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Ten Tips for Protecting Mechanic’s Lien Rights

May 3, 2013
 

        In Indiana, the right to assert a mechanic's lien is a statutory remedy and you must strictly comply with the requirements of the statute to acquire a valid lien.[1]  The failure to meet statutory lien requirements could result in the loss of lien rights, subject you to a slander of title claim and decrease your likelihood of getting paid.  This article is designed to help you avoid these outcomes by providing ten tips involving mechanic's lien rights on Indiana private construction projects.

        1)         If you provide labor or materials to a private construction project, you likely have lien rights and should consider exercising them.

        Nearly anyone performing labor or furnishing materials to a private construction project can acquire lien rights so long as the services and materials add value to and constitute an improvement to the real estate.  This includes contractors, subcontractors, material suppliers, laborers, mechanics, lessors of equipment, architects, engineers and surveyors.

        There are only a small class of potential claimants that are not protected by the mechanic's lien statute.  Suppliers to materialmen usually cannot file mechanic's liens because they are "too remote" from the project.  Those providing purely supervisory or advertising services (i.e., providing no physical labor that adds value to the land or a structure thereon) generally are not protected by the lien statute.

        The ability to acquire lien rights can dramatically increase your chance of being paid because the project owner's payment to the general contractor is not a defense to your lien.  Indiana is a non-derivative state, which means that your lien rights are not limited by or subject to those the general contractor has against the owner.  Even if the owner has paid its general contractor in full, you can still acquire and enforce a mechanic's lien and the owner may have to pay twice.  So, in addition to other remedies you may have, you should consider whether you have lien rights.

        2)         Carefully monitor your deadline to record the lien.

        There is no easier way for the project owner to invalidate a mechanic's lien than to show that the lien was recorded after the statutory deadline.  In fact, examining whether or not the lien is timely is likely the first thing the owner or counsel will do upon receiving notice of the filing.

        For residential projects, the lien must be recorded within 60 days after the date you last furnished materials or labor to the project.  As discussed below, you may also have to comply with pre-lien notice requirements on residential projects to acquire a valid lien.  For commercial projects, the lien must be recorded within 90 days after your last date of furnishing of materials or labor to the project.  If these deadlines are missed, generally so is any chance of acquiring lien rights.  Accordingly, it is crucial that you have procedures in place to monitor these deadlines.  Because title work will often be required to obtain a legal description for the lien, you should calendar at least two weeks in advance of the deadline to begin preparing the lien.  Mistakes invalidating the lien are much more likely to occur when the lien is prepared at the last second in a rush to meet the recording deadline.

        The time limit for recording the lien on commercial and residential projects does not begin to run until you have performed all acts required under the contract.  Thus, where a commercial contract calls for materials to be delivered to the project at different times, the lien deadline begins to run after the last shipment of materials is delivered to the project.  It is important, however, not to rely on invoice dates in calculating the deadline.  The better practice is to keep track of delivery or service dates, which are much more reliable in establishing these critical dates.  After all, the statute provides that the lien deadline begins to run after the last labor is performed or material is furnished, not when the invoice for that labor or material is issued.

        3)         Be weary of unique requirements for residential projects.

        The mechanic's lien statute provides extra protections for homeowners in the form of pre-lien notice requirements.  This means that a condition of obtaining lien rights on an owner-occupied home is that you first provide notice to the owner that you are providing labor or materials.  If this pre-lien notice is not given within the time frames discussed below, you cannot later acquire a valid lien.

        For owner-occupied repair or remodeling projects, pre-lien notice involves sending written notice directly to the occupying owners within 30 days of the date you first provide material or labor.  For new construction projects, prelien notice must be given directly to the owners within 60 days of the date the materials or labor are first furnished.  The pre-lien notice for repair or remodeling projects does not need to be recorded with the county recorder, but does need to be recorded for new construction.  For both repair/remodel and new construction projects, the mechanic's lien must still be recorded within 60 days of last furnishing.  The pre-lien notice does not create the mechanic's lien.  It merely sets the stage for filing a lien at a later date.

        Pre-lien notice is not required where the home is being used as rental property or for commercial purposes or where you have a direct contract with the homeowner.  Therefore, on residential projects, you should determine whether the home is occupied by the homeowner.  If it is and you do not have a direct contract with the owner, then you are probably required to give pre-lien notice and should closely monitor the pre-lien notice deadlines discussed above.

        4)         Taking the time on the front end to ensure an accurate lien, will save you time and money in the long run.

        To obtain a valid mechanic's lien on real estate, the lien must contain: (a) the name and address of the claimant; (b) the name of the owners and legal description of the property; (c) the address of the owners; (d) the common address of the property; (e) the amount of the claim; (f) be verified ("sworn") and filed in duplicate (one for recorder and one for each owner); and (g) contain the signature of the claimant or its representative.  The notice containing this information must be filed with the county recorder where the property is located.  The notice is then mailed to the property owners by the county recorder.

