What is a Mechanic’s Lien? Key Facts and Legal Implications

Mechanic’s liens provide legal protection for contractors and workers to ensure payment for construction work or materials provided. They take precedence over other debts, affecting property transactions and investment decisions.

By Douglas Wade, Attorney

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Table of Contents

1. Mechanical Liens: What Are They?

2. A Mechanic’s Lien: What You Need to Know

3. Enforcement of a Mechanic’s Lien

4. Mechanic’s Lien in Comparison to Other Liens

5. Practical Restrictions on Mechanic’s Liens

6. How a Mechanic’s Lien Works in Practice

7. Are Mechanic’s Liens Open to Anyone?

8. Ways to Prevent a Mechanic’s Lien?

9. How Does a Lien Waiver Work?

10. In Conclusion

Mechanical Liens: What Are They?

A mechanic’s lien ensures that parties with a security interest in property will be compensated for their overdue debts. If the business goes bankrupt, the lien will make sure the workers get their money first. Any time or money spent on a property’s upkeep or repair might give rise to a mechanic’s lien.

Key Points

If a construction project goes bankrupt, a mechanic’s lien will ensure that the people who built or repaired the facility, as well as any other parties involved, get their money.
When hiring construction workers, mechanic’s liens are frequently required.
When considering a property for investment, keep in mind that mechanic’s liens typically take precedence over other types of debt.
Thomas Jefferson originally proposed the mechanic’s lien as a means of establishing a landed aristocracy in America.

A Mechanic’s Lien: What You Need to Know

It is common practice to use mechanic’s liens when hiring labor for a building job. This lien will remain in effect until the project is fully paid for and the construction crew has been paid in full. Construction companies, general contractors, and builders frequently employ mechanic’s leans when constructing or repairing buildings. The mechanic’s lien not only covers repairs to the structure, but also to the vendors of supplies and subcontractors.

When considering a property for investment, keep in mind that mechanic’s liens typically take precedence over other types of debt. In case of repossession or foreclosure, this order of precedence establishes the hierarchy of claims.

The fundamental idea of a mechanic’s lien may be traced all the way back to the early years of the United States of America. Thomas Jefferson originally proposed the lien as a means of establishing a landed class in the newly formed nation. A mechanic’s lien allowed Americans to profit from the country’s abundant arable land and establish farms.

Construction workers were formerly known as mechanics or “handiworkers,” which is the origin of the term “mechanic’s lien” to describe the type of lien they held.

Enforcement of a Mechanic’s Lien

When building expenses, such as labor or materials, go unpaid, a mechanic’s lien can be filed to collect on such debts.

A mechanic’s lien can cover a variety of expenses, the precise nature of which is defined by state law. There may also be statutes of limitations or time limits on submitting a mechanic’s lien, which depend on the date of performance or completion of the work.

The terms “mechanic’s lien,” “artisan’s lien,” and “materialmen’s lien” all refer to the same thing.

Since a property cannot normally be sold while a mechanic’s lien is active, the owner of the property may feel forced to resolve the problem promptly. Upon conducting a title check, any prospective purchaser of the property would discover the existence of the lien. The responsibility for paying off any debts on the property would shift to the new owner.

It is important to tell the difference between a mechanic’s lien, a machinery lien, and a possessory lien. While the former grants the owner the authority to bring a claim against a piece of property or real estate, the latter does not. The owner is obligated to follow the necessary legal procedure and is not permitted to expel property holders from their land. A lien on equipment grants the owner the legal right to seize an item of machinery, such as a car, in exchange for outstanding debts.

Mechanic’s Lien in Comparison to Other Liens

There are a number of ways in which mechanic’s liens are different than other lien kinds. Lenders or government agencies often impose traditional liens, including tax liens or mortgage liens, on real estate. The construction industry is the primary focus of mechanic’s liens.

The type of the debt that is secured by the lien is another key variation between the two terms. Mortgage liens guarantee the payback of a loan taken out to buy a property, but mechanic’s liens guarantee payment for the materials, labor, and services required to renovate the property. In the case of mechanic’s liens, it is possible for one individual to collect funds from a lien in order to actually make payment to another individual (for example, compensating a subcontractor).

