Perfecting and Successfully Enforcing a Mechanic’s Lien and Dealing with a Lender’s Priority

It goes without saying that any mechanic’s lien must be timely filed and must meet all the statutory requirements under the applicable lien statute, not only if the lien claimant expects to enforce its lien, but also if a lien claimant expects to have its mechanic’s lien enforced ahead of the lender’s lien, perfect the lien in accordance with the local statute, and meet any deadline and other requirements for instituting and successfully prosecuting an action to enforce the lien. 

It is important to remember that the courts of almost every jurisdiction hold that mechanic’s liens are in derogation of the common law and the requirements to perfect and enforce a mechanic’s lien will be strictly enforced. Courts in Virginia and other states strictly enforce the statutory requirements for filing, perfecting, and enforcing mechanics’ liens, so subcontractors or suppliers should consult an attorney who is admitted to practice in the jurisdiction where the property is located and has knowledge of the local mechanics’ lien law versus using an online service that holds itself out as having the capability of filing mechanics’ liens in any state.                       

If there is a recorded deed of trust on the owner’s property having priority over any mechanics’ liens, the lien claimant may not be able to fully enforce its lien.  And even where there is a statute giving a mechanic’s lien priority over a lender’s lien, if the value of the property with its improvements is not enough to satisfy the claims of both the lien claimant and the lender, it is unlikely that the lien claimant will receive full payment of its claim.  Not only might the lender be equitably subrogated to the rights of other subcontractors or suppliers to whom it may have made payment, but the cost of a judicial sale may further diminish what is left for allocation among lien claimants and the lender. Thus, a subcontractor should not blindly rely upon the belief that filing a mechanic’s lien will insure that it will be paid what is owed to it.  If other alternatives are available to secure or protect the right to payment, serious consideration should be given to other ways to protect the subcontractor’s right to be paid for its work.  In some jurisdictions, including Virginia, there may be an available statutory procedure under which a subcontractor or material supplier can make the owner liable to pay a subcontractor or supplier if the prime contractor does not by giving statutory notices both at the beginning and at the completion of the work.[1]

There are several things an unpaid subcontractor can do to enhance the chances of obtaining payment through the mechanics’ lien route where a lender holds a deed of trust to secure a loan to the property owner.           

            If there is a provision in the local mechanic’s lien law regarding a lien claimant’s priority over the claim of lender, here are some things which can or should be done to establish or perfect the right of a lien claimant to receive payment from the enforcement of its lien, in whole or in part, ahead of the lender’s rights under a mortgage or deed of trust or to otherwise protect the subcontractor’s or material supplier’s right to payment for its work:

