Receiving a mechanics' lien notice is rarely a pleasant experience. However, there are things that an owner or developer should do (or, at least, consider doing) when a lien notice arrives that can limit the cost, inconvenience and anxiety that may otherwise result. Give some thought to doing the following:
- 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. See our previous Real Estate Alert.
- 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 mechanics' lien claim recorded by a subcontractor or supplier. Under any circumstance, it is imperative to 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. Getting immediate clarification and, ideally, resolution of or a firm commitment to resolve the situation from the general contractor will do much to limit the cost and inconvenience of receiving an unexpected lien claim.
- If the liened property is being leased or rented, contact the tenant. A mechanics' 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 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 independent 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 mechanics' 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 mechanics' lien independently -- a secured lender has the right to do so. A mortgage on commercial property that secures funds from a loan that were for the project giving rise to the lien claim has priority over a later-recorded mechanics' lien.
- Take the lien claim seriously and deal with it as expeditiously as practicable. A viable mechanics' 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. Moreover, quickly determining who has legal responsibility for a lien claim -- for example, a general contractor or an insurer -- and putting that party on notice of the claim offers the best chance of limiting an owner's or developer's exposure if and when these claims arise.