Additionally, mechanic’s liens are distinct from other forms of liens in terms of the procedure for filing and enforcement. It is common practice to register mortgage liens while purchasing or refinancing a property, but mechanic’s liens are usually filed once construction is finished.

Thus, it is imperative that the general contractor in this scenario regularly assesses the property liens over the course of the project. Unlike a mortgage, which is recorded just once at the closing of a house, a mechanic’s lien might change or develop over time.

Practical Restrictions on Mechanic’s Liens

While the purpose of a mechanic’s lien is to safeguard particular parties, it can come with certain drawbacks. While not all of the following may be applicable in every circumstance, here are some caveats:

There is often a hard and fast deadline, sometimes known as a statute of limitations, for filing mechanic’s liens. Calculated from the latest date of work done or supplies given, these deadlines differ by jurisdiction. If the related party declares bankruptcy without paying, you will still not be able to register a lien because the deadline has passed.

Preliminary notifications or notices of intent to lien are required by law in some states before a lien may be established. Just before you can file a mechanic’s lien, you need to serve them on the property owners or general contractors. No matter how legitimate the underlying debt may be, the lien may be null and void if the notification requirements are not satisfied.

There are also concerns regarding priority. It is possible that mechanic’s liens will not always take precedence over other liens. A lien’s priority dictates the sequence in which it will be satisfied from the sale profits during a foreclosure or sale procedures. Senior liens, such as tax liens or mortgages, may supersede mechanic’s liens.

Legal action may be necessary to enforce a mechanic’s lien, which presents its own set of challenges. This procedure can be costly, complicated, and time-consuming. Taking a case to trial still does not ensure a positive outcome.

There may be limits to how much money you may get back, even if you win your mechanic’s lien case. The business could, for example, be short on funds and unable to pay the whole lien amount. It is possible that lienholders will only get a portion of the whole sum due, leaving them short.

How a Mechanic’s Lien Works in Practice

If a homeowner fails to pay a contractor for some of the work they’ve done, the contractor may file a mechanic’s lien to collect on the outstanding balance. If the main contractor doesn’t pay the subcontractors for their work and materials, the subcontractors might file a mechanic’s lien.

In order to complete a specific task, such as the delivery and pouring of concrete, a contractor may use a subcontractor. Unlike the contractor, the property owner is not a party to the subcontractor’s agreement. If the contractor doesn’t pay the subcontractor for the concrete they supplied for the job, the subcontractor can file a mechanic’s lien. The owner would be compelled to take action due to the lien being placed on their property.

Take the Arizona housing complex X Phoenix as an example from real life. Building on the structure came to a standstill as it approached completion. Consequently, the site accumulated almost $30 million worth of mechanic’s liens, with the general contractor’s $25.6 million claim being the highest.

In the event that the contractor is not meeting their obligations, a second breach of contract action might be brought against them. By taking this course of action, the property owner can join the contractor in putting pressure on the subcontractor to pay up.

Are Mechanic’s Liens Open to Anyone?

It is common practice to allow anybody who supplies materials or labor to a construction project to file a mechanic’s lien. Notably, subcontractors are able to place mechanic’s liens on property regardless of whether or not a direct contract exists between the owner and subcontractors. Because of this, homeowners may feel more compelled to pressure contractors into paying up.

Ways to Prevent a Mechanic’s Lien?

Homeowners can protect themselves against mechanic’s liens by taking certain steps. The most basic is keeping accurate and timely records of payments made to contractors. When it comes to distributing cash, experts advise using joint checks to make sure that all parties involved, including subcontractors and contractors, have signed off on the payment.

How Does a Lien Waiver Work?

To prevent a mechanic’s lien from being imposed on a project, a lien waiver can be utilized, albeit this varies by jurisdiction. This is a formal document wherein one party waives their entitlement to attach a lien to another’s goods or property.

In Conclusion

The mechanic’s lien is a legal mechanism that guarantees payment to those who have worked on a building, project, or property, including contractors, subcontractors, and workers. When a company goes through liquidation, the workers will get their money back thanks to the mechanic’s lien, which has priority over other types of debt. It is possible to file a lien against the property even in situations when the contractors, and not the owners, have neglected to pay their subcontractors. Liens filed in reaction to unpaid expenses compel property owners to intervene.

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