What is a Subcontractor Lien?
A subcontractor lien is a legal claim held by a contractor or subcontractor against a property owner. Subcontractors, such as electrical and plumbing firms, may file this type of lien on a foreclosure property in order to secure payment on labor and materials they provided for renovations made by the general contractor. When the property owner fails to pay the contractor, it can deprive the subcontractor of compensation for work performed and may prevent them from being able to collect that compensation.
Subcontractors may file a lien even if they had a verbal agreement with the general contractor. If this agreement does not produce payment, the subcontractor has the right to file a lien. The notice of lien must describe all work done, material provided , and materials furnished on the property. It is also important for subcontractors to know the lender/investor holds first lien position in the event of foreclosure. Contractor liens and materials liens have been known to prevail against the lender.
One reason a foreclosure property may be desirable to a subcontractor is that the lien it has on the property generally prevents the homeowner from selling the property until the lien is satisfied. The lien is satisfied when the homeowner pays the amount owed to the contractor or subcontractor or the contractor or subcontractor forecloses the lien.
Contractors and subcontractors are required to file their lien in a timely manner. Generally, lien deadlines for contractors and subcontractors are 30 days after they finish their work. Keep in mind that a lien that is filed too soon or too late will be voided and unenforceable.
If foreclosure is imminent the property owner may have a compelling reason to make an arrangement with the subcontractor about the debt. Before resorting to the courts for help or even proceeding with foreclosure, the homeowner may want to try resolving the lien with the contractor or subcontractor directly.
Lien Rights for Subcontractors
Legal Rights of the Subcontractor: Lien Law
Subcontractor Liens – Yes, subcontractors are considered a "construction professional" and may lien provided they are hired to perform labor or furnish materials for the construction of an improvement to real property. Public Policy behind Subcontractor Liens: the Florida Construction Lien Law was enacted to ensure that construction workers and suppliers were not left unpaid for work that they performed and materials they furnished on a construction project. Essentially, the Law (F.S. 713.01) created a statutory right of lien for improvements constructed on real property. The law has been modified at various times, through the years, but the primary purpose has remained unchanged. It is Florida’s Construction Lien Law that allows subcontractors to file a lien against your property. F.S. 713.01 provides, in pertinent part, "Every person performing any work or labor upon, or furnishing any material, services, or equipment to, any real property, shall have a lien upon the real property . . . which the person constructed, reconstructed, altered, or repaired . . ." Subcontractors are also strictly liable for materials and services. As such, a substantial contribution must be made towards the type of improvement sought to be enforced for a lien to attach. Should this test be met, the subcontractor may lien for the amount of their unpaid portion on the project.
How to File a Lien
For a subcontractor to file a lien, they first must have provided labor or materials, and second, have a contract with another party. The party with whom they have a contract is referred to as their "owner." If the subcontractor does have a contract, then their next step is to see whether they provided labor or materials directly to an "improvement." An "improvement" is a type of structure or item that is added to or objects attached to land to benefit the owner of the land and is the subject of a lien. Much case law has been developed over the years to define what qualifies as an "improvement." A good rule of thumb to follow is that a new structure qualifies as an "improvement" (such as new plastering, new tile work, cabinets, or flooring), but repair work generally does not (such as replacing a broken tile or a chipped cabinet). Once the subcontractor has satisfied the two conditions of having both a contract and provided labor or materials for a qualifying "improvement," the subcontractor can then file a lien.
However, given that a lien must be timely filed, it is important to keep in mind the step of determining when the "improvement" is "complete." If the "improvement" work is done, as a general rule, the lien needs to be filed within 60 days. Thus, it’s a good idea to file any lien as soon as the improvement is "complete." A "subcontractor" within the meaning of California law is someone with a contract with the owner. All persons who provide construction-related services and materials for projects on private property are "subcontractors," except for those who sublet contracts to other contractors or people who merely furnish materials. Once a subcontractor has determined they have provided qualifying labor or materials, the subcontractor must then fill out and serve the required lien form. If the "total amount claimed" on the lien is $4,000 or more, the lien must be recorded with the county recorder and then served to the owner. If the "total amount claimed" is less than $4,000, then the lien needs only to be served to the owner, and it does not need to be recorded. The lien must be signed by the following:
If the subcontractor retains a license as part of the work they performed, then the lien also must be signed by their surety. In an ideal world, all subcontractors would receive 100% of the payment they believe they are due for the work performed, and at the same time, all liens would be timely recorded. Because life is not ideal, however, if a lien is filed, it will need to be enforced, and this is typically done via a lawsuit.
States Enforcing Subcontractor Liens
As with most other issues in the construction industry, subcontractor lien laws vary from state to state. These differences can manifest in different ways. While all states allow subcontractors to file liens, they may require the written consent of the contractor. In some states, a subcontractor must serve a notice of lien upon the owner and the contractor. There are other states where recording an affidavit of furnishing suffices. And there are still other states that require a bond . It is important to understand the necessary steps in the lien process before subcontractors file lien claims. First, because they can be barred from recovery if they do not comply with the law. Second, the procedures to file a lien are often arcane and tedious. And third, just because a lien is authorized by state law, the custom and practice of subcontractors, contractors and owners may be quite different. Failing to conform to these customs and practices could result in a waiver of a lien claim.
Subcontractor Lien Problems
Common challenges and mistakes encountered by subcontractors include:
Many subcontractors do not realize that they must file the lien in the county where the property is located. The statutory requirement is that the lien must be filed against the unpaid sum of the owner. This will often create difficulties for heating/air conditioning or plumbing subcontractors who perform their work in several counties. It would be an administrative nightmare for those subcontractors to file a lien in every county where any of their work is performed.
