Protect Your Assets: A Contractor’s Guide to a Construction Lien

Protect Your Assets: A Contractor's Guide to a Construction Lien

Home remodel construction can cost homeowners $10,000 to $500,000 depending on the project. As the contractor, you try to protect your business by billing your customers in phases. 

But what happens when you finish the project, and the homeowner refuses to complete payment? A construction lien is just one of a handful of tools that contractors can use to obtain payment that is owed to them. 

If you are unsure of what a construction lien is or how to use it, follow this guide to help you get started protecting your business. 

What Is a Construction Lien?

When contractors provide professional services by working on a home or other property, they expect to receive payment upon completion. In a perfect world, this happens. 

Unfortunately, this is not a perfect world. A construction lien protects contractors from not getting paid by placing a lien on the property. 

You may also hear of these liens referred to as a mechanic’s lien. These liens are not only available to large contracting firms. Anyone who is a contractor, subcontractor, or supplier of labor, materials, or services can file a lien. 

When Do You File?

You shouldn’t immediately file a lien when the property owner doesn’t pay. Your first step is to try an obtain payment by amicably reaching out to your customer. 

Try calling or sending an email reminding them of the debt. This gives them the benefit of the doubt that maybe they lost the original invoice or simply forgot to pay. 

If this doesn’t work, then you should send a formal demand letter. An attorney like Verhaeghe Law can type this up for you. If you choose, you can create the letter yourself on your business letterhead. 

This type of letter puts your customer on official notice that you are still owed money and will pursue legal action. It will also show the court that you tried to obtain payment amicably before using the court system. 

If at this point you still have not received payment, you can safely assume that your customer doesn’t intend to pay you. You may now file a lawsuit and a mechanic’s lien. 

What’s Included in the Lien? 

The specific requirements vary from one jurisdiction to another. So you need to check the law for where you are to ensure your lien is enforceable. 

There are a few things that are typically included. It’s a short document, just a couple of pages. 

You need to include the name of your company and contact information for your company, the homeowner information, what was provided, and the total amount of money that is still owed. 

Another important element is whether or not your lien needs signatures, witnesses, or notarization. An experienced construction attorney can give you the specifics on all procedural requirements. 

How to File Your Lien

Any lien that you create must be publicly filed with the county clerk where the property is located. This attaches the lien to the official public property record. That way anyone that searches the title for that property will find out about the lien.

You will also need to let the property owner know that their property now has a lien on it. You do this by having the homeowner served. 

At this point, you aren’t finished. You will also need to have anyone else who has a legal interest in the property served. This could include other contractors or mortgage holders. 

The Effect of Your Lien 

Your lien will become a black cloud on the property. The title is now subject to your lien. 

Think of this working in a similar fashion to a mortgage on the property. The homeowner will have a tough time selling the property or refinancing while your lien is in effect. 

The hope is that the lien will give the homeowner an incentive to settle their debt with you. 

Things to Consider When Filing Your Lien 

The homeowner will view you filing a lien against their home as an aggressive act. It will be seen as a personal attack on themselves and their home. 

The response to this is to go on the defensive. This may encourage the homeowner to hire an attorney instead of paying their bill. 

Once the homeowner hires an attorney, it is in your best interest to also hire an attorney to represent you. Now your expenses for collection are going to increase as you pay lawyer fees. 

Another action taken by homeowners is to retaliate by publicly claiming your company performed shoddy work. You have probably worked hard to create an effective branding strategy for your business. Are you willing to accept this potential damage to your brand to obtain payment? 

Potential Pitfalls When Filing 

It is vital that you use the proper legal description of the property. This isn’t necessarily the address for the property. 

The legal description is what the court will recognize as where the property is located. Get this wrong, and your lien will attach to the wrong property. 

If this happens, you are liable for any damages your lien causes to this third party property owner. 

Another potential pitfall is getting the legal owner of the property wrong. You need to list out the owner exactly how it is recorded on the title. This may not be the names that are on your contract. 

This can happen when someone goes by one name in their everyday life, but that isn’t their legal name. Or you could have contracted with one spouse while both spouses are the recorded owners. 

Statute of Limitations 

Each jurisdiction has a limit on how long you can wait before you can file a lien. You need to keep this in mind when pursuing payment. If you wait too long, this remedy will be barred from you. 

In some states, this limit is as short as a few months. But these time limits change depending on whether or not the property is private or public, commercial or residential. 

These are also different time limits to those that are in place for filing a lawsuit. You will want to keep all of these time limits straight so that you don’t mix them up and accidentally miss out on protecting your right to payment. 

How Long Your Lien Lasts 

Your lien will not last forever. It can vary how long it lasts though. For example, in Florida and Georgia, a contractor’s lien will expire after one year. While in California it expires after just 90 days. 

To prevent the lien from expiring you need to take steps to protect your interest such as filing a lawsuit against the homeowner for the amount owed. Once you file your lawsuit, your lien becomes protected and will not expire until the resolution of the lawsuit. 

Keep in mind that the homeowner can also file during this time to dispute your lien. 

What Happens If the Lien Expires?

If you let your lien expire than it becomes no longer effective in protecting your right to payment. An expired lien is unenforceable and invalid. 

But an expired lien doesn’t simply disappear from the public record. The only way for a lien to disappear is to have it canceled. 

So even though it’s expired, it can still cause problems for the homeowner as anyone searching the property can find the expired lien. The homeowner will then have to come back and ask that you remove the lien. 

If you refuse, you will face a lawsuit from the homeowner claiming that the lien is frivolous and slanderous against the title since it is no longer enforceable. Now you face having to pay the homeowner for any damages that they experienced as a result of the lien. 

It doesn’t sound fair, but this is a battle you will likely lose. So whether you got paid or you are giving up on the lien, it is in your company’s best interest to release an expired lien. 

Protect Your Construction Business 

You put forth time, effort, and your expertise to complete the service you were hired to do. Now it’s time to pay, and the homeowner acts like they don’t know who you are. 

You have a business to run so working for free is unacceptable. When dealing with a non-paying customer, a construction lien can provide you with protection and a method for securing payment. 

If you decide to file a lien, you need to commit and take the steps legally necessary to pursue payment. Otherwise, you risk losing your right to enforce payment. You may even become liable for damages against the homeowner that are caused by your lien. 

Stay on top of building trends with these home construction trends for those building their dream home. 

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