Small business owners are always concerned about getting paid. A customer who can’t or won’t pay can be a major problem. So how can a business collect a payment or debt without using a collections agency?
One option is to file a mechanics’ lien (also known as a contractors’ lien, construction lien, or property lien). All 50 states have laws that allow contractors, subcontractors, and suppliers to file liens against property owners for unpaid work.
Lien rights provide security for contractors, subcontractors, and suppliers who perform work on property, including real estate, houses and vehicles. By filing a lien, a service provider asserts an interest in the property until the debt is paid. A lien generally means the owner will not be able to sell the property, or to take out a mortgage or refinance.
Here’s a basic example: ABC Construction enters into a contract with John Doe to build a home. After ABC finishes construction, John Doe refuses to pay the outstanding balance on the contract. ABC has the option to sue John Doe for breach of contract. But ABC can also file a mechanics’ lien on John Doe’s home.
Provide Advance Warning – Preliminary Notice or Notice of Intent:
In many states, contractors must send a preliminary notice or notice of intent to secure the right to file a lien. Failure to provide proper notice can nullify your lien rights.
The idea behind these advance notices is to inform the property owner and other contractors of your involvement on a project and that you believe you are entitled payment. Even in states that do not require preliminary notice, it’s generally a good idea to send a preliminary notice, which might speed up the payment process.
File a Mechanics Lien:
Following advance notice or warning, the next step is filing the mechanics’ lien. Mechanics’ liens are typically recorded at the county level, so it is important to confirm the local rules with your county clerk. Importantly, different states have different deadlines for when a mechanics’ lien needs to be filed, ranging anywhere from three months to a year after work on a project is completed.
Enforce the Lien:
Service of Process – You may still need to take additional steps after filing a mechanics’ lien. Most jurisdictions require that you should serve the mechanics’ lien on the required parties. Typically, this means that you must send a copy to the property owner and the general contractor. The best practice may be to send notice to all potentially interested parties, including subcontractors, construction managers, property managers, and lenders.
After distributing the mechanics’ lien to the interested parties, follow up with the party most likely to pay you—usually the person who hired you. If that party refuses (or can’t) pay, then follow-up with the property owner. Since it’s their property on the line, you should have their full attention.
Notice of Intent to Foreclose – The next step, if you still haven’t been paid, is to send a notice of intent to foreclose to all interested parties, including the property owner. This is a final warning that you will pursue legal action if you don’t receive payment.
Most mechanics’ liens are settled by this point. But you may ultimately have to initiate a foreclosure lawsuit. This will require hiring an attorney, especially since small claims court is usually not an option for foreclosure actions.
*This article does not provide legal advice. If you need assistance in recording or enforcing a mechanics lien it is highly advisable to work with a trusted attorney licensed in your state.