The Bond Claim Remedy on State and County Projects

So, if you can’t file a mechanic’s lien, what can you file? For this, let me direct you to a guest post I published for a good friend on his Construction Law Musings blog:  A Lien By Any Other Name Can Sound Just As Sweet.

The point of this article is that it doesn’t matter whether you can or cannot file an actual “mechanic’s lien” against a state or county project; there are related and just as powerful remedies available to you.  The trick is knowing the subtle differences between lien and bond claim remedies, and making sure you take advantage of your rights.

Once you’re certain you’re on a state or county work, you’ll need to follow the bond claim regulations for your state. Here is a guide to how to file your bond claim against a state or county construction project.

1) Preserve Your Bond Claim Rights By Sending Required Notices

Damn, you’re probably thinking, notices are required on state construction projects too? I have unfortunate news to you.  Not only are preliminary notices sometimes required on state and county construction projects, but they are frequently entirely different requirements from those on private projects in the same state (but not always).

As with private projects, it’s important to know and understand the notice requirements in your particular state. Send the notice that is require, maintain proof of sending or delivery, and do it at the very start of furnishing.

2) If Unpaid, Timely File Your Bond Claim

After you’ve furnished your labor or materials, if you remain unpaid it may be time to lodge your bond claim. There are two issues to consider:  (i) When must the bond claim be filed; and (ii) How is the bond claim filed.

Both of these questions are answered differently from state to state, although there are a lot of consistencies in states that have adopted a standard “Little Miller Act.“  The Miller Act is the bond claim laws governing federal construction projects. Many states have simply adopted the provisions of the Miller Act for their own state, and these are called the “Little Miller Act.”  If this is the case, the rules are the same state-to-state.  However, many states have not adopted the Miller Act word-for-word, contain their own state specific nuances, or have a statutory structure completely independent from the Miller Act.

With this in mind, I’ll address each of the two issues:

(i) When Must The Bond Claim Be Filed?

In many states, those who contract with the prime contractor are actually excused from actually lodging a formal bond claim. However, please, please, please don’t accept that sentence for face value and skip this step.

Not only does this step apply to a lot of potential claimants, but even if it doesn’t apply to you, it’s a good practice to send it anyway as it will protect you in the event you made a mistake about whether it was a required filing, and it will open the bond claim process with the surety.

As far as when these bond claim filings are required, there are generally two concepts across the states for this.  In some states, the bond claim is required within a certain time period after your last furnishing, with the most popular period being 90 days from last furnishing.  In other states, the bond claim must be filed within a certain period of time after the entire project’s acceptance by the state.  This time period is usually a bit shorter (30-60 days), and it’s risky, because you’re not always told when the project is completed.

It’s always best to get bond claims in earlier than later to avoid potential deadline issues, and consider some type of software (like the LienPilot or outsource deadline management to Zlien) to help you manage these deadlines.

(ii) How To File The Bond Claim

Filing a bond claim can actually be more complex than filing a mechanic’s lien claim. Mechanic lien claims are all alike – they are filed in the county recorder office, and the property owner is served.  That’s virtually the same everywhere.

Bond claim filing requirements are all over the place, however.

In some states, you’re required to file the bond claim with the county recorder like a regular mechanic’s lien, but this is actually only true in a minority of states.

More typically, the bond claim is “filed” by sending it certified mail, return receipt requested to one or more parties.  Most commonly, the prime contractor must be sent the bond claim, as nearly every state requires the prime to receive the claim.  In addition to the prime, states require the claim be sent to either (or both) the surety and the public entity commissioning work.

It’s important to know two things when filing your bond claim, therefore.  First, know who needs to receive it.  Second, know the surety.

Even if it’s not required that you send a copy to the surety, it’s a really terrific idea to do so. Sending a copy to the surety ensures that your bond claim is opened, as a prime contractor may sit on your claim and not forward it to the surety for processing, making the claim process longer and perhaps even jeopardizing your rights under the bond.  (Don’t know who the surety is?  Just ask).

3) Reply of Bonding Company, Providing Backup

Once you lodge your bond claim, the surety should contact your company and provide you with a “claim form.”  This claim form will ask you some basic information about your role in the project, and require that you sign and have notarized an acknowledgment of your claim.

