Business owners should understand mechanics' liens

All businesses, whether construction, manufacturing, or professional service, realize the risk that a certain portion of their customer accounts will not be paid. But with the recent economic slowdown, managing these risks is more critical. By obtaining a better knowledge of mechanic's lien laws, business owners can better protect their rights in collection for services and supplies and protect their property whenever work is performed by others to improve it.

Mechanic's lien laws are designed to protect unpaid contractors, subcontractors, and material suppliers who provide improvements to an owner's property. A mechanic's lien is similar to the lien a bank obtains when you borrow money to purchase a piece of property. If the debt is never repaid, the lien can be enforced through a judgment and a foreclosure sale.

Business owners who have work performed on their property usually encounter mechanic's lien issues when the original contractor has not paid persons who provide labor, material or services, provided by what are commonly known as "subcontractors." Although the owner pays the original contractor, the owner may be still responsible for paying the subcontractor if proper notice is given.

Before a mechanic's lien may be claimed, notice must be given to the owner that notifies the owner of the identity of the contractor and their lien rights. The timing and the manner of giving notice depend upon whether the property is commercial or residential and whether the person seeking the lien is either an "original contractor" or a "subcontractor."

The failure to give timely notice will result in the lien being invalid or only partially enforceable.

The notice requirements for a mechanic's lien vary from state to state. Therefore, business owners should consult their attorneys as to what state's laws apply.

Under Missouri law, original contractors must give the statutory notice to the owner at the beginning of the project or the mechanic's lien will fail.

As a practical matter, the notice should be contained in a written contract before any work is performed. But the notice may be received at the time the materials are delivered, work commences, or the first invoice is received so long as the notice is received before receiving any type of payment.

Subcontractors must serve notice to the owner of their intent to file a lien at least 10 days before filing. All contractors must file a claim of a lien with the circuit court where the property is located within six months of the last date materials or labor is provided.

Missouri law affords greater protection to residential real estate owners from subcontractors than it does to commercial owners. A subcontractor's rights to obtain a mechanic's lien are limited if the owner does not give consent to be liable for subcontractors' costs. Because the original contractor does not want the subcontractor to compete with their lien rights, few original contractors require the property owners to give consent. Under most circumstances, the subcontractors will lose their ability to enforce their rights when the residential real estate owner makes full payment to the original contractor.

Some Practical Tips for Property Owners:

1. Property owners should consider consulting their attorney to review contracts with original contractors. If the contract involves the improvement of commercial property, the owner should obtain the names of the subcontractors beforehand. If there is residential real estate, owners should understand their obligations to subcontractors.

2. Ask your attorney about obtaining a lien waiver form. With any type of real estate improvements, payments to the original contractors should almost never be made without obtaining a lien waiver from the subcontractor.

3. Learn more about the financial condition of the original contractor. Original contractors with cash flow problems frequently lead to subcontractor mechanic's liens.

Some Practical Tips for Original Contractors and Subcontractors:

1. Ask your attorney to prepare the notices to one owner and the claim of lien documents because each has specific legal requirements and disclosures.

2. Subcontractors should obtain as much information about the owner and general contractor's relationship and communicate their intentions of seeking mechanic's liens if payment is not received. Wishing to please their customers, original contractors will know to ask for lien waivers for their customers.

3. A subcontractor's credit department should establish a procedure to identify unpaid accounts and coordinate the accounting system with the deadlines for sending the appropriate notices to the owner and the original contractor when a project is completed.

4. Companies doing business in several states, should consult an attorney familiar with each state's laws because mechanic's lien laws vary greatly. For example, in Illinois, two statutory notices are required to be sent to a property owner in order to enforce a lien on residential real estate, whereas Missouri requires only one.

Mechanic's liens give contractors and subcontractors leverage against business and property owners. Thus, both contractors and subcontractors benefit by understanding what needs to be done to enforce a mechanic's lien. Because businesses and property owners could end up paying twice for the same labor and materials, they must carefully choose their original contractor and understand their obligations to original contractors and subcontractors.

(The preceding article is reprinted with the permission of The Missouri Bar. Sean P. Clancy practices with the firm of Paule, Camazinc & Blumen-thal PC in St. Louis.)