Mechanic’s Liens and Construction Credit, Common Terms

14 Common Words in Mechanic’s Liens and Construction Credit

Every business has its own keywords, phrases, and acronyms. Heck, one episode of NCIS will give you a full lesson in Naval Criminal Intelligence lingo. While mechanic’s liens and construction credit aren’t nearly as exciting as solving crime, the terms, phrases, and keywords are important. Here are some of the most common keywords and phrases you may hear in the land of mechanic’s liens and construction credit.

1. Key Dates

  • First Furnishing: The first furnishing date is the date on which you first provide materials or perform services for a project.
  • Last Furnishing: The last furnishing date is the date on which you last substantially provide materials or perform services for a project.
  • Completion: Completion is the date of fulfilment of the prime contract for work of improvement.
  • Acceptance: Acceptance is an official act where entry is made in the government records that a public work under contract is completed and accepted.

Note: If you are a subcontractor or material supplier, “completion” is likely not the date you finished furnishing to a project – think of “completion” as the entire project being complete, not just your part.

2. Notice of Commencement: A Notice of Commencement is a notice typically recorded by the owner of a construction project, in the county where the project is located, prior to materials or services being provided to the project. The information provided in the notice of commencement assists in the preparation and service of the preliminary notice.

3. Preliminary Notice: A preliminary notice is a notice typically provided to the owner and/or general contractor as a precondition to filing a mechanic’s lien or serving a bond claim. A preliminary notice may also be known as Prelien Notice, Notice of Furnishing, Notice to Contractor, Notice to Owner. Typically, a preliminary notice is served when you first begin furnishing to a construction project. A preliminary notice is NOT a lien or claim, nor does it reflect negatively upon on any party in the ladder of supply.

Pro-Tip: Preliminary Notices May Be Required on Private and Public Projects

4. Mechanic’s Lien: A mechanic’s lien (aka construction lien) is a lien against real property, filed by a party that provides materials or services to a construction project, when that party hasn’t been paid. It’s a form of security used in the construction industry to recover payment.

Bonus: Full Balance Lien vs. Unpaid Balance Lien

    • Full Balance Lien: the lien is enforceable for the full amount owed, regardless of payments made by the owner.
    • Unpaid Balance Lien: the lien is limited to the unpaid portion of the contract.

Filing in an Unpaid Balance Lien State? Even if your lien is filed timely, it may be unenforceable if the property owner paid the general contractor in full prior to the lien recording, so we recommend filing your lien ASAP.

5. Payment Bond: A payment bond, issued most often on public projects, is issued as assurance of payment to certain parties, should the principal of the bond breach their construction contract. Typically, on public and federal construction projects, the project owner will require the general contractor to obtain a payment bond. Then, in the event the GC fails to pay its subcontractors and suppliers, those parties would pursue a claim against the bond to recover payment.

6. Bond Claim: A bond claim is a written notice that a claimant (e.g., a subcontractor, supplier, distributor) looks to the recipient for payment. Bond claims are frequently served on the surety (the insurance company that issued the bond) and the principal (often the prime contractor/GC) of the bond.

7. Stop Notice: A stop notice alerts the party paying for work of improvement of money due, which can obligate that party to withhold sufficient funds to cover noticed amounts.

8. Lien on Funds / Public Improvement Lien: A lien on funds is a lien against the money owed by the project owner under contract with the general contractor.

9. Demand Letter: A demand served upon a debtor, advising legal action may be taken including, but not limited to, filing a lien or suit to enforce a lien, making a claim against a bond, or filing suit to enforce a bond claim, or whatever other remedies may be available, if payment is not received within a specified time. Copies may also be sent to the owner, prime contractor, and subcontractors on a construction project.

10. Suit to Enforce Your Claim (aka Suit): A suit, or lawsuit, is an action in a court of law to enforce a claim. Is this the same as foreclosure? Foreclosure is a legal action to enforce a lien against real property with the purpose of having the property sold to satisfy the lien. Suit may lead to foreclosure. It has been our experience that suit does not usually result in foreclosure/sale of the property; more often, during the suit phase, settlement agreements are reached without the need for sale of the property.

11. Retainage / Holdback: Retainage is an agreed amount of a contract price retained (or withheld) from a contractor as assurance that subcontractors will be paid, and the job will be completed.

12. Lien Waiver: A lien waiver is a signed document in which the would-be lien claimant agrees to waive rights to its claim based on payment received. There are four types of lien waivers:

  • Partial Conditional: waives rights to a claim for a dollar amount or through a specified date, conditioned upon receipt and clearance of the partial payment.
  • Partial Unconditional: waives rights to a claim for a dollar amount or through a specified date. The waiver is not conditioned upon clearance of a payment. If the check is not received, or does not clear, the contractor/subcontractor/supplier will have waived their rights to that partial payment.
  • Final Conditional: waives rights to a claim, conditioned upon receipt and clearance of a final payment. If the contractor/subcontractor/supplier does not get the final payment, or the payment does not clear, the waiver does not waive their rights.
  • Final Unconditional: waives all rights to a claim. The waiver is not conditioned upon clearance of a final payment. The contractor’s/subcontractor’s/supplier’s rights will be waived whether payment is received or cleared.

Pro-Tip: a lien waiver and a release of lien are not the same thing.  

A lien waiver acknowledges receipt of payment whereas a release of lien releases a previously recorded document.

13. Joint Check Agreement: An agreement between two parties, allowing one to make payment through a joint check issued to two or more payees.

14. Release of Lien: A release of lien is a document recorded upon the satisfaction of a claim of lien. In other words, if you filed a mechanic’s lien and have been paid, you must release the lien.

Questions?

If you have questions on any of the above or there are any I haven’t highlighted here, please contact us! There is a lot to learn in mechanic’s liens and construction credit, and we’re here to help.

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