Legal and Regulatory

The Costs and Benefits of Perfecting and Pursuing Lien Rights

When mechanic’s liens are effective, they can work like magic for little cost.
By James T. Dixon
August 9, 2022
Topics
Legal and Regulatory

To understand lien rights and related strategy, it is best to build from the ground up and start with an understanding of the term “mechanic’s lien.” To paraphrase the definition published by Merriam-Webster, a “lien” is a charge on property that arises by operation of statute to satisfy a debt. And, from the same dictionary, a “mechanic” is a manual worker. The concept traces its roots to the days of the Roman Empire, with a similar right existing in French and Spanish law at the time that Thomas Jefferson saw it as a means to encourage the construction of buildings in Washington, D.C.

The statutory right exists in all 50 states, though each state has its own requirements for perfecting and pursuing the right. This article will highlight the steps to perfection and relief that are created in Ohio’s statutory scheme. While the lien right is broadly available, the costs and benefits of the pursuit of a lien claim must be understood for construction executives to effectively consider strategy. This is because the perfection of a mechanic’s lien, at its best, can lead to immediate payment. At its worst, it can lead to expensive litigation with no positive return.

Statutory mechanic’s lien rights tend to be structured around a trade-off. The lien law gives laborers, suppliers and contractors the extraordinary right to force a sale of real property against an owner’s wishes to generate cash for payment. In trade, the lien law gives property owners opportunities to protect themselves from such sales by imposing notice requirements on potential lien claimants. Typically, these notice requirements are very strictly enforced so the sale will only occur if the claimant has fully complied.

In Ohio, the process starts with the property owner’s or prime contractor’s preparation, recording (in the public records for all to see) and posting (on the jobsite for all to see) of a Notice of Commencement. At this stage, the cost to the potential lien claimant comes from securing a copy of the Notice of Commencement so the claimant can provide the required notice to the owner. This cost is minimal and, for this reason, it is almost always worth it for a company to put someone in charge of obtaining a copy on every project. The company can simply send a letter asking for a copy of the Notice of Commencement, make a copy of the version posted at the jobsite or find a copy online through the county recorder’s website.

In Ohio, if an owner has provided a Notice of Commencement, a potential lien claimant must notify the owner that it is providing materials, equipment, labor or other services to the project. Thus, the next step in the process involves the service of a Notice of Furnishing. The statute provides a form for this notice that can be copied and pasted onto company letterhead and sent by certified mail to the party designees identified in the Notice of Commencement. In Ohio, it is best to send the Notice of

Furnishing within 21 days of the first date of work. Since the cost of this step can also be minimal, construction companies can train their staff on the steps needed to obtain a copy of the Notice of Commencement and serve, in a timely manner, a Notice of Furnishing. These tasks can be initiated automatically no matter the size of the project or after a certain project size is reached. One can imagine that this is a more involved undertaking for a supplier of aggregates that supplies materials to dozens of projects in a day than for a construction firm that handles a few dozen projects in a year.

There is more cost involved with the next step, which is the preparation, recording and service of a lien affidavit in a timely fashion. Associated deadlines for these acts vary greatly by state. In Ohio, for a commercial project, the contractor has 75 days from its last work to record the lien affidavit and 30 days after that to send a copy to the owner. Preparation of the document takes time, so the decision should be made well in advance of the deadline. And, even though the statute in Ohio explains the information that must be included in the form, specifies that the form must be recorded and explains how a copy is to be distributed, this is a complicated undertaking. This is particularly true where a "Notice of Commencement" has not been provided and the contractor must obtain the required legal description of the property through other means. While there are companies that specialize in lien preparation, this step is best completed with the assistance of counsel, particularly where the dollar value of the unpaid work is significant.

Strategically, then, this is often the first step at which a contractor will have to decide if the pursuit of lien rights is worth it. In some situations, a contract and equitable rights to recovery may already be compromised, so a mechanic’s lien claim may be the only remaining avenue to recovery. The preparation, recording and service of a lien affidavit can cost several thousand dollars. Is that worth it for a $10,000 receivable?

The specific circumstances of each project will determine if the mere recording of a lien affidavit will generate payment. In many cases, it does, and the investment pays off. In some cases, however, it does not. The initial consideration is whether there is a construction or other lender that is going to declare a default if it sees that a lien has been recorded. The next consideration is if the project owner is still in a position to care if it has fallen into default under the terms of its loan agreement. And, another consideration is if an angry lender and owner can force a general contractor to correct the payment deficiency. Things only get more complicated if there are questions about defects or deficiencies in the performance of an unpaid subcontractor or the materials or equipment provided by an unpaid supplier.

If a properly prepared, recorded and served lien affidavit does not generate payment, the company will have a decision to make about initiating litigation. In some states, there is a very short deadline to initiate suit after a lien is recorded. In Ohio, that deadline is six years; though of course, the claimant may not want to wait that long to see if other factors arise that could force payment. If a lawsuit is contemplated, it is at this point that construction executives should gain a very good understanding of the potential costs of further pursuit of the mechanic’s lien claim. The preparation of the foreclosure complaint by counsel will cost several thousand dollars. And many jurisdictions require that plaintiffs file title reports with their foreclosure complaints so that all parties with a recorded interest in the property can be identified and joined to the lawsuit. Those title reports can cost $2,000. Is that worth it for a $10,000 receivable?

The strategic considerations are made even more complicated by the fact that foreclosure sales are governed by the rules of priority. What does that mean? It means that the statutory schemes establish who will be paid first if a property is sold through a foreclosure sale. Most often, the party that is paid first is the construction lender. That is because most lenders are careful to record their mortgages before construction work begins and before the Notice of Commencement is recorded. Considering that the sale is involuntary and conducted by the local sheriff’s office by way of auction, the property most often will not sell for what it would otherwise be worth in a private sale. If the lender has first priority, the mechanic’s lien claimants can generally forget about receiving anything other than pennies on the dollar, if that. And this will only come after the litigation, and its expenses, have advanced to the point where the priorities and lender’s intentions are established.

But can lien claimants recover their legal fees as a part of the foreclosure action, and would this impact strategy? Yes, if there is enough money left in the sale. But that is a big “if,” so contractors must severely handicap that possibility.

While this sounds complicated and distressing, when mechanic’s liens are effective, they can work like magic and for little cost. This most often occurs at the point where there has been minimal investment in preparing, recording and serving the lien affidavit in situations where there is a lender to please and where the owner and general contractor are solvent. At the point where litigation is the next step, construction executives and their counsel should have thorough discussions of potential costs and benefits. They should also have a full and complete understanding of the rules of perfection and pursuit in the state in which their project is located, and an understanding of the viability of contractual, equitable and bond-based rights to recovery as alternatives.

by James T. Dixon
Jim Dixon helps members of the construction industry manage risk, avoid loss, and resolve disputes on projects throughout the country. Jim drafts and negotiates construction contracts, advises clients during construction, and resolves disputes through mediation, arbitration and litigation. He has handled claims related to defective construction, schedule delays, disruption and acceleration, differing site conditions, unapproved change orders, payment and performance bonds, and mechanic’s liens. Jim is adept at advancing bid protests on public projects, in resolving disputes on tunneling projects, and in addressing disputes on projects utilizing the integrated project delivery system.

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