What Type of Lien Is Best for Your Business?

The mechanic's lien laws we know today provide a legal claim on homes and other property filed by an unpaid contractor or material supplier. Liens are used primarily to collateralize a debt that is owed. Many different liens exist today, including tax liens, mortgage liens, UCC liens and mechanic's liens, just to name a few. Trade creditors are often most familiar with UCC liens and mechanic's liens.

The concept of the mechanic's lien on real estate came from Thomas Jefferson during the building of the nation's capital, the District of Columbia. Subcontractors and material suppliers were being asked to extend large lines of credit to construct buildings, but these subcontractors and suppliers had no assurances to get paid by the property owner. Jefferson introduced the first mechanic's lien in Maryland in 1791 to ensure that subcontractors and material suppliers could hold the owner accountable and responsible for the debt by virtue of a mechanic's lien.

Jefferson used the term mechanic because all tradespeople, including contractors, were referred to as mechanics, and the vernacular stuck. However, with statutes currently in all 50 states, the term mechanic's lien encompasses so much more today, said Chris Ring of NACM's Secured Transaction Services.

"It is important to distinguish the meaning of mechanic's lien because Jefferson's definition of a mechanic did not have to do with machinery and repairment—the job we know today," he explained. "Thomas Jefferson's original concept of the mechanic's lien law was to minimize risk of a write-off and to extend larger lines of credit when not selling directly to the property owner. The vast majority thinks mechanic's lien laws apply to the modern definition of a mechanic, but a mechanic's lien on real estate is different."

For example, if you take your car in to get fixed by a mechanic, the process consists of the mechanic holding your car as collateral until the debt to repair your car is repaid. This would also be considered a type of mechanic's lien. Associating the term with machinery did not exist until automobiles were invented—which is where a misunderstanding of the term stems from today. A mechanic's lien is something that is filed. With vehicles, a lien has to be filed at the DMV or any motor vehicle association, rather than a mechanic's lien on real estate which is done at the county recorder's office.

"It's a matter of knowing what type of lien you need to file," Ring said. "It's understanding what type of mechanic's lien you need to file and when. Those who contact me are typically informed of the differences and how to understand them through a guidance perspective rather than a service we can bill them for to help them."

Mechanic's liens are used by trade creditors who supply materials, services or labor used in the construction of a piece of real estate. UCC liens are granted by virtue of consent and the consent comes in the form of a security agreement signed by the debtor and the creditor—and the lien is filed at the Secretary of State. UCC liens can be used by any trade creditor whose customer is willing to sign a security agreement.

NACM members are most familiar with a mechanic's lien on real estate. But it can sometimes be mistaken for the mechanic's lien used by automotive mechanics because the name is the same. The primary difference between UCC liens and mechanic's liens is that mechanic's liens are granted by virtue of a statute at the state level and the lien is most commonly filed at the county recorder's office.

The STS Lien Navigator is the credit professional's authoritative guide to notice, lien, payment bond and suit time requirements for all 50 states and Canada. Submit a service request so that NACM's STS professional staff can research, produce and serve your Preliminary Notice/NTO or place your mechanic's lien or claim against a bond filing using one of our network attorneys.

-Kendall Payton, editorial associate