no dispute with regards to your work, then there may be priority issues which means that there will be some time spent on discovery with regards to the lender and when the mortgagees were recorded vs. when the work was started.
An ideal situation would be that you come out of the litigation with a judgment from the Court stating:
a. The lien was properly perfected.
b. You have a valid, legal interest in real property.
c. The property may be sold to satisfy the lien.
Now, if you have gotten this far without anybody coming and saying that let’s get you paid, then this is definitely the time when you will get paid.
It generally depends on what kind of person you are dealing with. Sometimes the payment is settled just hours before the sale starts because if there is any value to the property, then there are enough people interested who wouldn’t want the property to be sold to the lowest bidder.
Once the Court rules that the property can be sold:
a. You will get a Writ of Execution and the Sheriff will sell the property.
b. If the proceeds of the sale are not sufficient to pay everybody in full, then the proceeds will be split pro rata basis amongst all the lien claimants.
Although in some states, the first filed gets paid first, that does not apply in Kansas.
Here are some lien killers that you must be aware of:
a. Defects in Mechanics Lien Statement – Since mechanics lien is a statute which provides the right to get paid, you must ensure that you are following the statute to have a good mechanics lien filed. For example, there may be some situations where the owner, general contractor etc., must come up with enough money to pay somebody twice. In such situations, you must ensure that you are following the statute to a T, so that you have a good claim to enforce the other issues.
b. Priority Problems – There may be superior liens on the property. In such situations, you might want to be open to some of the alternatives that we mentioned earlier, such as bonding the lien, assignment of lien, etc.
c. Waiver of Lien Rights – Another big lien killer is waiver of lien rights. Some people sign the lien waiver without reading it thoroughly just to get the progress payments. But you must always prepare the lien waivers and ensure that they are not too broad and that they are appropriately limited in time or amount.
d. Public Property – You can claim for payment bonds on public projects. But you must remember that payment bonds are also time sensitive. You need to analyze and decide on how you are going to proceed based on what type of property it is. Sometimes this gets problematic because you may be working on a publicly owned property, but it is leased for private use, or the property is for private use but funded by public funds.
So, you must do your analysis early on because there is no point in going all the way only to find out in the end that you don’t have any lien rights on the project, and you are out of time as well for other options.
So, these are all the things that you need to be aware of in the process of pursuing your lien and bond claims. Make sure you check everything, especially the lien killers, so that you can avoid unnecessary problems and get paid successfully.