The claim form will also request you provide backup materials about your claim, including invoices, contracts, correspondence, change orders, etc. – whatever you have to prove that you’re owed the money in your claim.

Get this claim form filled out and sent back to the bonding company as soon as possible, as the more you delay the return of the form, the longer your claim will go on.  It’s also a good practice to include your backup materials in the bond claim itself.  If you preemptively send it to the surety, that will get the ball rolling on your claim faster – which means a faster payment.

4) Followup with the Bond Representative

Don’t be surprised if you send in all of your project information, the claim form and respond to all questioning and then don’t hear anything back for some time.  Sureties have been known to procrastinate on processing claims, and so it’s a good idea to contact the surety and check on your claim.

When you receive the response from the bonding company, you should have been given information identifying a representative for your claim.  Give that person a call or email them and check on the status of your claim.  If more information is requested, get it to them.

5) File Lawsuit To Enforce Your Bond Claim

Just like a mechanic’s lien has an expiration date, so too does a bond claim. State laws require that a claim against a surety bond be “enforced” if unpaid within a certain period of time.  The timing varies, but can be as a little as a few months and as much as a few years – with the median being about 1 year.

No need to wait until the deadline, however.  If you file your bond claim, and it’s not paid within a reasonable period (i.e. 60 days), move on and file your lawsuit to enforce the claim.  These suits are typically filed against the prime contractor, the party you contracted with and the surety.

If you have not been paid for labor, services or materials furnished on a construction project in Washington, you may be able to collect the money you are owed by filing a mechanic’s lien (also referred to as a claim of lien). You can file a mechanic’s lien claim on your own, or call upon an attorney or mechanic’s lien service to help you navigate the paperwork and process.

Step 1: Determine If You Are Qualified To File A Mechanic’s Lien

Not everyone is entitled to file a mechanic’s lien. The services, materials or labor you furnish to a construction project must qualify for protection under Washington’s lien laws. Liens are authorized by RCW 60.04.021 for any person furnishing labor, professional services, materials, or equipment for the improvement of real property.  The trick is determining whether your construction project is a qualifying improvement, which is defined by RCW 60.04.11(5):

“Improvement” means: (a) Constructing, altering, repairing, remodeling, demolishing, clearing, grading, or filling in, of, to, or upon any real property or street or road in front of or adjoining the same; (b) planting of trees, vines, shrubs, plants, hedges, or lawns, or providing other landscaping materials on any real property; and (c) providing professional services upon real property or in preparation for or in conjunction with the intended activities in (a) or (b) of this subsection.

Suppliers to suppliers are not protected.

Step 2: Confirm You Preserved Your Mechanic’s Lien Rights

In Washington, most construction participants must deliver some type of notice to preserve their rights to file a mechanic’s lien.

Those who did not contract with the property owner must deliver a “Notice to Owner” within 60 days of first furnishing labor or materials to the project. If you did not send a preliminary notice on time, but have furnished labor or materials within 60 days, there are some protections for those who sent late notices as to labor and materials furnished within a 60 day period from when the notice is sent.

While most notice requirements are for those who did not contact with the property owner, in some circumstance, those who did contract with the owner must provide a “Model Disclosure Statement” before commencing work to preserve their lien rights. This is required on select residential and commercial projects. You can learn more about this requirement at this post: Deliver the Model Disclosure Statement in Washington…Or Else

If you furnished these notices, you’re in luck, and you’ve preserved your right to file a mechanic’s lien. If you haven’t furnished the requisite notice, you may not have lien rights.

Step 3: Produce The Mechanics Lien Document With Required Content

Now it’s time to produce the mechanic’s lien form. Washington has strict requirements about what your mechanic’s lien must contain (see RCW 60.04.091) Here are a few:

• Identification of the party who hired you
• Description of the labor, materials or services furnished to the project
• Legal Property Description
• Identification of the Property Owner
• Date services first and last furnished
• Amount due and unpaid to you

The statute itself proscribes a form to use to file a Washington mechanic’s lien. Download the form for free here: Free Washington Mechanic’s Lien Form.

The most challenging part of completing this form is to insure you have the proper legal property description for the property being liened, as this is an absolute requirement for your lien to be valid in Washington.

