This is the fifth in our series of blog posts regarding the protection of the right to payment in construction with a focus on mechanics and construction liens. This time the focus is reversed.
There are obviously two sides to the payment and lien equation. An owner’s perspective on lien claims is that there should never be a lien on a project. It is a fact that state lien laws create involuntary rights to liens. Lien claims are avoidable. But how to get there?
The owner’s first line of defense should be to see that everyone gets paid. Owners need to adopt rigorous payment processes with documentation, timely payment and lien waivers (including subcontractors and suppliers). Joint payment checks may be a useful tool for this process. Owners must also require similar processes at the contractor level. This should be spelled out in the contract and enforced through the contract provisions requiring the contractor to keep the project clear of liens and indemnify the owner (assuming it is not the owner that is in default).
If the owner is just the lessor of the property and the work is contracted by a tenant, there are often statutes providing a notice of non-responsibility for work not authorized by the owner. This can effectively limit lien rights to the leasehold interest of the tenant and protect the owner’s fee title.
On projects of any size, owners should consider requiring performance and payment bonds from the prime contractor or contractors. Adding the cost of bond premiums to a project also adds value. It can buy the owner protection against both contractor default and lien claims. It has the incidental benefit of assuring an owner that a bonded contractor has been vetted by its surety company.
No-lien-contracts are not a good way to avoid liens in most states. Such provisions are barred by statute in many states and may be prohibited indirectly by laws against requiring lien waivers in advance. California and New York, for example, have reached this result in case law.
If a lien does appear, the owner should gather the facts. There are several reasons for the owner to actively investigate. One is to facilitate the owner’s tender of lien defense to the contractor with an indemnity obligation. Another is to determine if a payment problem somewhere in the project is a symptom of some larger concern. If a key subcontractor is in trouble, the whole project might be in trouble. The lien was the canary in the coal mine. A lien claim may also trigger a judicious withholding of funds to cover the lien with care to not strangle the contractor and precipitate even more liens. The owner might also choose to pay good claims directly and claim a suitable credit against the contract price.
From the facts, the owner can make an independent risk assessment of the lien. The owner should review the lien basics for any identifiable defect. Was the lien timely? Does it identify the correct property? Did the claimant serve the proper early notices? Is the amount (although probably disputed) within a “reasonable” range?
If the lien is truly defective or wildly overstated it might give rise to a claim of slander of title or an action to determine adverse claims. Allegations of lien defect mostly form the basis for negotiations and foreclosure defenses. Overstatement can, in some instances, actually get a lien voided. Slander of title claims are another common threat, but rarely pursued, because the standard for proof of the required “malice” element is high.
If the lien is a particular problem because of a pending sale or financing, most states have a procedure to bond off the lien. This substitutes a payment surety bond in place of the lien. The bond premium is a cost to the owner but the benefit is that the lien is taken off the title so that the transaction can go forward—presumably to the owner’s greater benefit.
Altogether there is quite a bit that an owner can do to avoid and manage lien claims. Owners need the credit that all the contract tiers extend in order to build the project. That credit rests in large part on the fact that the lien laws exist. It is for the owner to recognize and balance the risks of lien claims through good contracts, documentation and project management to handle lien issues.