One of the strongest ways to secure payment rights on a construction project is through a mechanic's lien. Contractors and subcontractors often "finance" construction projects with their work, which is paid for later. And like the banks that finance projects with money and secure their capital with mortgage liens, contractors, subcontractors and suppliers use mechanic's liens as security.
Many hesitate using or enforcing their lien rights because they're taboo in a lot of circles in construction—no one wants their contractor, sub or supplier to file a lien, and they're basically shamed when they do. But every person or company that furnishes work or material to a project is given lien rights the moment they start improving someone else's site—and believe it or not, mechanic's liens are as American as apple pie.
It's true, they have no history under English law (outside of personal property) and appear to have been created—or at the very least, promoted in their infancy—by Thomas Jefferson of all people, with the Mechanic's Lien Act that he first introduced to the Maryland Legislature in 1791 to encourage construction of Washington D.C. How 'bout that?
OK, so mechanic's liens are an American creation and are important to protect payment rights for those folks that physically do the work on any given project—private or public. And yet, many contractors, subcontractors and suppliers routinely lose their lien rights on projects. When payment delays or issues develop, they've lost a tremendous amount of leverage and can find themselves in a very difficult spot and in some cases leaving the project without a nickel in their pocket. So how do folks lose lien rights?
Waiving Lien Rights by Contract. Sometimes prime contracts or subcontracts are written to have the contractor waive their lien rights before beginning work. This is completely legal. Ohio law, for example, says that as long as a contractual lien waiver is supported by valuable consideration per the contract that contractor will be found to have lost lien rights to the point where that contractor's lien filed later will be a breach of the contract, and they will be liable for the owner's damages from the lien, including the costs and expenses to remove the lien. So, reading or having your lawyer read, your contract before signing is critical. Sometimes a contractor can take the position that they will not waive their lien rights (without payment), but sometimes the owner or general contractor won't budge because they can't (due to lender requirements, etc.). But at least then you'll know and you can decide whether you want to accept that risk or not.
Failing to Serve Notice of Furnishing. Once you start work, there may be pre-lien filing requirements to preserve lien rights. As a subcontractor or supplier in Ohio, that means serving the owner (or on public projects, the prime contractor) with a Notice of Furnishing—which is basically a simple letter via certified mail advising these folks that you were hired to work on their project. In Ohio, in order to preserve lien rights over all your work (assuming there is a Notice of Commencement for the project involved), you must serve this Notice of Furnishing either before starting work or within 21 days after your first day of work. Without it, you cannot file a lien against the project.
Failing to Track Dates. Many times, a contractor or subcontractor signs a contract that doesn't waive lien rights, and they knew to serve a Notice of Furnishing on the project owner but they finish their work, invoice for their work and/or retainage when they can, and a month or two later they realize they're still unpaid and getting nervous. Too often that realization will come, say, more than 75 days after their last day of work on a private commercial job (or 60 days on a residential project, or 120 days after a public project). In Ohio, a contractor or supplier must file an affidavit of claim within those time periods in order to properly assert their lien rights. Failure to do that means they can't file a lien.
Executing improper lien waivers. Above I mentioned contractual lien waivers, where you may be waiving lien rights before setting foot on the job. But almost always you are asked to waive lien rights after you've begun work in exchange for receiving payment. Conditional lien waivers, conditional final lien waivers, unconditional waivers, trailing waivers—there are several different types of lien waivers, and almost all of them have different triggering mechanisms from when lien rights are waived. So, by signing a lien waiver as part of a payment application, you might be waiving lien rights before you're paid, or you waiving lien rights effective only after your payment application is paid, but you've waived lien rights on extra work you performed at the owner's direction but for which no change order is issued yet. Understanding those lien waivers is crucial.
Bad advice. Contractors and subcontractors often use "mechanic's lien self-help" remedies, such as using someone else's lien affidavit form and getting sideline advice from another contractor or a lawyer friend. And I understand that lawyers aren't cheap, and without a lawyer you trust who's knowledgeable about lien issues, scrambling to find one after you're not being paid can be intimidating. Or you've actually retained a lawyer but he's not skilled and experienced in lien law. (Spoiler: This happens all the time). And then, they send their Notice of Furnishing too late or to the wrong person, or their lien affidavit refers to the wrong party as owner or doesn't include the right legal description of the project, or they don't properly serve the owner with the lien affidavit within 30 days of filing the lien—the screw-ups go on and on. In either case, the contractor is left with a big unpaid balance, and no security or leverage to force prompt and full payment.
There are many other ways that contractors, subcontractors, and suppliers lose their lien rights, including lack of timing billing. But if you're not getting your bills in on time, you've got bigger problems than losing lien rights. The takeaway here is that a bit of knowledge, organization, and a construction-specific trusted advisor go a long way to protecting payment rights on private projects, public jobs or residential projects. After all, it's what Thomas Jefferson would've wanted you to do!
-Phil Truax, Truax Law Group, LTD