Service Area: Notice and Mechanic’s Lien Services

Guide to Managing Mechanic’s Liens Across Multiple Sites

Posted on October 19, 2018 by - In Other Commercial Credit News

Are You Furnishing to the Construction on More than One Building?

Multiple Mechanic’s Liens May Be Required.

We are often asked whether a single mechanic’s lien can be filed on multiple buildings or parcels. The answer is: maybe. We have previously discussed the complexity involved in wind & solar farm projects. In today’s post we’ll take a quick look at whether a lien can be filed on more than one building, highlighting a recent article by Michael Benson of Greensfelder.

Illinois & Missouri Mechanic’s Lien Rights

Before diving in to Benson’s article, Can You File a Single Mechanic’s Lien on Multiple Buildings in Illinois and Missouri, let’s review the steps for securing lien rights in IL & MO.

Illinois

Generally, a preliminary notice is not required for private commercial projects, however, there is a Notice of Lien (done in conjunction with the lien).  In the event you have been unpaid on a project, you should serve a copy of the notice of lien upon the owner and lender within 90 days after your last furnishing. Then, you should file a lien within 4 months after your last furnishing. In certain circumstances, a lien may be filed after 4 months from last furnishing, but it will have limited effectiveness.

Missouri

If you have contracted with the owner on a private commercial project in Missouri, you should serve a Notice to Owner upon the owner prior to receiving payment and: at the time of the execution of the contract, or when materials are delivered, or when work is commenced, or deliver with first invoice. If you are providing rental equipment, a notice should be served upon the owner within 15 business days from first use of the rental equipment.

In Missouri, a Notice of Intent must be served at least 10 days prior to filing the lien. The lien should be filed within 6 months after the indebtedness shall have accrued. For rental equipment, if you use rented equipment in performing work, you should file the lien within 6 months after the indebtedness shall have accrued. If you rent the equipment to others, file the lien within 60 days after the date the last rental equipment was removed from the project.

Single Lien on Multiple Buildings?

In his article, Benson provides a typical example of a single construction contract for the construction of multiple buildings. Warning: you may have momentary flashbacks of middle school math problems.

“[A] general contractor may be asked to construct under one contract two buildings kitty-corner to one another at an intersection. During construction, materials delivered to the project site are jointly used on the two buildings and workers work on both buildings interchangeably. The general contractor completes construction on the first building on Jan. 1, 2019 and completes construction on the second building on Jan. 1, 2020. Based on the completion date of the second building of Jan. 1, 2020, the general contractor provides notice to the owner that it intends to file a mechanic’s lien on the two buildings. The owner refuses to pay and the general contractor files a mechanic’s lien covering both buildings within the necessary statutory period based on the completion date of the second building.”

The ultimate question: does the contractor have lien rights on both buildings?

Much to the dismay of the contractor, lien rights do not exist on the first building, whether the construction is in IL or MO, but for different reasons.

In Illinois, one lien can be filed on multiple, non-contiguous lots, as long as “’[I]t is shown that such material was in good faith delivered at one of these buildings for the purpose of being used in the construction of any one or all of such buildings, or delivered to the owner or his or her agent for such buildings, to be used therein[.]” 770 Ill. Comp. Stat. Ann. 60/7.” However, as Benson tells us, the contractor’s lien is invalid on building one, because the contractor failed to file the lien timely.

“Illinois requires that one file a mechanic’s lien within the statutory period following the completion of the first building and each subsequent building…. Therefore, the general contractor’s lien on the first building fails because the lien was not timely filed… to have lien rights on both buildings, the general contractor needed to file its mechanic’s lien within four months of completion of the first building and then file an updated mechanic’s lien within four months of completion of the second building.”

What about Missouri? Benson advises the lien rights on building number 1 would be non-existent in Missouri because Missouri “…requires that those buildings be “united together and situated upon the same lot or contiguous lots, or separate buildings upon contiguous lots” and that they are erected under one general contract. Mo. Ann. Stat. § 429.040.”

So, the question in this case is whether a shared corner constitutes contiguous lots. The answer, unfortunately, is no. Benson states that Missouri courts have determined lots are contiguous if they share a common side, and a “side” is not a “corner.”

