The Mechanic's Lien

Northern Virginia's construction industry was hit hard by the recent recession. One indicator of that is the spiraling number of mechanic's liens filed by unpaid general contractors, subcontractors and suppliers. The figures rose at a staggering rate during 1989 and 1990. By the end of 1990, more than $105 million worth of liens had been filed in Northern Virginia counties, including Loudoun, Fairfax, Arlington, Manassas and Alexandria. During the first half of 1991, 2,798 liens were filed, worth $53,144,530.10. In times like these, contractors have good reason to take advantage of this extraordinary remedy.

The mechanic's lien was specially created by lawmakers to protect the workers and suppliers whose sweat and effort should not go unrewarded, even if the General Contractor or Owner of the property goes bankrupt. A mechanic's lien gives contractors and sub-contractors a star preference over virtually all other creditors and liens, sometimes even challenging the Internal Revenue Service. The catch is: you must follow the rules. Even small errors could frustrate your chance to collect on a debt. Since mechanic's liens arise only under specific statutes, the courts strictly follow those laws.

What Is It & How Do I Get It?

Anyone whose work or materials are used to increase the value of real property has the right to secure a lien on that property. The lien is only a potential right until it is properly "perfected" in the manner specified by law. You perfect a lien by recording a Memorandum of Mechanic's Lien with the records division of the county or city where the property is located. This notice lets the world know of your lien interest. The Virginia Code sets out in detail what must be included in the Memorandum. Virginia Code, sections 43-5 (general contractors), 43-8 (sub-contractors) and 43-10 (laborers and materialmen).

The Memorandum and a lawsuit to enforce the lien (Bill to Enforce Mechanic's Lien) must be filed within specified time periods (see the filing deadlines). The Bill to Enforce asks the court to sell the property in order to pay the lien.

Enforcing Liens Against Subsequent Purchasers

The sale of the building or property does not destroy either a filed mechanic's lien or the legal right to file a lien. Thus, many new homebuyers are shocked to find that they may be responsible for a mechanic's lien filed after settlement. Title insurance is the method of protection recommended for residential purchasers. Fortunately, banks always require the owners of commercial property to have title insurance.

Virginia is only one of seven states giving mechanic's lien claimants the power to sell the property to satisfy the debt even against good faith purchasers. In fact, a 1988 Fairfax County Circuit Court case, (Talbot v. Swango, 18 Va. Cir. 5), held that purchasers after a foreclosure are at risk for liability on outstanding liens, even if the lien is not perfected until after the foreclosure sale! Since Virginia law provides a relatively generous amount of time to file a lien after work is completed (compared to Maryland and the District), subsequent purchasers may have no notice of the lien and no idea they can be liable for the debt.

Statutory protection for contractors and subs is under continual challenge in the Virginia General Assembly. The legislature is considering measures that would shorten the time for filing liens and would provide less protection for contractors.

Get It Right the First Time

The Memorandum of Lien and the Bill to Enforce must be complete and accurate. Although there are a few trivial mistakes involving form that the courts will overlook, the courts strictly enforce the statutory requirements. One recurring problem is the failure to name the correct Owner or naming only a few of many owners. Avoid this mistake! Have a title search performed. Once the time for filing the mechanic's lien has expired, a judge will not allow an amendment to correct mistakes contained in the Memorandum.

Many deserving lien claimants have lost their only possibility of being paid because they failed to include all necessary parties or to correctly state all requirements in the Memorandum and the Bill to Enforce. The Virginia Supreme Court in Mendenhall v. Douglas L. Cooper, Inc., 239 Va. 71 (1990), dismissed an action to enforce a mechanic's lien, because the named trustee under a recorded Deed of Trust was not included as a party to the suit when it was filed. Because of the technical nature of these procedures, it is advisable to rely on an experienced attorney to enforce your rights.

The Case of the Absconding General

Suppliers of labor and materials should take steps to protect themselves from the risk of a nonpaying General Contractor before they begin work or deliver supplies. It is essential to make careful decisions regarding extension of credit (see article on Credit Applications). But, despite all reasonable measures, there will be those few General Contractors who pocket the money intended for subs and blow it on fun and frolic. Or more commonly, the General files for bankruptcy protection. In many states, including Virginia, once the Owner pays the bill to the General Contractor, he is released, regardless of whether the subs and suppliers get paid.

Virginia, however, has a seldom utilized statute (Virginia Code §43-11) which lets you impose personal liability on the Owner or General Contractor, despite the absence of a written contract. By following specific notice requirements, the sub-contractor or materialman can obtain this additional security without having to resort to the mechanic's lien process.

It is worth noting that Virginia law also imposes criminal sanctions on General Contractors or sub-contractors who intentionally and fraudulently keep money intended for those who performed labor or furnished materials. Virginia Code §43-13.