        Frequently, lien claimants record liens that contain incomplete property owner names or short form and inaccurate legal descriptions to avoid having to hire an attorney and order title work.  Although this may save time and expense on the front end, the temptation to take these shortcuts should be avoided.  When the lien contains defects (even if relatively trivial) the project owner is given a basis to challenge the lien.  This drives up litigation expense, creates the risk of an unfavorable outcome and diminishes your settlement position.  Where the amount owed justifies the expense, it is always best to have an attorney prepare the lien and to obtain title work.  This will ensure that statutory requirements are met and reduce potential owner defenses.

        5)         Anticipate potential lien defenses and take measures to guard against them.

        There are several legal defenses to mechanic's liens commonly raised by project owners.  By understanding these defenses, you can be proactive in taking steps to reduce their effectiveness or eliminate them entirely.

        Project owners may challenge liens on the basis that the materials provided were not intended for or actually used on their particular projects.  Simple ways to demonstrate that the materials you are providing are intended for and were used on a particular project include referencing the job name and job address on credit applications, invoices, receipts and in correspondence with your customer, assigning job names and numbers to customer accounts, maintaining separate accounts for each project the customer is buying materials for and keeping records of the delivery of materials, including delivery receipts.  Under Indiana law, materials are presumed to have been used on a particular project if they are delivered to the project.  Retaining legible copies of bills of lading and delivery receipts is therefore extremely important.

        Where improvements are provided at the request of tenants, project owners often argue they did not consent to the improvement and the lien is therefore invalid as to their property interest.  Where a non-owner has requested the improvement, Indiana law requires that you show that the owner gave more than mere inactive or passive consent.  Therefore, when a tenant is requesting that you perform work, it is recommended that you attempt to make the owner jointly liable with the tenant for the work to be performed.  At a minimum, you should try to obtain written confirmation from the owner that it authorizes and consents to the work and its acknowledgment that it will benefit from it.

        Under Indiana law, you are entitled to a lien for the reasonable value of the labor or materials you provide, and not necessarily the unpaid contract price.  Owners may argue that the amount owed for materials or labor provided is more than the value of the improvement to the real estate.  To counter this argument, there is case law holding that the unpaid contract price is evidence of the reasonable value of the improvement provided.  To demonstrate that you added value to the real estate, you should maintain records reflecting the charges for the materials furnished, including your cost to obtain the materials, and employee records showing time expended and labor costs.

        Project owners may attempt to attack the timeliness of a lien on the basis that you have "tacked" separate and distinct contracts to extend the lien deadline.  For example, if you have a contract to provide services to Building A on Lot A, and also have a separate contract to provide services to Building B on Lot B, you must file your lien on Building A within the time limit after completing work on Building A and for the amounts due on Building A only, even if Buildings A and B have the same owner.  Because of the risk of a "tacking" defense, it is recommended that you obtain a purchase order for the entire job, issue a quote for the entire job or enter into one contract for the entire job.  This will help establish that the series of invoices are really part of a single contract and that the lien deadline begins to run after the last shipment of materials is delivered.

        6)         Check for no-lien contracts prior to working on residential projects.

        There are limited situations in which your ability to acquire a mechanic's lien can be cut-off by a no-lien contract between the project owner and general contractor.  No-lien contracts are allowed on residential projects, but are not permitted on commercial projects.

        In order to be enforceable on residential projects, a nolien contract must: (a) be in writing; (b) contain the correct legal description of the real estate; (c) be acknowledged before a notary; (d) be recorded in the county recorder's office where the land is located; and (e) be recorded within five (5) days after execution.  When properly recorded, the burden is on subcontractors and material suppliers to search the county records for no-lien contracts before providing labor or materials to the project.  In fact, there is no requirement that notice of the no-lien contract be posted on the job.  It is therefore important that you search county records for the existence of no-lien contracts prior to providing labor of materials to a residential project.

        For commercial projects, however, your lien rights cannot be extinguished by a no-lien contract and your customer cannot force you to contractually waive your lien rights.  In fact, with respect to commercial projects, Indiana statute provides that any provision in a contract is void if it requires a person to waive the right to a lien before the person is paid for the labor or materials furnished.  The statute also provides that any contractual provision in which a person agrees not to file a lien is void.  Your customer also cannot condition your right to record or foreclose a lien on the customer's receipt of payment from a third party.  The bottom line is that Indiana statute prohibits a customer from forcing you to contract away your lien rights on commercial projects.

        7)         Carefully monitor the deadline to foreclose the lien.

