What is a mechanic's lien, and what does it mean for my real estate transaction?

Low interest rates and a renewed optimism around the economy have resulted in a skyrocketing demand for properties of all types. In real estate transactions, we always want a smooth process, but it is not unusual for there to be surprise obstacles that must be dealt with on the path to a successful deal that is great for all parties involved. A common obstacle that arises during transactions is the presence of mechanic’s liens on the property. Accordingly, I thought it would be good to give a brief overview of what they are, and what it means when you encounter one on a property.

What is a mechanic’s lien?

A mechanic’s lien is a tool designed for contractors, subcontractors, and those performing construction work related to a property, to have recourse in the event of non-payment. Once in place, it will put a hold on selling or refinancing the property without first paying off the disputed debt. It, therefore, has the potential to add significant costs to a property transaction, since it must be remedied prior to the transaction being completed. 

Is it possible to have a lien on the property that is not the property owner’s fault?

Yes. Unfortunately, it is not uncommon to see a lien placed on a property where the property owner paid-in-full the contractor, however that contractor may have had a dispute with their subcontractor or failed to pay them, and thus that subcontractor has placed a mechanic’s lien on the property. 

Who can file a mechanic’s lien?

Since mechanic’s liens are available to almost anyone who contributes labor, services, or materials to a real estate improvement project, there are a wide range of parties who may be able to file on a given project. As a result, it is important to consult an experienced real estate attorney if you see a lien, due to the potential for it to be invalid, or for a matter that was incorrect. As an example, mechanic’s liens must be recorded in the county in which the project is located, the person or entity filing must be licensed in that state, and the supplier must have given supplies directly to the project versus to another entity that then supplied the project. These are all examples of cases in which the lien can be invalid, but it will be up to you to determine the validity of the lien, since many title companies will neither make their own assumptions on validity, nor waive their requirement that it be paid if they see the lien on the property.

What happens if a contractor files a lien but has not finished the project or fixed the work?

There are many reasons why an erroneous or disputable lien may have been filed. This can range from differences in opinion of the work to be done, to simple misunderstandings of payment intervals. Sometimes rather than have conversations to clarify, the parties involved will assume the other side was on the same page and they choose to take offense to a lack of payment for milestones or at certain time intervals. Other times, there may be deeper issues that are more complicated to remedy. 

Once a mechanic’s lien has been recorded, the claimant must file a court action to enforce the lien within an established timeframe. If that court action has not been filed by that deadline, the lien is no longer valid. This is usually a good first step. After checking the criteria required to verify if the lien is valid, you or your attorney can petition the court to release the property from the mechanic’s lien. This is called an action to “vacate” or “discharge” a mechanic’s lien. 

This lawsuit will have the effect of requiring the lienor who placed the lien on the property to prove why you owe them money. Conversely, you and your attorney will show through testimony and evidence that the scope of work established under the contract was not properly fulfilled, or was not done to a mutually agreed-upon quality standard. If you win, the court can order that the lien be stricken from the property record. It is important to note that the contractor or service provider can usually appeal a decision they do not like in favor of a better future outcome, so it is important to build as strong an initial case as possible.  

Is a mechanic’s lien the same as a judgment lien?

The easy answer is “no.” Whereas a mechanic’s lien is limited to securing payment for construction work, a judgment lien can be filed by anyone who receives a judgment from a court. If you sue for money owed and win, the court will enter a judgment for the debt, which can then be filed against the debtor’s property.  

When dealing with a lien, you will usually want to begin by making sure the lien meets the county’s rules for formatting, procedures, and other aspects that can make it invalid if not followed correctly. For example, was a preliminary notice provided to the property owner at least 20 days in advance of putting the lien on the property? Were detailed bills and statements provided that showed the contractual agreement, the costs associated, all services that were to be performed, and what was done? If not, there may have been procedural missteps that make the lien invalid.

Next, you will want to consult with your attorney to decide how much of a case you have, and what timeframe and expenses will be required to fight it. Alternatively, if time is important in the transaction, or if the lien is valid, you may discuss alternative options such as surety bonds (sometimes called lien discharge bonds) that allow the transaction to continue while shifting the responsibility of the lien to be attached to the bond rather than the property. 

When dealing with real estate transactions, the easiest way to ensure a quick resolution is often with an experienced attorney. Feel free to reach out if you, or someone you know, is dealing with a commercial or residential transaction that might be complex or have possible obstacles.