Protect yourself from mechanic's liens if your contractor fails to pay subcontractors or suppliers.

All Kate and Peter wanted to do was remodel their ancient kitchen and build on a family room. They saved and borrowed, got their permits, and hired a contractor. The construction was over after just five dusty months, but the legal headaches were just beginning.

It turned out that the contractor hadn't paid the lumberyard thousands of dollars for the lumber, doors, and windows used in the new family room. The lumberyard recorded a lien on Kate and Peter's house and threatened to file a lawsuit to force the sale of the house. Kate and Peter had already paid the contractor and had no money left over to pay again.

Suddenly they were faced with the possibility of losing the house they'd worked so hard to improve. Kate and Peter were blindsided by what's known as a mechanic’s lien. A mechanic’s lien has nothing to do with mechanics in the usual sense. It's a legal claim against property being improved, and it can be filed by anyone who provides materials or does work on the project and doesn't get paid. The property itself becomes responsible for the debt, and the people who are owed money can force its sale at auction if something isn't worked out.

The Rationale of Mechanic's Liens

Most homeowners, like Kate and Peter, are shocked when they find out that they might still end up owing laborers, carpenters, electricians, materials suppliers, or equipment lessors, even if they pay the contractor in full. But that's the law. The whole point of the mechanic’s lien procedure is to make the improved property the ultimate guarantor of payment for all contributors to the project. It dramatically turns the economic tables by shifting the burden of proof on the question of payment from workers and suppliers to the property owners themselves.

Basically, state law is more concerned about those who provide labor or materials to an improvement project without getting paid than it is about the possibility of the owner having to pay twice for the same work. After all, the owner can turn around and sue the contractor (or subcontractor or supplier) to recover the funds. But that's another story.

How They Work

Here, generally, is how mechanic’s liens work. First, a contributor (a supplier or subcontractor) who does not contract directly with the homeowner must provide the homeowner with fair notice that describes the goods or services that are being contributed. The notice must typically be delivered within 20-30 days of when the goods and services were first contributed.

A 20-Day Notice Is Not a Lien       

You'll probably receive notices from suppliers and subcontractors that contract with the general contractor to work on your house. This notice is not a lien; it is an informational notice that's useful to you because it gives you contact information for subcontractors and suppliers so you can check in with them at the end of the construction process to make sure they've been paid.

If the contributor isn't paid after work is begun or the materials are supplied, then the contributor files a document called a "claim of mechanic’s lien" at the county recorder's office for the county where the real estate is located. The contributor then has a period of time -- typically between 60 days and six months -- in which he or she can either work out the payment problem or file an action against the owner to enforce the lien, which may ultimately lead to the property being sold at auction. If the enforcement action isn't filed by the statutory deadline, the lien becomes invalid.

Home Improvement: How to Avoid Paying Twice

As it turns out, mechanic’s lien enforcement lawsuits are seldom filed within the mandatory period, which should mean that the lien has no further effect. Even so, an old lien on a property can negatively impact the owner’s ability to sell the property because many title insurance companies will refuse to clear title when the property is sold unless the lien is affirmatively removed, either by a release from the lien claimant or by court order. Fortunately, in most states, getting a court order is simple and straightforward when it is clear that the mechanic’s lien claimant blew the enforcement action filing deadline.

Heading Off Problems

There are some steps that an owner can take -- both before and during an improvement project -- to protect against this type of horror show. The main idea is to make sure that everyone is paid. One approach is to not rely on the general contractor to pay off the subcontractors and materials suppliers. Instead, the owner can write a number of checks, each check being jointly made out to the general contractor and to a particular subcontractor or to a subcontractor and a materials provider. The idea here is that the check may be cashed only if the ultimate beneficiary endorses it, which will help assure payment and eliminate the risk of a mechanic’s lien. This is a common procedure, especially near or at the very end of a project. In California, see A Homeowner's Guide to Preventing Mechanic's Liens at www.cslb.ca.gov/services/guides.asp.

One should consult with a qualified real estate professional prior to implementing real estate strategies.