Conclusion

While the title companies may ultimately have to pay for a perfected mechanic's lien, they will test every technical aspect of the lien, from the filing date to inclusion of all necessary parties. Nevertheless, the mechanic lien process remains one of the best methods for assuring payment. During these tough times, it is often the only way to be paid.

Mechanic's Liens Filing Deadlines

Are Owners Liable When a Mechanic's Lien is Filed Against a Tenant?

What happens if your tenant hires a contractor to do work on the leased property, and then fails to pay for it. Many property owners would assume they have to pay once they receive notice that a mechanic's lien has been filed. Not necessarily so. With some exceptions, the mechanic's lien may only be good against the tenant's leasehold interest, and may not attach to the underlying property. Owners should check on this rule before agreeing to pay.

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The above article is not meant to replace legal counsel. If you'd like to speak to an attorney, please contact Gross & Romanick by calling 703-273-1400, emailing law@gross.com, or filling out the firm's online Information Request Form.

New Mechanic's Lien Statute: Cure or Just Another Hurdle

Several major title insurers refused to continue writing title insurance in Virginia, citing loses from undisclosed mechanic's lien claims. Since the Virginia Code permits notification of a claim even after settlement, many residential properties would be conveyed prior to notification, which caused problems for the new owners and their title insurers.

With the participation of the title companies the Virginia legislature has amended the mechanic's lien statute, which substantially alters the notification procedures relative to one and two-family residential dwellings. A construction project may have a "mechanic's lien agent" for receipt of notices from potential mechanic's lien claimants. The agent will be identified in the building permit, which must be "conspicuously and continuously posted" on the property. If no agent is designated, the normal rules apply.

A claimant must notify the agent in writing within thirty days of the time he first furnishes any work or materials. An agent may be designated after construction begins, in which case the claimant must provide notice within thirty days after such permit is issued. Notice must be sent by registered or certified mail or by physical delivery. The required contents of the notice are set out in Virginia Code Section 43-4.01(B).

Only title insurance companies, banking institutions, and attorneys may perform the duties of a mechanic's lien agent. Builders who fail to disclose at settlement all claims for mechanic's liens will face criminal sanctions.

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The above article is not meant to replace legal counsel. To speak to a lawyer about mechanic's liens please contact Gross & Romanick directly by filling out our online information request form or by calling (703) 273-1400.

Mechanic's Lien: What is Part of the Original Contract

A recent decision by Judge Thomas D. Horne of the Circuit Court of Loudoun County in Tart Lumber Co., Inc. v. Drewer Dev. Corp. may have significant impact on the timing requirements for filing mechanic's liens by suppliers, subcontractors and other lien claimants. Judge Horne dismissed approximately half of the $91,613.51 of liens by finding that each invoice evidenced a separate contract with a separate required date for filing of the memorandum of mechanic's lien.

Under Virginia Code ß43-4 a lien claimant must file a memorandum of lien no "later than ninety days from the last day of the month in which he last performs labor or furnishes material." In the 1993 Virginia Supreme Court case of American Standard Homes Corp. v. Reinecke a portion of a mechanic's lien was dismissed because subsequent orders were not considered part of the original deal; thus, the memorandum for the earlier materials was found to be filed after the statutory period for filing expired.

Judge Horne essentially agreed with the title companies' view of the Reinecke case. Even though the contractor signed a credit agreement pursuant to which the goods were delivered, the court found that each separate delivery was a separate contract. The credit agreement did not obligate the supplier to sell, nor the buyer to purchase, any specific materials. Thus, the court found each order to be a separate contract with a new 90-day filing requirement.

While Judge Horne is only a circuit court judge and his opinion has no precedent value in other courts, it may mean that other judges and ultimately the Virginia Supreme Court will have the same interpretation of the Reinecke case. On the other hand, we are aware that other circuit court judges have ruled more favorably regarding inclusion in "last perform(ed) labor or furnish(ed) materials". Apparently there are some cases on appeal to the Virginia Supreme Court to settle this issue.

Meanwhile, it will be important to file mechanic's liens within 90 days of the last day of the month for each separate invoice, or make sure you can prove that subsequent deliveries were pursuant to a prior single contract. Judge Horne's opinion focused on whether the supplier would have been required to deliver and whether the contractor would have been required to accept the materials in question; absent such requirement, he found that there was no contract and each delivery was a separate sale with a separate time period. This means that claimants need a written contract for the entire order, or file quick and often.

As you imagine, claimants seeking to collect unpaid bills believe the courts are impairing the protection that the mechanic's lien statute intended to provide. Property owners, title companies and banks are pleased with the ruling which presents another technical roadblock to enforcement of a mechanic's lien.

The above article is not meant to replace legal counsel. To speak to an attorney, please contact Gross & Romanick directly by filling out our online form, emailing law@gross.com, or calling (703) 273-1400.