legalSOLUTIONS

Protection for Contractors Through Mechanics Liens and Other Means
By Samuel H. Levine

A

s the ongoing credit crisis continues to reshape the financial markets, there is no doubt that banks, contractors, landlords, and other organizations have entered uncharted territory in this economy. Today’s volatile market conditions present unique challenges and situations as developers are out of funds, lenders have refused to lend, sales activity has plummeted, and construction activity has halted. Consider the following example which has become all too common in today’s environment. A condominium conversion loses sales momentum halfway through the project and abruptly halts construction. With the developer out of funds and facing bankruptcy and its lender considering foreclosing on the unsold units, how can trade contractors protect themselves and ensure they will be paid for labor and materials already rendered to the property?

MECHANIC LIEN CLAIMS

In the current economic climate, more and more trade contractors are asserting their rights through mechanics lien claims as a vehicle for payment. A mechanics lien is lien by one who furnishes labor, materials, or services for the benefit of the project. The work can be for the improvement of an existing building or for new construction. Mechanics lien statutes carefully balance the rights of owners, original or general contractors, subcontractors, and lenders. However, a properly perfected claim for lien can provide leverage for the trade contractor to collect amounts owed it. In filing a mechanics lien claim, contractors must act swiftly and aggressively in asserting their rights. If a trade contractor is not being paid, chances are that other trade contractors and the lender are also not being paid and asserting claims against the real estate, the owner, and the developer. The decline in real estate values ultimately means there is less equity available to support all of these claims.

NOTIFY OWNER AND LENDER

The first step is for trade contractors to notify the owner and the lender of a claim. In some states if an owner receives a statutory notice, it is required to withhold the amount claimed in the notice. Notice is especially important when a

ABoutthe AutHor
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Samuel H. Levine is a partner in the Litigation and Construction Practice Groups at the law firm of Arnstein & Lehr LLP. He has extensive experience in a broad spectrum of activities in the area of real estate and construction litigation, with a particular emphasis on mechanics lien cases. He can be reached at 312. 876.7182 or shlevine@arnstein.com.

| JULY2009

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trade contractor does not appear on an application for payment or contractor’s sworn statement. Notice also puts the developer and lender on notice of a claim. The lender can then assert pressure against the developer or settle directly with the lien claimant so that it can protect its own interest. A lender will often settle in this manner as lenders do not want the mechanics lien claim to impede their own ability to foreclose a mortgage.

RECORD A PROPER CLAIM

Second, the contractor needs to record a proper claim for the mechanics lien. Care needs to be taken in drafting a claim for mechanics lien. Since they are a special right given to a contractor by statute, they are strictly construed. Dates of work and the description of the real estate liened have to be accurate. When multiple properties are involved, the claim may have to be allocated against each property. It is important that contractors and trade subcontractors avail themselves of all possible remedies. Besides asserting a claim for mechanics lien, a trade contractor may have a claim against the party with whom he contracted based on breach of the construction contract. The breach is the failure to make payment. There are also potential actions against a surety, on a payment, or bond in connection with a project. Surety bonds are frequently used by a general contactor or developer in order to obtain a contract to build a project. The general contractor or developer may provide a payment bond, a form of surety bond, to ensure that subcontractors or suppliers are paid for work done.

Some states, such as Illinois, have statutes which allow a subcontractor to bring an action directly against the owner. Illinois also has a construction trust fund statute which permits it to sue a party which receives a waiver of lien from the contractor but does not withhold payment for the party giving the waiver. Illinois also has a prompt payment act which requires the party upstream to acknowledge whether payment is due and provides for additional interest if payment is not received within 15 days of acknowledgement of whether payment is due. Other states have prompt payment statutes.

DON’T BE INTIMIDATED BY BANKRUPTCY

Finally, a contractor cannot ignore or be intimated by a bankruptcy. Some states, such as Illinois, require that a contractor perfect its claim for mechanics lien by serving its notices and recording its claim for lien despite notice of bankruptcy. The reason is that the claim relates back to the construction contract which predates the bankruptcy. However, suit cannot be filed without permission of the bankruptcy court. It is important that a lien claimant pay attention to the bankruptcy proceedings. For example, the proceedings may provide an opportunity for real estate to be sold free and clear of liens with the proceeds of the sale providing a fund for payment of claims. In times of economic stress, it is especially important for contractors to make sound business decisions when entering into contracts. A mechanics lien is not a substitute for good credit practices. However, when a project goes under, it provides an essential leverage to secure payment from the developer. ■

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JULY2009

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