Construction projects are often significant investments for both the client and the contractor. A given contractor may only work with a few clients at a time, so the revenue from a specific project is critical to its finances. Meanwhile, construction costs often comprise a substantial portion of a client’s budget.
This is why mechanics’ liens exist. Also known as construction liens, these legal orders provide construction companies and other contractors with a security interest in the property on which they work. When written and enforced correctly, they provide the contractor with valuable financial protection if the client is unable to pay their invoices without unfairly impacting the client’s rights. However, these liens are not without their drawbacks. Whether you are a contractor or a business considering a new mechanical project, it is worthwhile to understand how these liens may impact you.
What Is a Mechanics’ Lien
A mechanics’ lien is a contract that grants a contractor, such as a construction firm, builder, or supplier, additional legal recourse if a client cannot or will not pay them. These liens give the lienholder certain rights toward the property on which they are working. Standard mechanics’ liens offer contractors two specific rights:
- The right to “cloud” the property’s title, preventing the owner from selling it until the lien is resolved.
- The right to foreclose on the property and seize the title.
Typically, liens are placed when a client fails to submit timely payment according to the terms of the contract. After the lien is filed, should the client become delinquent for a specified time, the lienholder can take ownership of the property and sell it to recoup its losses.
Liens are often compared to mortgages but are not entirely the same. Mortgages grant the rights listed above to the lender immediately; if the buyer fails to pay for a certain amount of time, the lender has relatively little to do before they can foreclose on the property. In contrast, construction liens are served after a contract has been signed and work has begun on a project. A property will likely never face a construction lien if there are no financial disputes or late payments.
Furthermore, while any contractor working on real estate may request a lien, it is typically reserved for projects where the work performed and materials used are worth a significant fraction of the property’s overall value.
For example, a firm may consider a lien worthwhile if they completely renovate a structure, add significant new facilities to a property, or perform other costly and time-consuming work. In less financially impactful disputes, contractors may be better served by pursuing a breach of contract lawsuit immediately instead of placing a lien.
Benefits of a Mechanics’ Lien for Construction Companies
The primary benefit of a mechanics’ lien is that it ensures the lienholder will be compensated for their time and materials one way or another. It accomplishes this in several ways:
- It prevents the owner from selling or refinancing the property without permission. This prevents the owner from making full use of the property, incentivizing them to address the late payments.
- It ensures the lienholder can be paid in full if the owner sells the property. If an owner decides the project is too demanding or otherwise wants to divest from the property, they cannot do so without permission from the lienholder. Most lienholders only grant this permission if the owner agrees to cover their unpaid debts out of their proceeds from the sale.
- It allows the lienholder to take ownership of the property and sell it if payment is not received. If the property is not sold and payment is not received, the lienholder can recoup debts by foreclosing on the property and selling it. This is often the least preferred option because it is often a time-consuming task that may not generate enough proceeds to cover the debt, but it is a helpful last resort if other measures do not succeed.
Resolving Construction Liens in Florida
Resolving a construction lien is in the best interest of all parties. It allows the client to use their property according to their preferences and provides the construction firm with fair compensation for its services. Liens are most often resolved through one of the following methods:
- Simple payment: Ideally, when a client is notified that they may be served a lien, they will immediately take action to pay the lienholder the delinquent amounts. In this case, the lien is never actually placed; the
- Negotiation, mediation, or other alternative dispute resolution: In many cases, liens become necessary because the subject of the lien cannot pay what they owe. In these situations, liens are often resolved through negotiation. The client and contractor will work together to determine a payment plan regarding the lien that works for both parties. Once the negotiated amount is paid in full, the lien is released.
- Foreclosure: If an owner does not abide by the terms of the lien, the lienholder will foreclose on the property.
- Litigation: Owners who do not believe that a lien should be placed or the property foreclosed upon may file a dispute in court to litigate the matter.
Because of how quickly a simple lien can escalate into a complicated legal dispute, it is critical for construction firms to work with skilled legal counsel when drafting, submitting, and defending liens. At Isriel Ponzoli, our knowledgeable associates have proven track records of providing bespoke legal counsel to construction firms and other contractors in financial and legal disputes. Learn more about how we can assist you by scheduling a consultation with our Florida real estate and commercial law attorneys today.