Maintaining cash flow is an essential part to any company's survival. Without cash, you cannot pay your employees, purchase necessary supplies, or pay for marketing and advertising. As a consequence, businesses need to ensure that they receive payment from their customers.
As with any business, there is no doubt there will be customers that fail to pay their bills in a timely fashion. This is especially true in the world of subcontracting, where subcontractors are often bound by contractual terms that leave them open to being paid when the party they contracted with is paid. What can subcontractors do to protect themselves in these situations? Depending on the project and state, mechanic's lien laws offer some protection to subcontractors when, for whatever reason, they are not paid in a timely fashion for their work.
What is a Mechanic's Lien?
Created by state law, a mechanic's lien permits a subcontractor to make a legal claim against the property of an owner for whom the subcontractor has provided services. It is separate from a claim against the party who failed to pay the subcontractor. In essence, the property itself acts as a security for unpaid labor and materials expended in improving an owner's property.
In most states, a mechanic's lien is recorded in the chain of title and serves to hinder an owner's ability to sell or transfer the property until all payments for work on that property have been satisfied. In some instances, if it is determined that an owner has unjustifiably withheld payment to a contractor or material supplier, the owner's property may be sold to cover the debt. This acts as a serious incentive for owners to pay their contractors' bills and ensure their property remains free and clear of liens.
Enforcement of Mechanic's Liens
To initiate a mechanic's lien, notice must be provided to the owner of the property within a specified time after completion of work. In addition, after notice is provided, the lienor must take timely steps to "perfect," or record, the lien or he or she risks losing all lien rights against the property.
For example, in Virginia, the notice, or Memorandum of Mechanic's Lien, must be filed in the circuit court of the county where the subcontractor performed the work. The memorandum must be filed within 90 days of the last day of the last month in which the subcontractor performed work. In addition, to perfect the lien, the subcontractor must initiate a lawsuit to enforce the mechanic's lien within six months of the filing of the memorandum. Failure to comply with either of these statutory requirements may result in dismissal of the lien.
In addition, most state lien laws may have specific caps on the number of days for which a subcontractor can claim unpaid fees. They may also have restrictions on the scope of liens, so as not to overburden the property. This is especially relevant when dealing with condominiums or commercial projects, where both private and common elements of the structures may exist.
In short, state mechanic's lien laws are heavily laden with complex and specific requirements, including notice, enforcement and timing requirements. Failure to strictly adhere to any of the statutory requirements can be fatal to your lien claim.
Also, the laws governing mechanic's liens vary greatly from state to state. As such, it is extremely important to familiarize yourself with the laws governing each state in which you perform work to ensure that your lien is not compromised.
Public Versus Private Jobs
Unlike private jobs, subcontractors performing work on public projects should know that it is almost always prohibited to place liens on public property. As such, in the context of federal construction projects, Congress enacted the Miller Act to provide some protection to unpaid subcontractors and suppliers. This law requires that all general contractors post two bonds a performance and a labor and material payment bond on projects that exceed $100,000. A subcontractor that fits within the act's provisions may be able to make a claim against the bond for unpaid fees.
Similarly, some states have enacted parallel legislation, often called "Little Miller Acts," that protect unpaid subcontractors and suppliers who work on state construction projects. Before undertaking work on any public projects, subcontractors should obtain all necessary documentation relating to the bonds, ensuring that the bonds are in place and are sufficient to cover the costs of the project.
Practical Advice for Subcontractors
As stated earlier, before commencing work on any project, subcontractors should take the time to review and understand the applicable lien laws in the states they perform work. In most cases, this may require consulting with an attorney who has experience with the application of the specific laws, including notice and filing requirements.
Review your subcontracts before signing them to make sure that you are not contractually agreeing to waive your lien rights. Such contractual language could bar your lien claim, regardless of proper notice and timely filing of the claim.
Organize and implement an accounting system that provides you with up-to-date invoices that detail the scope of work and the dates you performed such work. Regularly bill your clients and keep detailed records of overdue accounts. Your system should also include mechanisms for sending overdue notices to customers with outstanding accounts and should provide strict deadlines for payment.
In the event filing a mechanic's lien is necessary, it is prudent to consult with an attorney and have him or her prepare, file and send the notices to the proper parties to ensure compliance with the specific lien laws. As discussed previously, failure to strictly abide by any statutory requirement could spell doom for your lien claim and ultimately your ability to recover any unpaid fees.
Subcontractors should take comfort in knowing that when they are not being paid for their work, there are legal remedies available that may assist them in recovering their hard-earned money. Careful consideration and application of your state's mechanic's lien laws can be a saving grace in these situations. Indeed, through these statutory mechanisms, subcontractors can help ensure that they are not deprived of the important cash flow that is necessary for their company's survival.
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