        A mechanic's lien automatically becomes null and void if an action to foreclose the lien is not filed within one year from the date the lien was recorded.  When a foreclosure action is filed, everyone that holds an interest in the real estate must be named in the complaint to assert their interest.  Title work must therefore be obtained in order to determine who has an interest of record in the real estate.  The title work should generally be ordered no later than two weeks before the one year deadline to foreclose to allow sufficient time for the complaint to be prepared.

        The mechanic's lien statute allows the property owner or another lienholder to expedite the filing of a foreclosure action.  If the project owner or another lienholder makes a written demand on you to foreclose your lien, you must file suit within 30 days of the date you receive the demand.  If suit is not filed within this 30-day period, your lien becomes null and void.  If you receive such a demand, you should take it seriously or you may lose your right to foreclose the lien.

        8)         Recording a mechanic's lien increases your chance of receiving payment, but does not guarantee it.

        A mechanic's lien is known as an in rem remedy.  This means the lien creates a claim against the project owner's interest in the real estate that you improved.  It does not make the owner personally liable for the amount you are owed.  As discussed above, the lien can be an extremely effective tool in increasing your chance of getting paid.  The act of recording the lien sometimes has the effect of disrupting the owner's financing for the project and may constitute a non-monetary event of default under the owner's construction loan with its lender.  Additionally, the owner likely does not want a foreclosure action to be filed because of the litigation expense, the risk of a foreclosure judgment and because its lender will be named in the lawsuit.

        With that said, the filing of a lien does not guarantee payment.  The owner may have a variety of defenses to the lien as discussed above.  Additionally, even if a foreclosure judgment is obtained, the real estate may not have equity sufficient to pay your lien.  For example, on many construction projects, the owner obtains a construction loan, which is secured by a mortgage on the real estate.  The mortgage is generally recorded prior to the start of construction and therefore before any mechanic's lien rights arise.  A mortgage recorded prior to labor or materials being furnished by a mechanic's lien claimant has priority over the later recorded mechanic's lien.  If the value of the real estate does not exceed the amount of the first mortgage, then there is no "equity" in the real estate to pay your claim.  Additionally, the lender holding the first mortgage can extinguish your mechanic's lien by taking its own foreclosure judgment and proceeding to a sheriff's sale.

        Even if you choose not to pursue the mechanic's lien remedy, there may be other remedies available on construction projects that can increase your chance of being paid.  These remedies may include a statutory notice to the owner that creates a lien on the general contractor's account receivable from the owner and a claim against a payment bond posted on the project.  You should consult with your attorney to fully explore all available legal remedies.

        9)         Consider waiving attorney's fees and interest as part of a settlement.

        The mechanic's lien statute provides that attorney's fees may be recovered as part of a foreclosure judgment.  The right to recover attorney's fees does not arise until the foreclosure judgment is entered.  Moreover, attorney's fees cannot be recovered as part of the foreclosure judgment if the property owner has paid the general or prime contractor in full.  Refusing to settle unless your attorney's fees are paid is generally not a wise negotiation strategy and may cost you more money in the long run.

        Prejudgment interest can also be recovered as part of a foreclosure judgment.  Again, however, because the ability to recover interest as part of the lien is contingent on there being equity in the real estate and requires the completion of a sheriff's sale, you should consider waiving interest in order to get the principal amount of your claim paid as part of a settlement.

        10)       Consider the business implications of asserting lien rights.

        Needless to say, project owners and general contractors generally are not pleased when a mechanic's lien is recorded on their projects.  When deciding whether to record a lien, you should balance your interest in getting paid for the labor or materials you provided with your desire to be hired by the owner or general contractor on other projects in the future.  There are instances in which you may not have been paid because your subcontractor went out of business after receiving payment from the owner or general contractor for the work you provided.  Although this isn't a defense to the lien, the owner and general contractor may feel that it is unfair they should have to pay twice.  Deciding whether or not to record a lien is sometimes as much a business decision as it is a legal one.  Filing a lien will likely increase your chance of getting paid, but other business interests should also be considered before doing so.

 

 

 

 

 

 

 

 

 

 

 

 

[1] Indiana's mechanic's lien statute is found at Ind. Code Section 32-28-3-1, et seq.

 

Disclaimer

This article is designed to provide a basic understanding of concepts of the law. The law, however, is very much subject to change and to interpretation by different courts. Additionally, the applicable law varies from situation to situation. Accordingly, this article should be viewed as educational in nature, and not to be considered as either legal advice or a substitute for competent advice from a qualified attorney. Rubin & Levin, P.C., and the author of this material encourage that you seek independent legal counsel to address any questions pertaining to particular issues or situations which you may encounter.

RUBIN & LEVIN, P.C.  |  342 Massachusetts Avenue  |   Indianapolis, IN  46204  | www.rubin-levin.com

 

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