Step 4: Timely Record The Washington Mechanic’s Lien with the Proper Auditor’s Office

The next step is to timely record your Washington mechanic’s lien. Washington requires all parties to record their mechanic’s lien within 90 days after last furnishing services, labor or materials to the project. The courts will not accept any excuses for a late filing. If you record a tardy mechanic’s lien , it will be void.

The Washington mechanic’s lien – statutorily referred to as a “Claim of Lien” – must be recorded in the county auditor’s office where the construction project itself is located. If a project is situated in two counties, it must be recorded with both auditor offices.

Step 5: Send Notice Your Mechanic’s Lien Was Recorded

Washington requires all mechanic’s lien claimants to serve a copy of the mechanic’s lien on the property owner within 14 days of recording.  While the failure to serve the lien will not invalidate it, it will disqualify you from recovering your attorney fees in any action to enforce the lien (Washington law typically allows lien claimants to recover their attorney fees).  So, not having the lien served can be an expensive oversight.

The mechanic’s lien must be served on the property owner by certified or registered mail, or by personal service.

Step 6: Foreclose On Your Washington Mechanic’s Lien

Mechanic liens in Washington (or elsewhere) do not remain effective and encumbering against a property forever (See: Does A Mechanic’s Lien Cloud Title Forever?).

In Washington, mechanic liens must be enforced within 8 months from the date the lien was recorded.  To learn more about lien foreclosure, read this tag: Foreclosures.

What Is A Credit Policy? A Mechanics Lien Policy?

According to businessdictionary.com, a credit policy is:

Clear, written guidelines that set (1) the terms and conditions for supplying goods on credit, (2) customer qualification criteria, (3) procedure for making collections, and (3) steps to be taken in case of customer delinquency. Also called collection policy.

So, if that’s a credit policy, what in the world is a mechanics lien policy?

This is actually a term-of-art I recently invented (I think) in response to inquiries from our clients about implementing procedures to help them utilize Zlien’s services and generally protect their lien rights on projects across the country.

This is something I alluded to in a previous post, “How To Incorporate Lien Protection Into Your Credit Policy – For Material Suppliers and Equipment Lessors.“  The idea is that in the construction industry, there’s a huge incentive to not only stay on top of standard credit and collection procedures, but to incorporate procedures to insure your lien rights are always protected.

A Mechanics Lien Policy is just that, an overview of what procedures your company will follow to preserve, perfect and enforce its mechanic lien rights.

Elements of a Mechanics Lien Policy for Material Suppliers

When crafting a Mechanics Lien Policy, material suppliers must keep in mind the credit and collection challenges specific to their industry.  We have a post about this from last week titled: Top 4 Mechanics Lien Law Challenges For Material Suppliers and Materialmen.

With these challenges in mind, here are some issues the building material supply company must keep in mind when writing a Mechanics Lien Policy:

What Is The Commitment To Sending Preliminary Notices?

Material suppliers are almost always required to send preliminary notice to preserve their mechanic lien rights. The backbone of your company’s mechanics lien policy, therefore, is to dictate the company’s commitment to sending preliminary notices.

In the sample mechanics lien and preliminary notice policy that I make available with this post, I address this commitment in a section titled “Mechanics Lien Philosphy.”  What goes here is a short statement about how aggressive your company intends to be with mechanic liens.  Are you looking to tip-toe around sending notices and filing liens because you’re scared of making waves with your clients (see Preliminary Notices Will Not Scare Your Customer!), or are you all-in and willing to send notices every time to ensure you have the maximum protection in the event of non-payment?

Here’s a quote from our sample lien policy’s mechanic lien philosophy:

[Example for Protection on Every Project:] The company furnishes materials on a high volume of projects, with the average value of those materials being between $50,000 and $75,000. Most of the time, these materials are sent to the job site on credit. Even though the credit worthiness of our clients are investigated pursuant to the company’s credit policy, because of the high dollar value of each shipment, the company values the option of filing a mechanics lien and desires sending all required preliminary notices to preserve those rights on every project. If an account remains unpaid, the company will file a mechanics lien before the state’s mechanic lien deadline. The company does so, despite the possibility of interfering with its relationships to project participants, because its willing to compromise elements of those relationships to protect its financial interests when payments are overdue.

Some companies like to separate their projects into risk categories, and then commit to sending preliminary notices to only those designated as high or medium risk. Risk categories can be based on any number of factors including the dollar value of the account (the more you can lose, the more risk) or the credit worthiness of the client.  What separates a high risk account from a low risk account is a call your company needs to make.