• At or prior to the time of entering a subcontract, check the title to the property upon which the work will be performed to find out if there is a recorded mortgage or deed of trust and, if there is, find out the name of the bank or other lender holding the mortgage or deed of trust.
• Ask the owner of the project whether the general contractor is required to furnish a payment bond. Making a claim against a payment bond is much easier and usually less costly than having to go the mechanic’s lien route to obtain a payment and, if there is a payment bond, the subcontractor will not have to deal with the issue of the priority, if any, of a mechanic’s lien over the lender’s lien.
• Perform a due diligence investigation of the prime contractor particularly where the subcontractor or supplier has never done work for this contractor in the past.
• Ask for a copy and review the terms of the prime contract before entering a subcontract or agreement to supply materials. Many subcontracts require a subcontractor to acknowledge it has read the prime contract and related contract documents which, by a “flow down” provision, are incorporated into the terms of the subcontract.
• Watch out for waiver of lien language in the subcontract[2] and in affidavits and lien waivers furnished with each payment application. A subcontractor cannot expect to achieve priority over a lender if it has waived its mechanic’s lien rights.
• If the subcontract gives the subcontractor the right to request that the contractor provide it with reasonable assurances that the subcontractor will be paid, request such reasonable assurances.
• In those jurisdictions which require a pre-lien notice, make sure that the required notice is given in a timely manner.[3] A failure to give a required pre-lien notice will result in the loss of the right to perfect a mechanics’ lien or limit such right to labor and materials furnished after such notice is given.
• Even though no notice is required to be given to the lender, where the name of the lender is known, give notice to the lender that the subcontractor will be performing work for the prime contractor and give the lender an estimate of the value of the subcontract work.
• In those states where a mechanic’s lien relates back to the date of the commencement of the work, where feasible, perform some visible onsite work and send a notice to the general contractor and to the lender that the subcontractor has commenced its work.
• Do not wait until all the work of the subcontractor has been performed to file a mechanic’s lien if the general contractor is behind in its payments. In some jurisdictions multiple mechanic liens can be filed.  By filing early, a subcontractor or supplier may be able to achieve priority over subsequent advances by the lender.
• If the subcontractor does not receive payment within a reasonable time that payment is due and the subcontractor is aware that construction is being financed by a construction loan from a lender, notify the lender and the owner that the subcontractor has not been paid and ask the lender and the owner to provide the subcontractor with the date and amount of the last draw and the last payment to the contractor.
• Maintain accurate job cost records. Even if a mechanic’s lien claimant has priority over a lender’s lien, the lien claimant will still have the burden of proving the amount of its claim.
• Be aware of defenses which may be available to the lender to defeat a subcontractor’s right to be paid the amount claimed in its mechanic’s lien. If a lender tries to raise a defense only available to the contractor under subcontract, challenge the standing of lender to raise the defense.
• Consider other options to secure payment. The subcontractor can ask owner to guarantee payment or it can request payment by a joint check agreement.
• If a subcontractor or supplier is not being paid, because non-payment will generally be held to be a material breach of contract, the subcontractor or supplier should consider stopping work rather than continuing to perform without payment, especially since a subcontractor or supplier may waive its right to stop work later by continuing to perform work or supply materials without payment. Also, where the completion of the subcontractor’s work is essential to the lender’s ability to sell the property in a foreclosure sale at a price which reflects the value of the property with its improvements, a subcontractor may have some leverage in attempting to work out an agreement with the lender under which the subcontractor would be paid not only for completing its work but also for what it is owed it for the completed work.
• Where a suit to enforce a mechanic’s lien becomes necessary, it is essential that all necessary parties such as the lender and trustees of any deed of trust be named as parties when required under local law. Also, since some states give priority to a mechanic’s lien based upon the value of the building or structure, not only should the subcontractor maintain accurate cost records, but the subcontractor should obtain an accurate appraisal of the value of the land and of any improvements thereon as of the valuation date under the applicable lien statute.  In some jurisdictions that date will be the effective date of the prime contract with the owners.  In other jurisdictions that date might be the date of any foreclosure or judicial sale of the property.
• Consider available legal remedies against the lender under local law. A lender which requests a subcontractor to complete its work may, for example, give rise to an action based upon implied contract, especially where a subcontractor completes his work in reliance upon some statement from the lender from which it can be implied that the lender would see that the subcontractor was paid, not only to complete its work but also prior amounts due it, if it would proceed with the completion of the work.  Some jurisdictions may allow an action against a lender under the theory of unjust enrichment, especially where the value of the property secured by a mortgage or deed of trust is enhanced by the work of the subcontractor.  There may be also statutory remedies under which a subcontractor or supplier can look to in order to get paid monies owed to it. 

While filing a mechanics’ lien may be the only remedy a subcontractor or material supplier may have to secure payment of monies owed to it, do not assume that simply filing a mechanics’ lien will result in payment.  If the amount claimed is rather small and is not in dispute, a contract action in a court having jurisdiction over matters where the amount in controversy is a limited amount may be a less expensive and much quicker way to secure payment. If the lien claimant is only one of several subcontractors and materialmen who have filed mechanic’s liens, this is an indication that the prime contractor or subcontractor who is not making payment may be having financial problems. Moreover, many jurisdictions like Virginia follow what is known as the New York rule under which no mechanics’ lien can be perfected for more than the owner owes or will owe to the general contractor and if the prime contract is terminated for the prime’s default, the owner can use the unpaid balance of the contract to complete the work of the prime contractor which may wipeout any mechanics’ lien rights. 

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[1] This is provided for under Virginia Code Section 43-11, and although this option is available as an alternative to filing a mechanics’ lien, it is infrequently used.  Presumably, the reason for this is that it is not as well-known as mechanics’ liens.  However, it can be a less expensive and less complicated option to filing a mechanics’ lien. 

[2] In Virginia, a provision in a subcontract whereby a subcontractor waives its mechanic’ lien rights are no longer enforceable

[3] As a general rule, there is no pre-lien notice requirement in Virginia except with respect to single or double residential properties where a mechanics’ lien agent has been designated on the building permit.