MEbiz Real Estate Insider – Reading Between the Liens
ME has one of the most powerful mechanics lien laws in the country protecting contractors’ rights to get paid for their work, sometimes to the detriment of owners and mortgage holders. A mechanics lien creates a security interest on real property in favor of the contractor that gives it a right, similar to a mortgage holder, to force a sale of the property if the owner does not pay for the work. A properly enforced mechanics lien may survive a sale of the underlying real estate or a bankruptcy, take priority ahead of a recorded mortgage, and, in the case of subcontractors and material suppliers, require the owner to pay for work a second time even if it has already paid the general contractor.
Mechanics liens are a creature of statute. ME’s statute provides that whoever performs labor or furnishes equipment to improve a structure, with the owner’s consent (which may be implied), has a lien on the land and building. Builders, realtors, architects, surveyors, landscapers, equipment suppliers (and suppliers of parts to equipment suppliers), and tenants may all have mechanics lien rights for improvements to the property with the owner’s consents. The lien pre-empts the interest of anyone with an interest in the land who consents to the work, so may encumber not only the interest of the owner but also “prime” a mortgage or other interest.
To enforce the lien, the contractor must file a lawsuit within 120 days of the last day of its work on the project. If it does not have a contract directly with the owner (and contractors should not presume to know the property owner without a trip to the registry to see whether the actual owner is in an LLC, trust, or other legal entity), the contractor must file a notice of lien in the registry of deeds within 90 days of its the last work on the project. These provisions are strictly enforced, and may not be varied by contract. On residential projects, there is an additional notice that the subs or suppliers must provide to preserve their rights. For owners or buyers of property, this means that there may be mechanics lien rights that do not appear of record in a title search for at least the 120 days preceding the title search.
One of the biggest shocks to owners or developers comes when they pay a contractor, but the contractor does not pay its subcontractors or suppliers. Those subcontractors or suppliers still have lien rights and the innocent but careless owners may have to pay twice. We often see this when an insolvent contractor or subcontractor diverts payments from one job to pay off obligations from another. The best way for an owner to protect against these nasty surprises is to require the contractor to disclose all major subcontractor and supplier relationships (and to have them in turn disclose all of their material relationships for the project). Then with each payment, require lien waivers from all major subcontractors and suppliers as a condition of receipt of payment. The waivers must be carefully crafted, and the owner must be sure that the right party signs them. Performance and payment bonds also provide protection, but add cost to a project.
Both owners and contractors may suffer if they are not aware of their rights and the technical requirements of ME’s mechanics lien statute. When properly used by owners and contractors, however, the statute ensures that construction funds flow to those who do the work, that contractors and suppliers are paid in an orderly fashion, and that owners hold title unencumbered by liens or controversy.