Outline A Plan for Execution

Once you decide who will get a preliminary notice and who won’t, it’s time to outline a plan to execute the policy.  The execution plan should not only contemplate how you’re going to send the preliminary notices, but also how and when you will file a mechanics lien, send the account to collections, and escalate the account to a foreclosure lawsuit.

Just as you would dictate within a credit policy when demand letters are sent and collection calls are made on overdue accounts, you’ll want to establish firm procedures on when notices, liens, collection efforts, and foreclosure lawsuits go forward.

Notices:  The thing about preliminary notices is that they are preliminary documents. You can’t wait until the account is overdue before sending these construction notices. You must send the notice to owner at the very start of furnishing to a project.  As such, the execution plan should call on your company to send a preliminary notice immediately upon signing a new contract or purchase order, or furnishing to a new project.

Mechanic Liens:  Unlike preliminary notices, mechanic liens are sent only after an account is overdue or some money is owed (with the exception of retainage).  While mechanic lien deadlines are important, you shouldn’t make a practice of waiting until just before the deadline to file your lien.  Not only does this subject you to error of a late filing, but you also miss opportunities to file your lien when the project is full of funding.  Earlier liens perform better, just like early collection efforts are more successful.

Your company should have a set number of days you wait until filing a lien, and it should be somewhat short.  Something like 30-45 days after last furnishing materials. This insures that (i) You get the lien filed while the account is still fresh, making collection more likely; and (ii) You don’t wait too long, as most lien deadlines are longer than 30-45 days.

Collections:  You may have between 90 days and 6 years to have your mechanics lien foreclosed upon.  Don’t wait that long. Give the mechanics lien 30-45 days to work by itself, and if it doesn’t work, escalate the situation and start collection efforts.

Foreclosure Lawsuit: Stay on top of the claim, so that if collection efforts don’t work within another 30-60 days, move the account up and require a lawsuit get filed to foreclose on the lien.

The specific number of days I propose here are just suggestions.  The important thing is to find something that works for your company, and to have a systematic, consistent execution. Also, when setting your execution policy, be sure to pay attention to the next point:  your deadlines.

Monitor Your Deadlines and File Your Documents Right

There are a lot of similarities between a credit policy and a mechanics lien policy. One key difference, however, is that when dealing with mechanic liens, preliminary notices and bond claims, compliance with complex legal nuances is required.  There are two primary components to this legal compliance:  (1) Getting everything filed before the deadline; and (2) Getting everything filed right.

First, everything in the mechanics lien world has a deadline.  There’s a deadline to send preliminary notices, to file the lien, to foreclose on the lien, and more. These deadlines change from project to project and state to state, and it’s going to be impossible for your company to track these deadlines.  You need a system, or to outsource your mechanics lien deadline monitoring.

Second, the notice, lien and bond claim forms and laws are hyper-technical. If you don’t complete the form exactly right, and send or file it in the exact right way, you’re going to forfeit your lien rights.  You want to make sure you understand all of the requirements (which is hard, because again, they change state-to-state and project-to-project).  Consider outsourcing this work.  See: 4 Reasons It’s Smart to Outsource Your Preliminary Notice Work.

Sample Policy

Finally, as promised, you can download a sample mechanics lien policy I’ve put together.  It can be used by anyone in the construction industry, but I wrote it with material suppliers specifically in mind.  You will notice that some items are in gray, as they present to you some choices in language.  Plus, you should edit the policy to fit to your company’s goals and philosophy.

Download the Sample Mechanics Lien Policy Here:
Sample Mechanics Lien Policy And Procedures – Word Version
Sample Mechanics Lien Policy And Procedures – PDF Version

Free Florida Mechanics Lien Forms For Download

Notice to Owner / Notice to Contractor

All parties who do not contract directly with the property owner in Florida must deliver a preliminary notice within 45 days of first furnishing materials and/or labor to the project. When there isn’t a payment bond posted to the project, the notice is styled a “Notice to Owner.”  When a bond is posted, however, the notice is styled a “Notice to Contractor.”

The Notice to Contractor is always delivered to the general contractor.  The Notice to Owner, however, must be provided to the property owner and everyone “above the contracting chain” from you.  Since potential lien claimants may not know whether a bond has been placed, or the specifics about who is issuing the bond, Florida law allows you to request identification of the bond from the property owner or prime contractor.

