Unpaid vs. Full Price: What’s the Difference?

Mechanic's lien law across the U.S. is a creature of statute, meaning there are specified items within each states' law (a to-do list) that must be done in order to have any chance of becoming a secured creditor on a private or public, but not federal, construction project.

There are some states where a party with lien rights does everything asked of them and more—crosses all the items off the to-do list as laid out in statute, yet they will not be paid for supplying materials, labor or a service via filing a mechanic's lien. This multistep process is only part of the solution for unsecured creditors looking to secure themselves on a project.

Knowing the location and type of project are two of the biggest factors when starting the lien or bond process. The location of the project will generally tell creditors which statute to follow, while the type of project (residential or commercial and private or public) will typically let creditors know what type of security they need to file. Among the items spelled out in statute are timeframes for filing certain documents, such as preliminary notices and the actual filing of the lien, as well as what information needs to be included—general contractor name, addresses, supplier name, etc.

Roughly half of the states are what is called "full price balance lien states," while the rest are unpaid balance lien states. Most states are only one or the other, while some are both depending on the project type (residential or commercial)—construction credit is quirky like that. Arkansas, Colorado, Maine and West Virginia are among those states that could fall into both categories depending on the project type and whether a specific notice is filed.

Unpaid balance lien states limit lien rights to unpaid funds between the owner and general contractor. Conversely, full price lien states do not limit lien rights to unpaid funds between the general contractor and owner, meaning the owner can be subject to paying twice as long as the mechanic's lien is properly filed.

"Lien deadlines in unpaid balance states are irrelevant," said Chris Ring of NACM's Secured Transaction Services. Even if a creditor follows all the steps to file a lien properly within the allotted timeframes as spelled out by law, if the owner has already paid the general contractor, the lien would be wiped out.

Then, there is the gray area of liens on public projects, which typically would be a bond claim rather than a mechanic's lien. However, several states, including California, Colorado, New York and Washington, allow for a lien on funds rather than the property as is the case with a private project.

-Michael Miller, managing editor

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Monday, 27 May 2019

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