10 Tips for Commercial Credit Management of Notices & Mechanic’s Liens
It’s part three of our three-part series of Commercial Credit Management Tips from NCS. Previously we provided favorite tips for Collections and UCCs. Today we wrap up this series with tips for Notices & Liens.
Commercial Credit Management Tips for Notices & Liens
Tip #1: No Notice Required? Serve a Non-Statutory Notice
There are instances where a preliminary notice isn’t required. As a best practice, serve a non-statutory notice. A non-statutory notice is a notification to an owner that its land has been or will be improved by the goods or services supplied. Often, the owner of a property is unaware that a supplier has provided value to a property or project until the notice is served. View the notice as a courtesy to the owner, advising of your involvement in providing quality products and services to the project.
Furnishing dates most often dictate the notice, lien/bond claim, and suit deadlines. First Furnishing is the date on which the claimant first provides materials or performs services on a project. Here are some typical examples of first furnishing:
- if you are providing only materials, the date the materials first arrive on the job site
- if you are providing only labor to the project, the date you first arrive on location
- if you are providing materials and labor to the project, the first date either materials or labor are provided to the job site
Last Furnishing is the date on which the claimant last substantially furnishes materials or performs services on a project.
Here are some examples of questionable last furnishing dates: punch list work, warranty, remediation. The key when using last furnishing to calculate a deadline is that it needs to be substantial.
Completion, which can also affect deadlines, is the date of fulfillment of the prime contract for work of improvement. Note: Completion is typically when the general contract is complete, not necessarily the date your contract is complete. Acceptance is an official act where entry is made in the government records that a public work under contract is completed and accepted.
Tip #3: Understanding Releases and Waivers
When signing any release or waiver for a project, make sure you are only releasing what you intend to release. Points to consider:
- Unconditional or Conditional: does the language within the waiver reflect the title of the release/waiver and does it express your intention? If the waiver is “conditioned” upon receipt of payment, use a conditional waiver form.
- Final or Partial: If additional payments are to be received, a partial waiver form should be used.
- Is the project information correct?
- Are the invoice(s) correctly and clearly identified?
- Is the amount shown in the waiver the amount you received?
- Is the amount shown correct as to the date released and waived through?
The most common mistakes made with releases and waivers are signing a waiver, thinking it is conditional, only to find the language was unconditional, and discovering the date released or waived through includes additional invoices that were not part of the amount paid.
Tip #4: Defining Your Contractual Chain
You’re filling out a job information sheet or completing an NCS Service Request form and see spaces for an owner, a prime contractor, a subcontractor. You aren’t sure who it is you’re selling to. Are you a supplier that ‘never’ sells to a general contractor? Has your customer ever said, “There isn’t a GC on this project,” when you ask for job information?
A prime or general contractor is typically described as the party who contracts with the owner and is responsible for day-to-day oversight of a construction project. You might be thinking, “My customer never acts as a general contractor because they aren’t responsible for anything else on this job.” Generally, what you want to do is look at the complete picture of the contractual chain.
The key is that if your debtor is selling directly to the owner; their contract is “prime” with the owner. Even though your debtor may not be overseeing other aspects of the project, they are working with the owner and should be listed as the prime contractor.
Remember, the prime contractor is the party who contracts with the owner. So, if your debtor is selling directly to the owner, and you must choose who you sold to, the answer is…drum roll please…the Prime Contractor.
Tip #5: Confirm Your Job Is Bonded
“What do you mean it’s not bonded – it’s a government job!” Not all government jobs are bonded. Some states have bond thresholds or requirements, but the only sure-fire way to know the job is bonded is to get the bond. Take some of the guesswork out of your security stance and ask for a copy of the payment bond up front. If the job isn’t bonded, at least you’ll know to investigate alternative security measures at the onset.
Tip #6: Use Public Liens Where Available
A bond claim is probably the most well-known form of security when providing labor and materials on a public works project. However, some states allow for a lien on public funds, which can trap money unpaid from the public entity to the general contractor. Though this service is often referred to as a Public Improvement Lien, states may call this type of claim something else: Municipal Mechanic’s Lien (NJ), Lien on Funds (NC), or Stop Notice (CA). There are 15 states that allow for a public lien on funds in addition to serving a claim against a payment bond.
Tip #7: How to Handle Sovereign Territory Projects
Sovereign land projects can be a big issue in terms of determining the best course of action for security. If a project is located on an Indian Reservation, the mechanic’s lien / bond claim statutes may not apply. Often, a project name or owner name can tip you off as to whether a project is located on tribal land or owned by a tribal authority. A simple owner search via the county assessor may help confirm if the project is considered government land and/or owned by the authority.
In some instances, the tribal authority may require a payment bond; however, this is not public information. We recommend a) proceeding with the statutory Preliminary Notice if applicable or a Non-Statutory Notice of Furnishing and b) having NCS investigate whether the project is bonded.
Tip #8: Waiting until the last minute to record a Mechanic’s Lien? Think again!
Factors like inclement weather, county closures, state holidays and the wait times for document recording can cause MAJOR delays in recording. When unforeseen circumstances arise, other methods of service may be required, which can be costly. Timely submission of requests enables cost effective methods of service, ensuring lien rights are protected.
Additionally, statute differs with each state dictating which means of serving a notice is acceptable. While some statutes allow for overnight delivery, other statutes require that documents be sent via certified mail, which slows the delivery time. This can be a crucial factor when the document must be received by the deadline. Again, timely submission will help to ensure your rights.
Tip #9: Learn the Distinction Between Full Balance Lien and Unpaid Balance Lien
It’s important to understand how the difference between a Full Balance and an Unpaid Balance Lien State can affect your lien rights. In a Full Balance Lien State, the lien is generally enforceable for the full amount owed, regardless of payments made by the owner. An Unpaid Balance Lien State protects the owner from having to pay twice for materials and labor provided to their construction project. When your lien is limited to the unpaid portion of the general contract, it is critical to file the lien as soon as possible, so that it is filed prior to the owner paying the prime contractor.
Tip #10: Protect Security When Negotiating a Settlement
With settlements including security and different sources of recovery, it’s important to only release the parties you are settling with and only for the amount they are paying. For example, you may have a mechanic’s lien on owner XYZ’s property for $10,000.00. Your debtor/customer is ABC. You accept XYZ’s offer to settle the lien for $8,000.00. In the settlement agreement it should state that the mechanic’s lien settles for $8,000.00 and releases XYZ only, allowing you to pursue ABC for the remaining $2,000.00 balance.