Further, you can send a combined “Notice to Contractor / Notice to Owner” preliminary notice, which will protect both your lien rights and bond claim rights.  The free form provided here is such a combined Notice to Contractor / Notice to Owner.  It also contains a formal written request for identification of the bond.

Claim of Lien

When unpaid on a construction project in Florida, parties may file a mechanics lien against the real property, gaining a real security interest in the property itself equal to the value of the services, labor and/or materials furnished to the project.  Mechanic liens in Florida must be filed within 90 days of last furnishing labor and/or materials to a construction project.  More specific information about Florida’s mechanic lien laws can be found in the post on this blog: 5 Things To Know About Florida’s Mechanics Lien Law.

This particular form should be filled in, signed and notarized, and then filed with the Clerk of Court for the county where the project is located. While usually filing with the Clerk of Court is sufficient, some counties have a separate County Recorder department.  If this is the case, the lien should be filed in with the recorder and not the clerk.

Notice of Non-Payment

When a bond has been issued for the project, lien claimants are entitled to file a claim against the bond, and not the real property itself.  This claim must be delivered to the prime contractor and the surety company by certified mail, with return receipt requested.  It must be delivered within 90 days of last furnishing labor and/or materials to the construction project.  The “Notice of NonPayment,” while creating a formal notice upon the claim under the Florida Construction Lien Law, does not require recording with the clerk or recorder.

Notice of Contest

If your property is liened, and you don’t want to wait for an entire year to see whether the lienor intends to file a lien foreclosure action, in Florida you can serve a “Notice of Contest” upon the lienor.  Service of this notice shortens the lien effective period from one year to just 60 days, meaning the lienor will be required to file the lawsuit to foreclose the lien within the following 60 days or the mechanics lien will be rendered void.

This document must be signed and notarized, and served on the lienor by certified mail with return receipt requested.

Discharge of Lien

After receiving payment on a mechanics lien, or for other reasons, you’ll be required to discharge your mechanics lien from public records.  The lien discharge documentation should be filed in the same recorder or clerks’ office where the mechanics lien itself was recorded.  The document must be signed and notarized, and must actually reference details about the recorded lien within it.

The Value of Zlien’s Services

While forms are important and Zlien prides itself on having the most complete and accurate set forms, there is more to filing a mechanics lien or properly sending a  notice to owner than just filling out the form and sending it on its way.  We provide these forms to our readers free of charge, but that’s because we understand that the true value of Zlien’s service is more than just providing our clients with forms.

First, forms are fluid.  The forms we provide above are simple generic forms for Florida mechanic liens. However, depending on your role in the project and the work you’re performing, these lien forms may exclude certain fields, or may change slightly in one way or another.  Plus, you have to make a decision about which form is the right form for you to use. When you use the Lien Wizard, all of these nuances and variables are taken into consideration.

Second, there are a lot of steps in putting these documents together and getting them filed or delivered.  A service like Zlien that handles all of the logistics has a value that cannot be understated.  Take a look at this blog post for a more detailed explanation: Why You Shouldn’t Use Do-It-Yourself Mechanic Lien and Notice Forms.

Parties looking to file a mechanics lien in Florida must comply with the statutes housed in Title 40, Chapter 713, Part I of the Florida Statutes, titled the “Construction Lien Law.”  Here are the top five things you should know about these laws to preserve, perfect and enforce your mechanics lien rights.

1) Preliminary Notice is Required

If you don’t deliver a preliminary notice at the start of furnishing labor or materials, you will likely lose your mechanics lien rights in Florida. All parties who did not contract directly with the property owner must serve a Notice to Owner within 45 days of furnishing labor and/or materials to the construction project. There are only two small exceptions to this requirement, as the requirement does not exist for pure individual laborers or for professionals (i.e. architects, engineers, etc.).

The preliminary notice must contain all the information required by the statute (including a statutory WARNING statement), and must be sent to certain parties.  Specifically, make sure you send the preliminary notice to those listed in any filed Notice of Commencement, and:

• If hired by the general contractor, send the notice to the property owner;
• If hired by a subcontractor, send the notice to the property owner and the general contractor; or
• If hired by a sub-subcontractor, send the notice to the property owner, the general contractor and the subcontractor.

