A Guide to Demystify Construction Liens

A Guide to Demystify Construction Liens

By Christina Fanning, Technical Director, Funds Control  |  Partner Engineering and Science, Inc.

Originally Published in the 2024 CLRM Journal

Construction projects are dynamic endeavors that involve numerous parties, extensive planning, and significant financial investments. Amidst the hustle and bustle of construction, one legal aspect stands out as crucial for all stakeholders to understand: construction liens. These liens, also known as mechanic’s liens or property liens, serve as powerful tools for contractors, subcontractors, and suppliers to secure payment for their services and materials. But what exactly is a lien?

In essence, a lien is a legal claim placed on a property by a party who has provided labor, materials, or services for the improvement of that property but has not been paid for their contributions. It serves as a form of security interest, ensuring that those who have contributed to the construction or improvement of a property have a venue for issues they might have with payment for their work.

Stakeholders’ Uses of Liens

Construction liens play a pivotal role for the various stakeholders involved in construction projects. Contractors, subcontractors, and suppliers use construction liens to establish legal claims and ensure compensation for their work and materials. They also leverage the threat of a lien to entice prompt payments and resolve disputes. A proactive approach to construction liens that facilitates timely resolution of payment disputes is best for property owners and developers since liens can jeopardize project financing. Construction lenders safeguard their loans by including provisions requiring borrower compliance with lien laws so to avoid lien encumbrances on the property. Lenders also monitor lien activity to help assess project progress and to monitor a borrower’s financial health.

Construction Notices

Construction notices play an important role in delineating rights and responsibilities among stakeholders throughout a construction project’s lifecycle. Often, there are state-specific requirements dictating the use and timing of these notices; some states mandate their use, while others leave them optional.

The Notice of Commencement holds significance as it marks the commencement of construction for a project and establishes the start of a timeline from which various items will be measured. Property owners typically initiate this notice, setting the stage for important project-related procedures. In addition to establishing the project’s commencement date, notices often identify the key project participants. The Notice of Commencement ensures transparency and clarity of important project information for all parties, and can help facilitate efficient project management and payment processing.

Another document is the Preliminary Notice, known by various names such as Notice to Owner, Notice to Furnishing, or Notice to Contractor depending on the jurisdiction. This pre-lien notice serves to inform property owners of the involvement of contractors, subcontractors, or suppliers in the project. Timelines for filing such notices vary by state, with some requiring submission prior to service and others mandating submission within a specified timeframe after service begins. Preliminary Notices act as a precursor to potential lien rights, highlighting the parties involved and their intention to claim a stake in the project’s proceeds if there are any problems with their compensation for services rendered on the project.

Lastly, the Notice of Termination serves as a counterpart to the Notice of Commencement, signaling the conclusion of the project or a specific phase. Property owners typically issue this notice, terminating the project’s construction period and setting a deadline for the filing of liens. Notably, in some jurisdictions, failure to file a lien by the termination date, or within a timeline established by statute or within the termination notice itself, can result in the forfeiture of lien rights.

It is essential for all stakeholders to be aware of the requirements and timelines for submitting these notices to ensure compliance with legal obligations and to protect their interests in the project.

Lien Waivers

Lien waivers serve as critical instruments for managing payment processes and mitigating risks for all involved parties. They serve as legal documents in which one party relinquishes the right to file a lien against a property upon receiving payment. There are two types of lien waivers commonly utilized: conditional and unconditional.

Conditional lien waivers provide a level of assurance to contractors and subcontractors that they will receive payment for their services or materials. By signing a conditional lien waiver, these parties agree to waive their lien rights upon the condition that they receive payment. This mechanism helps facilitate prompt payments while still affording contractors and subcontractors the protection of their lien rights until payment is received.

Unconditional lien waivers, on the other hand, signify that payment has been received by the contractor or subcontractor, and they are relinquishing their lien rights unconditionally against the subject payment. These waivers are typically issued once payment has been confirmed, providing property owners, developers, and construction lenders with assurance that lien rights have been waived and the property is free from lien encumbrances.

Both conditional and unconditional lien waivers play integral roles in the construction payment process, promoting transparency, facilitating timely payments, and minimizing the risk of disputes and liens.

Filing of Liens

In the event that a contractor, subcontractor, or supplier hasn’t received payment as per terms, state regulations dictate the process for filing a lien. Before filing a formal lien, some states require the party seeking payment to send a Notice of Intent to Lien to the property owner and other relevant parties. This notice serves as a warning of an intention to file a lien if payment is not received. If a party does not receive payment, they become a claimant and must appropriately prepare and file the lien with the appropriate authority and within the statutory timeframe. A lien must be properly served to all parties with an interest in the property, upon which the claimant becomes a lienholder. If payment is still not received after the lien has been filed and served, the lienholder may take legal action to enforce the lien. Action taken to satisfy a lien could be taken as far as foreclosure proceeding against a property/asset.

Bonding Off Liens

In the event that liens are filed, the bonding off of liens serves as a strategic recourse for addressing potential encumbrances on construction projects. In instances where liens are filed against a property, property owners or other interested parties may opt to bond off the liens via lien release bonds issued by a surety. A lien release bond redirects the claim from the property to the bond itself. These bonds act as a form of security, ensuring that lienholders will receive payment if their claims are upheld. Bonding off liens can expedite the resolution of disputes, maintain project momentum, and safeguard the property’s title and financial interests.

State-Specific Nuances

State-specific regulations present a significant challenge in understanding construction liens, as laws governing liens vary widely across different states. Each state has its own distinct requirements and procedures, adding complexity to lien-related processes. For example, certain states, like Georgia, mandate specific statutory lien waiver forms and language, emphasizing compliance with state laws regarding lien rights. Similarly, deadlines for filing construction liens differ from state to state; while some states require filing before the Notice of Termination, others specify a certain number of days after being on-site. Missing these deadlines can lead to the forfeiture of lien rights. Given these nuances, it is imperative for all stakeholders to familiarize themselves with the lien laws specific to the state in which the project resides to ensure compliance and to mitigate risks associated with liens. Fortunately, numerous online resources are available to guide you through the complexities of construction liens and state-specific requirements.

Risk Management:

Stakeholders of construction projects may benefit from utilizing funds control and construction project monitoring services from third-party consultants, like Partner, as a risk management measure to help prevent construction liens. Funds control involves overseeing the disbursement of project funds to ensure compliance with project milestones and budgets, and can also play a significant role in mitigating the risk of construction liens. By meticulously monitoring payments and ensuring timely disbursement to contractors, subcontractors, and suppliers, third-party consultants help prevent payment delays and disputes that often lead to the filing of liens. When coupling their lien law expertise with the collection of both conditional and unconditional lien waivers, third-party consultants provide stakeholders with an extra layer of protection against potential lien filings due to non-payment issues.

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The filing of a construction lien is an all-too-common occurrence for construction projects. However, project stakeholders have variety of options to help them navigate the various lien law requirements, including filing notices, conditional vs. unconditional waivers, and adherence to state-specific regulations. By leveraging resources such as third-party consultants for funds control and other risk management services, stakeholders can proactively address potential issues, adhere to regulations, and foster transparent communication among project participants. When done right, the handling of construction liens can have a positive contribution to the successful execution of a construction project.