Just because the Plaintiff prevails at trial, does not mean that that party will receive attorneys’ fees. Parties who prevail in lien litigation must prove to the Court that their claims are "in good faith". If the Court finds that the lien claimant was evasive or had any other improper motive, the Court will deny or significantly reduce the attorneys’ fees which would normally be awarded to a prevailing party.
It is common for owners to request a lien release in exchange for final payment. The owner will assure the subcontractor that the subcontractor can re-file a new lien after the final payment is made.
When a subcontractor actually files a lien, it typically has not been prepared by an attorney. The subcontractor has copied language from other liens that have been written or has downloaded the language from the internet. When the lien is challenged in a lawsuit, the subcontractor is left to argue its lien without the help or assistance of an attorney. I highly recommend that all subcontractors have an attorney write the lien so that these objections will be avoided.
There are many calculations that must be made when a lien is prepared. A lien may be invalidated if any of the calculations are incorrect. For example, if the pro-rate calculation is incorrect, the entire lien may be invalidated. It may be necessary to exclude the cost of change orders from the lien value if the change order work was impractical or unapproved, or if the change order was improperly approved.
The subcontractor typically does not know if the owner has paid the general contractor and will often file its lien prematurely. As with any contract, the subcontractor may not file a lien prematurely or it will be invalid. The exception to this rule is if the general contractor has "ratified" the lien by filing the lien in the public record. If the general contractor files the lien, it will have no choice but to post a bond to have the lien released. If the general contractor has posted a bond to release the lien, the subcontractor may then re-file its lien.
Subcontractors should not assume that just because they performed work on a project, they will be able to collect for their services. Subcontractors should be very careful before providing services to a general contractor on behalf of an owner or a landlord. Many subcontractors don’t realize that because they contracted with the general contractor and not the owner, they will not receive any payment if the general contractor does not pay for the work.
Avoiding Subcontractor Lien Disputes
When a contractor fails to pay for work performed, subcontractors may try to file mechanic’s liens. However, a subcontractor should be aware that it may be precluded from filing a mechanic’s lien in Oklahoma if the subcontractor has not followed the specific statutory process. In order to avoid any disputes arising over whether a subcontractor is able to file a mechanic’s lien, subcontractors should be aware of the tasks they must undertake prior to the filing deadline of a mechanic’s lien.
In Oklahoma, if a subcontractor wishes to file a mechanic’s lien, then he or she must request a lien waiver form from the contractor and provide it to the contractor within five days of commencing work at the jobsite. A subcontractor that accepts payment on a project waives its right to file a mechanic’s lien against a property, thus the purpose of the lien waiver. If the contractor provides a lien waiver to the subcontractor, but the lien waiver is not accurate or the subcontractor has not yet been paid, then the contractor should not provide a lien waiver. When a subcontractor requests a lien waiver form, he or she should make this request in writing. This form should not be provided orally or in any other manner. If a contractor requires sub-tier subcontractors to sign a contract, lien waiver forms may also be included in contract documents. Sub-tier subcontracts may contain provisions that both require a lien waiver and direct the sub-tier subcontractor to sign the waiver on behalf of the contractor. Generally, a lien waiver form must be provided to the subcontractor within five days of the commencement of the subcontractor’s work on the project. As soon as the subcontractor begins work at the project site, the time for the contractor to provide the lien waiver form begins. If the contractor fails to provide the lien waiver form within the five days, the subcontractor who has not been paid can still file a mechanic’s lien, and can still proceed with that at any time.
If the contractor has provided a lien waiver, then the subcontractor cannot file a mechanic’s lien against the property. This is true even if a lien waiver was signed for the wrong amount, or was signed by a subcontractor that was improperly directed to sign the form .
If a contractor intentionally provides a subcontractor with an inaccurate lien waiver, and the subcontractor accepts the inaccurate waiver, then this acceptance will preclude the subcontractor’s ability to file a mechanic’s lien for unpaid amounts. If a subcontractor suspects that a lien waiver is inaccurate, then the best course of action is to refuse to sign or provide the inaccurate waiver and provide notice to the contractor that the lien waiver was inaccurate and should be corrected. If there is good faith disagreement between the contractor and the subcontractor over the amounts owed, then the subcontractor should provide a lien waiver in the amount that the contractor agrees is owed to the subcontractor. A contractor’s acceptance of an inaccurate lien waiver may result in an action for damages.
In any case, if a contractor attempts to mislead a subcontractor into waiving its rights, or limits the amount a subcontractor is allowed under the contract or the mechanics’ lien laws, then the subcontractor should receive the erroneous lien waiver and file a mechanic’s lien for the correct amount. A subcontractor may be well advised to follow up with the contractor in writing, and provide notice that the provided lien waiver was inaccurate, and should be corrected.
Disputes in this context can be avoided by the subcontractor taking preventative action. First, in its sub-tier contracts the best practice is to require the contractor to provide accurate lien waiver forms within the prescribed time period. Second, and equally important, is the importance of communication. If a subcontractor has good faith disagreements with the contractor concerning the amount owed to the subcontractor, the contractor should be asked in writing to clarify the lien waiver form. Additionally, if a contractor provides a subcontractor with a lien waiver form that the subcontractor believes materially misrepresents the status of payments, then the subcontractor should be sure to insist upon the completion of a separate lien waiver.
As long as subcontractors are diligent in their sub-tiers and communicate with contractors, especially during the project, disputes over inaccurate lien waivers can be avoided.