2) You Must File A Florida Mechanics Lien Within 90 Days From Last Doing Work (Warranty Work Not Included)

In some states, the lien deadline starts to count from the end of the entire construction project.  Not so in Florida.  Claimants in Florida must record their mechanics lien within 90 days from last furnishing labor, services or materials to a construction project.  The 90 day period starts to count when the substantive portion of your work is completed, and you cannot include the correction of deficiencies in work or warranty work when determining this date.  If you are an equipment rental company, the last date of furnishing is the last date the equipment was actually on site and available to the parties for use.

When recording your mechanics lien, be careful where you are recording.  While most counties maintain county property records with the Clerk of Court for the Florida county, there are some exceptional counties where the property records function is delegated to an designated “County Recorder.”

3)  Know Who Does and Does Not Qualify For Lien Rights

Generally speaking, contractors, subcontractors, material suppliers, equipment rental companies, laborers and professionals have lien rights in Florida.  Florida does not require that you have a written contract to file a mechanics lien, so contracts can be oral, written, express or implied. However, the following do not have any rights to file a Florida mechanics lien:

• Sub-sub-subcontractors (those hired by sub-subs)
• Suppliers to suppliers
• suppliers to sub-sub-subcontractors
• Anyone who is required to be licensed in Florida, but who is not (read more about unlicensed contractor lien rights here)
• Maintenance workers (work / materials provided must permanently improve the property)

4)  Do Not Exaggerate Your Lien Claim

This one really applies nationwide, and not just in Florida.  However, it’s particularly important in Florida, because filing a mechanics lien considered “fraudulent” is a 3rd degree felony.  The tough part is distinguishing between a “mistake” or something subject to a “good faith argument” versus an actual willful or negligent exaggeration.

Florida does not allow lien claimants to include amounts within the mechanics lien for unapproved change orders, claims and lost profits on unperformed work, and other similar legally theoretical claims for damage payments. Similarly, lien claimants should not add costs or lien fees, interest or attorney fees to their Florida mechanics lien.

While all of these amounts may be recoverable in litigation, they cannot be added to lien itself, as the mechanics lien law in Florida only allows lienors to encumber the property for the value of its actual permanent improvement to the property.  This is a typical rule all across the country, as we discussed previously in this post:  What Costs Can I Include In A Mechanics Lien?

5) Know The Foreclosure Deadline…And All Exceptions

In Florida, as elsewhere, mechanic liens are only effective for a defined period of time.  Once that time period is up, the lien expires as a matter of law unless you file a lawsuit to foreclose upon the property and the lien.  The general rule in Florida is that the lien foreclosure action is due within 1 year from the lien’s recording.

However, the 1 year foreclosure period can be shortened to as little as 60 or 20 days. It’s important to know these two exceptions:

• Foreclosure period is reduce to 60 days if the property owner serves a Notice of Contest of Lien (F.S. 713.22(2)).
• Foreclosure period reduced to 20 days if the owner or interested party files a lawsuit complaint and summons with a rule to show cause on the mechanics lien (F.S. 713.21(4)).

As the holiday season winds down and 2012 approaches, everyone in the construction industry is looking back on the fiscal successes and failures from 2011, and making plans for the new year. Many businesses will be staring at a mound of “bad debt,” which may be written off when tax time approaches this spring.  You may be wondering, what can I do to stop accumulating so much bad debt?  Let us help you plan for 2012.

The High Costs of Bad Debt?

Think you can just write off your bad debt?  It’s not quite that simple. While there are certainly deductions available to you under the tax code to accommodate some of your bad debt, it’s irresponsible for you to write off uncollected receivables year after year without analyzing its effect on your company’s bottom line.  Unpaid receivables even in small amounts can have a very significant impact on your company’s profitability.

Let’s say you have just $5,000 of unpaid receivables, and you have a net profit margin of 5%.  Your company will need to make $100,000 in revenue to compensate for the lost $5,000.  That’s a significant amount of money to offset the loss of such a small debt.  Now, think about $20,000 of unpaid receivables, $100,000, or more.  The impact to a company’s bottom line can be staggering.

Filing Mechanic Liens Will Get You Paid More Often

Many feel that filing a mechanics lien is too aggressive, or that it will risk impairing a relationship with a good customer. The fact remains, however, that it’s hands-down the best way for someone in the construction industry to reduce their bad debts.

