Mechanics’ Lien & Property Crawlers
Project owners face a number of challenges when completing a project. Some owners have completed their project, paid their prime contractor, and then discover there are unpaid subcontractors and suppliers with mechanics’ lien rights. Unless the issue of mechanics’ liens is addressed before final payment is made, a project owner may literally have to pay twice. By taking a few extra precautions, owners can avoid mechanics’ lien claims and avoid double payment.
Strangers Are Using Your Property As Security For Their Credit Transactions
Many project owners do not understand there are dozens of credit transactions occurring between subcontractors and suppliers, each using the owner’s property as security. For example, a supplier may agree to deliver $1M worth of steel on credit to a subcontractor on the owner’s project. Without the owner’s permission or knowledge, the supplier can use the owner’s property as security for the subcontractor’s promise to pay for the materials. If the subcontractor fails to pay its steel supplier, that supplier can record a lien on the project, which could allow the supplier to sell the project owner’s property to satisfy the subcontractor’s debt. Although this may sound like it should be illegal, Arizona’s mechanics’ lien laws allow this.
Finding Protection For Your Asset
The simplest way a project owner can limit mechanics’ lien claims is to require the prime contractor to record a payment bond pursuant to certain statutory requirements. Once a payment bond in proper form is recorded, no subcontractor or suppler may use the owner’s property as security. If a payment bond in lieu of lien rights is not utilized, owners can employ other methods to avoid mechanics’ liens.
All potential mechanics’ lien claimants must serve the owner with a statutory form called a preliminary 20-day notice. Each notice must identify the potential lien claimant, entity they’re working for, type of labor or materials to be supplied and estimated total value. An informed owner can use this information to ensure that progress payments are used to pay subcontractors and suppliers.
A project owner should require the prime contractor to obtain a waiver and release from every claimant that has provided a 20-day notice. Each waiver and release must follow the statutory form. An owner should not pay its prime contractor until all potential claimants provide fully executed waiver and release forms.
The owner may also ensure potential lien claimants are paid by issuing payment to potential claimants directly, or by joint check payable to the prime contractor and the potential lien claimant. Many prime contracts permit the owner to issue payment directly or by joint check to subcontractors and suppliers.
Some owners mistakenly assume the construction lender is required to ensure that subcontractors and suppliers are paid, but most loan agreements do not require the lender to make this effort. Other owners believe a waiver and release from the prime contractor is sufficient. However, an owner should require waivers and releases from every entity that has provided a preliminary 20-day notice.
The prudent owner will require its contractor to record a payment bond or will maintain a list of the entities that have provided a preliminary 20-day notice. The owner can use this list to ensure potential lien claimants are receiving payment on a regular basis, by collecting waiver and release forms or by issuing payment directly or by joint check. By using these methods, owners can avoid mechanics’ lien claims and avoid paying twice for their construction projects.
Article written for AZRE by James Csontos, a partner with Jennings, Haug & Cunningham in Phoenix.