What Every Developer And Owner Should Know About Mechanics' Liens: Part I

What To Do When Served With A Mechanic's Lien Notice

 

In the current economy, developers and owners can expect to receive mechanics' liens more frequently and in unexpected circumstances. What the developer and owner does and understands about these notices can be critical to the impact that the lien will have on a project and a property. Here are several things to do as soon as a lien notice is received.

  • If the lien is filed by a subcontractor, contact the general contractor immediately. In many contracts, the owner is entitled to indemnification by the general contractor for any mechanic's lien claim recorded by a subcontractor or supplier. Under any circumstance, find out why the lien was recorded. Was the subcontractor's work defective? Is the general contractor financially solvent? In certain instances, the subcontractor may be entitled to funds that the owner otherwise would owe the general contractor. 

  • If the liened property is being leased or rented, contact the tenant. A mechanic's lien cannot attach unless the property owner consented to the improvements. A recent Indiana court decision concluded that active consent was required, meaning that it was not enough to show that a representative of the owner had knowledge of the improvements. Rather, the lien claimant (the person or entity making the claim) must show that improvements to the property were made under the authority and at the direction of the property owner. In a larger organization, that means that consent must come from a party authorized to bind the organization.

  • If the lien is filed by a subcontractor, contact the subcontractor immediately. It is rarely a bad idea to get direct corroboration of the facts giving rise to the recording of a lien notice. An owner may not get accurate information from a general contractor or construction manager. A subcontractor who has performed improvements on a property can likely have a valid mechanic's lien claim irrespective of what an owner is being told by its general contractor or construction manager.

  • Consider contacting your lender. In certain instances, the lender may wish to contest the mechanic's lien independently. A mortgage on commercial property that secures funds from loans that were for a project giving rise to a lien claim has priority over a later-recorded mechanic's lien.

  • Take the lien claim seriously and deal with it as expeditiously as possible. A viable mechanic's lien claim brings with it costs that are substantial. The award of attorneys' fees to a successful lien claimant is mandatory under Indiana law, meaning that judges have no discretion as to whether to award fees or not. Allowing a legitimate lien claim to fester simply drives up the expense of resolving the situation. Quickly determining who has legal responsibility for a lien claim -- for example, a general contractor or an insurer -- and putting that part on notice of the claim offers the best chance of limiting an owner's or developer's exposure if and when these claims arise.

  • Contact an attorney and seek legal advice. An attorney can quickly attend to many of the items listed in this alert. An attorney can often save you time, money and costly project delays because they are more familiar with the legal requirements to establish and enforce a lien.

  • Carefully examine the lien notice. The timing and content of the notice can determine whether it will be enforceable or not. Indiana courts require strict compliance with the Indiana statutes that prescribe requirements for recording and enforcing a lien. Failure to do so can render the lien invalid. Keep an eye out for the next part of this series, which outlines what to look for when examining a mechanic's lien notice.