A few months ago I wrote a White Paper titled: 5 Ways A Mechanics Lien Can Get You Paid.  To summarize that White Paper, mechanic liens have a host of consequences to a project, including freezing funds, eliminating the property owner’s ability to sell, refinance or transfer the property, securing your debt with the project’s property as collateral, and more.  When you file a mechanics lien properly and timely, an entire symphony of pressure points are pushed, and this results in getting you paid more often than not.

If you have any unpaid receivables at the end of 2011, a well-executed plan to protect and exercise your mechanic lien rights is your solution. You’ll see a huge difference in your bottom line.  To take advantage of the lien laws, however, you need to follow a lot of rules.  Here’s what you’ll need to know.

Part I:  Protect Your Lien Rights From The Start Of Work

In creating a mechanics lien plan, the first thing you need to know is that Filing A Lien Is A Discipline, And Not A Knee-Jerk Reaction. Namely, you have to begin protecting your lien rights by filing certain preliminary notices at the very beginning of every project.

I’ve discussed preliminary notices quite a bit on this blog (see Preliminary Notices category). The long and short of these discussions is that in many states, you’re required to deliver to certain parties a notice formally putting them on notice that you’re furnishing labor and/or materials to the project.  This notice is due within a certain amount of time from when you begin work, and if you miss your window to send the notice, you will forfeit your lien rights.  Ouch.

If you do three, four, five some-odd projects each year, sending the preliminary notice in-house is not going to be a big deal, although you’ll risk making a mistake.  However, for those companies who have a lot of preliminary notice filings each month or quarter, it’s probably a good idea to outsource this service.  Knowing when a notice is required is important, as is getting the notice prepared properly and sent timely.  Without it, the mechanics lien plan just won’t work.  Period.

Part II:  Exercise Your Lien Rights If Unpaid

So, you’ve filed your preliminary notices when required and protected your lien rights.  Things have been going well, but you’ve encountered a client who is not paying its invoice.  What now?

The next step is to exercise your lien rights by filing your mechanics lien. Like preliminary notices, this must be filed within a certain amount of time, which each state having different claim periods (Calculate Lien Deadlines with Zlien’s LienPilot).  Liens are typically filed after you’ve finished or stopped providing services, and after an amount of money has become due to you.

Be careful when filing your lien because there are lots of traps for the unwary.  In fact, you may be well served to use a service like Zlien, who will prepare, file and serve your mechanics lien for a flat fee. Once your mechanics lien is filed and served, you can then make additional attempts to collect the debt.

A lot of times, the filing of a mechanics lien alone will be enough to turn things around and get payment. If you remain unpaid, however, you’ll need to move to the final step, as the mechanic lien will not tie up the property forever.

Part III: Enforce Your Lien Rights With Suit

The idea behind a mechanics lien is that you’re constricting alteration of the property’s title in any way, so that if you’re debt is not paid you could theoretically call upon the sheriff to seize the property and sell it to pay off your debt.  If the filing of the lien alone does not produce payment, you will want to begin taking steps to enforce your lien and requesting the property’s acquisition and sale.

This request is done through an ordinary lawsuit filed against the property owner (and frequently also the prime contractor and party who hired you). You’ll be required to prove that your debt is owed, and if you prevail at trail and get a judgment, the judgment would request the sheriff to proceed to foreclose on the project’s property.

This is a long road and most liens get resolved before going this far…but, you must take those first steps in the journey and understand the procedure to most effectively use your lien rights.

A Guarantee

When account receivables are at issue, it’s hard to guarantee anything.  However, in my experience of helping suppliers and contractors around the country implement quality credit policies and mechanic lien plans, I can guarantee you that a well-planned and executed mechanics lien plan will nearly eliminate your bad debts in 2012 and beyond.

When thinking about a mechanics lien plan, understand that implementing it in-house will be very, very difficult.  There are so many state requirements which differ depending on your tier in the project, the project type, and other variables.  Keeping up with these changes and differences is impossible if you’re not in the business of doing it. Therefore, again, your best option is to outsource this stuff.  And that’s a positive thing, because it means you can implement a mechanics lien plan, turn around your bad debt situation, and not create additional work for your business.

