In this blog, presented by SunRay Construction Solutions and Leslie A. Boe, Shareholder/Director, Dysart Taylor, you will learn what are the steps that should be taken or key points to consider by lien claimants to ensure that they get successfully paid after they record their lien.
Enforcing a Mechanics Lien
Most construction professionals are aware that their mechanics lien is one of the most powerful tools that can help them get paid and this stands true for bond claims as well if you do not have lien rights on the construction project. One of the major reasons why it is considered such an effective tool is because it also involves other parties, besides the entity who is not paying you.
a. It puts a pressure on the owner because their property is being encumbered or the bank may get upset if there is a lien on the property, or if it is a tenant finish type work, then the landlord is unhappy.
b. When you have a lien on the property, it puts pressure on all these other parties who in turn put pressure on the entity that is supposed to pay you, so that they can get the lien released.
c. The end result is that you can ultimately get the property sold to satisfy the lien.
Sometimes, filing a lien and foreclosing on it is the only way contractors, subcontractors, and suppliers can get their payment. Having a good lien or bond claim is often the only way to get paid if whoever was supposed to pay you goes out of business, is in bankruptcy, etc.
Know more: A Contractor’s, Subcontractor’s & Supplier's Step-By-Step Guide to Getting Paid - Missouri
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 in Missouri as well as several other states is that your lien is attached from the first day of work. This gives you priority over others, such as lenders with encumbrances on the property. It gives you a sort of superpower in terms of your negotiation position and your right to enforce your lien.
b. Perfection – In Missouri, the perfection process refers to the filing of the lien. In some states, the actual filing of a suit is also a part of the perfection process. But this distinction typically comes into the picture where you have situations where you are trying to enforce a lien but one of the interested parties is in bankruptcy and you are figuring out if you can go ahead with filing the suit given the bankruptcy stay. However, in Missouri, you can still file your lien even if there is a bankruptcy stay.
c. Enforcement – The process of enforcement begins with filing a lawsuit to enforce and foreclose on your lien, ultimately ending in a foreclosure sale.
To proceed to enforcement, your lien has to be perfected. So, what does that mean? It means that:
a. You are a proper lien claimant and you have made a claim for all lienable items.
b. All the required Notices have been given properly in terms of their timing, method of service, etc. For example, in Missouri, a subcontractor who is going to file a lien must give the property owner 10 days’ Notice first and it must be served personally. This is why it is always recommended that you should not wait until the last moment to send out the Notices because sometimes you may have trouble tracking down the owner.
Your lien and bond rights are also time-sensitive, so you must keep track of the timelines to follow them so that when it is time for you to enforce your lien, you have a good lien.
c. You also need to ensure that the lien is properly filed, which means that the lien contains everything that it should and of course you need to file it in a timely manner.
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 Missouri, your lawsuit must be filed within 6 months of lien filing. Nowadays with the option of electronic filing, you can also file a lawsuit over the weekend. You must keep the deadline in mind because although in some cases the deadline gets extended if the last day falls on a holiday or the Courthouse is closed, in this case, you will not get any extra day after the 6 months period even if your deadline falls on a Sunday.
b. Your petition is carried out in the same way as any other regular lawsuit; however, in a lien enforcement action, you must allege the facts that are necessary for securing a lien. There is also a statute that requires you to include the legal description of the property that is being charged in the lien. So, it is highly recommended that you gather all these key details before you go ahead and file your suit.
c. Finally, you must name all the parties who have an interest in real property. If you don’t name them, then they are not going to be bound to your lien. For example, if there is a lender with a mortgage on the property, you must name them as a party to the lawsuit. If you don’t, then they are bound to any of the court’s decision about your lien.
A common question that arises is whether you should include the original entity who didn’t pay you. The answer is yes, you should include them. If you are owed money by a general contractor or subcontractor and they are gone, you still need to name them because you have to establish the breach of contract that resulted in you being owed money.
To have a successful lien, you also need to have a successful count against the entity that owes you money.
Lien Enforcement – Alternatives
a. A common question that arises is whether there are statutes that allow for a lien to be bonded. Although some states have this statutory provision, Missouri does not have it. This option is typically used when the owner or the landlord doesn’t want a lien to be sitting on the property. However, more and more owners or commercial projects are coming up with this option. So, if you are presented with this option, check with your lawyer to see if it is a good idea to get the lien bonded. This is especially helpful if there are concerns about the value of the property or if you have concerns about the priority of your lien, etc. Having a bond means that the money is there and if you have a good lien, then the surety will make the payment.
b. Assignment of lien is another alternative to consider. Sometimes, if you are a subcontractor working for a general contractor and due to some reason, like a dispute with the owner, you are not getting paid. In such cases, sometimes, the general contractor will take an assignment of your lien claim and the terms of this agreement can vary a lot. For example, they may just pay you, take the assignment of lien, and pursue it with the owner. Sometimes, you may agree to a partial payment with an agreement that you would get paid in full when the contractor is done pursuing the owner.
The enforcement action is typically litigation which can take time, especially on projects where there are a lot of lien claims. But in the end, when you prove that your lien is good, you have followed all the Notice requirements, timelines, etc., you get a Court Order which states that:
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, as we mentioned earlier, the mechanics lien is a really powerful tool, so it is not often that you get so far in the process of getting the property sold. Many of the parties make the payment even before the lawsuit is filed. However, this is not to say that you will not be in a situation where things go all the way to the end.
It generally depends on what kind of person you are dealing with. Some like to make the payment as soon as they receive the bills, some pay it as soon as a lien is filed, some make the payment when they realize how long the litigation will go on and the costs involved in it, while there are also some who make the payment after the judgment is given.
Now, if you do get to the end of the road which is the where the Court has ruled that the property can be sold, then:
a. The procedure followed is that the order is enforced by a Writ of Execution where the Sheriff sells the property. There is a lot of paperwork to be filed and the sale takes place in an auction style.
b. A key point to take note of is that if the proceeds of the sale are not sufficient to pay all the lien claimants or other people with interest in the real property, then the proceeds will be split pro rata basis amongst all the lien claimants.
So, unlike some of the other states, construction professionals in Missouri do not have to race to the Courthouse to be the first one to file the lawsuit because the Court will consider all the lien claimants and split the payment on a pro rata basis.
In the process of filing and enforcing your lien, you also need to be aware of lien killers, i.e., things that can affect the validity of your lien claim.
a. Defects in Mechanics Lien Statement – Do you have a good lien with all the required content? If you don’t, then the defendants can pick that out during litigation. Did you take all the necessary steps that you are required to as per the Missouri statutes, such as giving a 10 days’ Notice to the owner, itemizing your labor and materials so that someone can investigate the propriety oof your claim, etc.
b. Priority Problems – There may be superior liens on the property. In such situations, you might want to be open to the suggestion of bonding the lien.
c. Waiver of Lien Rights – Another issue that comes up in litigation as a defense to lien claims is lien waivers. You must be very careful while signing your lien waivers and be specific about what lien rights you are exactly waiving off. Do not sign the lien waivers without going through them carefully as you can end up giving away all your lien rights.
d. Public Property – You can claim payment bonds on public projects. But these payment bonds also have built-in time limits that you must adhere to, and you should be aware of them when you start the entire process of enforcement. This is because nothing is more frustrating than doing all the legwork filing your lien, only to have it kicked out of the Court.
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.