The economic and construction boom in Western Montana has been wonderful for many of Worden Thane’s clients. However, the recent economic disruptions have caused significant cashflow shortages which have resulted in concerns with getting paid. After several calls from concerned contractor clients in the past couple weeks, we thought we should provide a quick primer.
The scenario is common: ABC Contractor was doing work for the landowner. Landowner can’t pay. What can ABC Contractor do?
The answer: record a construction lien.
While the initial answer is easy, there are additional questions which must also be answered:
What is a construction lien?
Properly recorded, a construction lien gives the construction contractor a security interest in the real estate improvements. Or, in other words, a construction lien gives the contractor an interest in the real estate that he or she just improved. It can be a powerful way to get paid.
Does the type of construction matter?
Construction projects can be split into three topic areas: (1) federal or state contracts, (2) residential construction, and (3) commercial construction.
What if the construction is on a federal or state contract?
Federal and state contracts are generally governed by the Miller Act (federal contracts) or the Little Miller Act (state contracts). Construction liens are not allowed on public lands. Instead, the general contractor is required to place a bond for the work which is designed to ensure payment. As this article is about construction liens, the specifics of how public construction contracts work is beyond the scope. However, we may follow up in the future or feel free to call us to ask.
What are the preliminary requirements to claim a lien on residential construction?
Residential construction, as it deals with consumers, has specific requirements which must be followed before a contractor can claim a construction lien. Initially, you must determine whether you have a contract directly with the homeowner. The general contractor almost certainly has a direct contract. Some subcontractors may, if the landowner directly purchases the goods and services with the subcontractor.
However, if you are a subcontractor who does not have a direct contract with the homeowner, Montana law (with limited exceptions) requires you give notice to the homeowner of your right to claim a lien within twenty days of the date you begin work on the construction project. The Notice of Right to Claim Lien must be sent to the homeowner by certified mail and, also, recorded with the county clerk and recorder.
Most subcontractors, understandably, do not send these Notices because, understandably, homeowners do not like receiving them, especially by the required certified mail which makes the Notice seem even more adversarial. However, if a subcontractor fails to properly both mail and record the Notice, they could lose their right to claim their own construction lien. One tip we provide to subcontractors is to send a letter with the required Notice. In the letter, you can explain the law requires you to send the Notice and clarify that you are not claiming a lien, just that you can claim one if you aren’t paid.
Further, the landowner, in addition to not paying the subcontractors, is also likely not paying the general contractor. The general contractor, in most scenarios, can include the amount any subcontractor (including any subcontractor who failed to provide a Notice of Right to Claim Lien), is also owed in the general contractor’s construction lien. So, all is not lost if a subcontractor does not provide the Notice, though the subcontractor will want to work with the general contractor in getting the lien filed.
Are there any preliminary requirements to claiming a lien on commercial construction?
Commercial construction essentially presumes the landowner is more sophisticated than a consumer homeowner. As such, commercial contractors and subcontractors do not have to provide any Notice of a right to claim a lien.
Some states, like North Dakota, require an additional notice be sent prior to claiming a construction lien. Montana does not have any such requirement.
The landowner isn’t paying me. Do I need to do anything soon?
This is, of course, some of the worst news a contractor can receive – the owner is missing payments. Once you start to feel like there may be an issue, you need to start getting ready to claim a lien. Of course, calling an attorney is a great idea.
You will need to make that call early. Construction liens have a specific drop-dead time limitation. The lien must be recorded within ninety days of the last date you worked on the project. This deadline is crucial. You do not want to miss it because you miscounted the days or it took you a little longer to get the information together. If possible, it is always best to record it before the deadline.
Sometimes there can be a question as to the last date of work. Is it when you moved your truck and picked up your tools? Or, what about that one day you moved some dirt? The best guide is to think of the last date you did something of some significance to the project and count the ninety days from there.
Often, the landowner will make promises of payment. Most of the time, the landowner even means well and is diligently working in all good faith to get the money to finish the project. Even still, you cannot let the ninety days run or you will likely lose your right to claim a lien.
What information will you need to record a construction lien?
A construction lien is, essentially, just a form. In order to complete the form and record the construction lien, we need to know:
• The name of contractor (or subcontractor)
• The name of the landowners
• The address of the property. We will use the address to determine the legal description.
• The date you started work
• The last date you performed work
• A description of the work you performed
• The amount owed
How is a construction lien recorded?
We give the completed lien to the county clerk and recorder. Once recorded, it is a formal, legally recognized lien on the real estate and gives notice to everyone that the property essentially cannot be sold, or new financing obtained, without resolving the lien.
How does the landowner find out about the construction lien?
To claim a valid construction lien, the contractor (or the attorney) must send a copy of the lien to the landowners via certified mail, return receipt requested.
The landowner seems like a good person and has promised payment. Will filing the lien mean they will get mad and not pay me?
This is an understandable concern. A mad landowner may be less willing to pay and sending this formal, legal process can exacerbate the situation. There are easy ways to mitigate the situation. Of course, it is always best to stay in contact and communication with your landowner to let them know what you are doing. You can, accurately, tell them you are merely filing the lien to protect your business and you can and will easily remove then lien once you get paid. Filing a lien does not have to be an aggressive “shot across the bow.” In fact, we will sometimes send a letter along with the lien just explaining the lien is just a simple business requirement and will be removed once payment is made.
We’ve properly recorded the lien. How do I get paid?
That is good news. You have a proper construction lien. Now for some of the bad news. Filing the lien does not guarantee quick payment. Instead, if the landowner still won’t pay you, you will have to file a lawsuit to foreclose the lien. This lawsuit must be filed within two years of when you filed the lien.
A foreclosure lawsuit is a legal proceeding filed with the district court wherein you demand payment by selling the real estate. In addition, if you prevail, you can likely recover your attorneys’ fees, costs, and interest in pursuing the foreclosure of the lien. Admittedly, it is not as good as cash in hand. But, it does give you a powerful position since most landowners don’t want to lose their property. As such, almost all construction lien foreclosures settle.
In addition, if there was construction financing, you might be able to claim your lien has priority (gets paid before) the bank’s construction loan. As you might expect, this scenario often makes banks put pressure on landowners to resolve liens early.