Every now and then, though, lien priority becomes very, very important.  And us construction lawyers and mechanic lien gurus rely on these fairly rare situations to occur so that the courts have the chance to interpret the laws and give us all some guidance on what happens to a mechanic lien claim when its fighting against the lender for money.

So, what exactly is lien priority?  I’ve got a “Lien Priority” Tag here on the Construction Lien Blog, and you can learn a good deal on the topic there.  In short, lien priority refers to the ranking of claims against a property.  If you file a mechanics lien against a property with 4 other liens and a lender’s mortgage, the property is foreclosed upon, and a pile of money (but not enough money to pay all claims) is recovered by the sheriff…who gets paid, and who doesn’t?

In dispersing the funds between mechanic lien claimants, most states employ a “first to file” rule.  Those who file first get paid first.  If you’re not in a first to file state, you may be in a pro-rata state, which separates the money available between all the claimants.

The tougher question arises when there’s claims to the money by mechanic lien claimants and a lender. In some states, the lender’s mortgage is inferior to the mechanic lien claimant, even if it was filed first.  Also, in some states figuring out who “filed first” can be complicated because of the concept that the mechanic lien attaches at the very start of construction, not upon formal filing.

If a mechanics lien doesn’t get you paid immediately, however, and you actually proceed to foreclose upon the project’s property, the obscure concept of lien priority can become critical.  How the project’s state handles priority will dictate if you get full or partial payment, or just go home empty-handed.

• Is My Project Private, Federal, State…Or Something Different?
• The Differences Between Public and Private Projects

Part I:  Understand You’re Filing A Claim Against The Bond, Not The Property

If you’re unpaid on a private construction project, you’re going to file a mechanics lien against the property itself.  The property where you performed work acts a legal security for your debt, and in theory, you can foreclose on that property, have it sold at a sherriff’s sale, and collect your payment.

Obviously, the government is not going to let you foreclose on its own property. So on state projects in Florida, as elsewhere, if unpaid you can file a “lien” or claim against the project’s bond, and then foreclose or enforce against the bond.

Most state projects require the prime contractor to obtain and record a bond. Knowing who issued the bond is important, and if you don’t know if a bond exists or any details about the bond, you can request it. The Florida statutes provide that “any claimant may apply to the governmental entity having charge of the work for copies of the contract and bond.”

Part II:  Send Required Preliminary Notices

Ah, the dreadful preliminary notice.  Some states require notices on private and state projects, some states don’t, and other states only require notices on one project type or another.  Understandibly, it’s hard to keep up with these notice and lien requirements. Unfortunately, however, those difficulties do not excuse noncompliance.

Florida is a notice state regardless of whether working on a state or private project. If you’re not in “privity” with the prime contractor (i.e. you contracted with a subcontractor), you must deliver a written preliminary notice to the prime contractor within 45 days of first furnishing labor and/or materials to the project.

This notice must be served to the prime contractor and surety pursuant to the requirements of F.S. §713.18, which allows for service by actual delivery to the person, by registered or certified mail, or by overnight or second-day delivery.

Part III:  Send Your Bond Claim / Notice of NonPayment

If unpaid on the state construction project, those who are not in “privity” of contract with the prime contractor (i.e. you contracted with a subcontractor) must serve a written notice of nonpayment to the prime contractor and its surety.  This notice can only be served within a specific window of time:  It cannot be served any earlier than 45 days after first furnishing labor and/or materials to the project, and it cannot be served any later than 90 days after the last furnishing of labor and/or materials to the project.

This notice must be served to the prime contractor and surety pursuant to the requirements of F.S. §713.18, which allows for service by actual delivery to the person, by registered or certified mail, or by overnight or second-day delivery.

Part IV: File Lawsuit To Enforce Claim

After the “notice of nonpayment” is properly served, if this doesn’t produce payment, the claimant must proceed to bring an action to enforce the claim.  This action must be instituted against the contractor or the surety within 1 year of the last furnishing of materials or labor to the project.

The claimant has just a bit more time to bring the legal action for retainage payments due to it (although the claim for retainage must be included in the notice of non-payment, as this notice must segregate how much of the claimed amount is retainage).  The action to recover retainage must be brought within 120 days from the happening of a certain condition, such as the public entity has paid out retainage, the work is completed and the prime has sent its request for final payment, 160 days has passed since substantial completion, etc.