No Two States are Alike

Whether contiguous, like Illinois and Missouri, or not, like New York and California, lien rights and the validity of a lien will be different based on the state’s statutory requirements. As a best practice, review the statute up front, seek guidance at the onset of the project, and always allow enough time to determine and secure the rights available.

South Carolina Lien and Bond Claim Rights

Posted on October 15, 2018 by - Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

South Carolina Mechanic’s Lien and Bond Claim Rights – Here’s What You Should Know

Furnishing to a construction project in South Carolina? Today’s post is for you! We will review the statutory requirements for securing mechanic’s lien and bond claim rights for projects in South Carolina.

I Love South Carolina!

Each fall I take a trip to North Myrtle Beach with a side trip to Charleston and it is, hands down, the greatest week. And I’m not the only one that has a fondness for S.C., after all, there is a great deal of construction happening there! Unfortunately, with a lot of construction, payment issues are bound to creep in. Make sure you take the proper steps to secure your right to recover payment.

South Carolina is a Notice of Commencement State

On private and public projects, the prime contractor (or payment bond principal) may file and post a Notice of Project Commencement within 15 days from the commencement of work. If the prime contractor doesn’t file a Notice of Project Commencement, a Notice of Furnishing isn’t required.

Private Projects in South Carolina

Remedies available on private projects include mechanic’s liens and potentially a bond claim. Securing mechanic’s lien rights begins with serving a Notice of Furnishing upon the prime contractor as soon as possible. The lien, when later filed, will be limited to the amount owed by the prime contractor at the time the Notice of Furnishing was received.

As a best practice, you should always serve the Notice of Furnishing, even if it’s not required. When might a notice not be required? Your notice may not be required if you contracted directly with the owner or prime contractor, or, as stated above, if a notice of commencement was not recorded.

What information should be included in the Notice of Furnishing? Here’s the list, according to S.C. Code Ann. Sec. 29-5-20:

(1) the name of the sub-subcontractor or supplier who claims payment;
(2) the name of the person with whom the claimant contracted or by whom he was employed;
(3) a description of the labor, services, or materials furnished and the contract price or value thereof. Materials specially fabricated by a person other than the one giving notice and the contract price or value thereof shall be separately stated in the notice;
(4) a description of the project where labor, services, or materials were used sufficient for identification;
(5) the date when the first and the last item of labor or service or materials was actually furnished or scheduled to be furnished; and
(6) the amount claimed to be due, if any.

If necessary, you should file your lien and statement of account within 90 days from your last furnishing.  In the event you remain unpaid, you must file suit to enforce the lien within 6 months from your last furnishing date. Miss the suit date? Lose your lien.

(A) Unless a suit for enforcing the lien is commenced and notice of pendency of the action is filed within six months after the person desiring to avail himself of it ceases to labor on or furnish labor or material for the building or structure, the lien must be dissolved. (S.C. Code Ann. Sec. 29-5-120)

Is the private project bonded? You should serve a Notice of Furnishing upon the principal of the bond as soon as possible. Then, much like the lien, the bond claim, when later filed, will be limited to the amount owed by the principal of the bond at the time the Notice of Furnishing was received.

You should serve your bond claim upon the principal of the bond within 90 days from your last furnishing. If the bond claim does not prompt payment, you should proceed with suit to enforce your bond claim after 90 days from your last furnishing, but within 1 year from last furnishing.

You can view statute in greater detail here: Private Bond Claim (S.C. Code Ann. Sec. 29-5-440)

Public Projects in South Carolina

Payment bonds protect claimants on public S.C. projects. Generally, the prime contractor is required to obtain a payment bond for public highway construction projects exceeding $10,000, government contracts exceeding $50,000, and state procurement contracts exceeding $100,000.

As a best practice, always attempt to obtain a copy of the payment bond!

Like private projects, a Notice of Furnishing should be served for public projects as soon as possible. The bond claim, when later served, will be limited to the amount owed by the principal of the bond at the time the Notice of Furnishing was received.

For those who remain unpaid, a bond claim should be served within 90 days from last furnishing, and suit to enforce the bond claim should be filed after 90 days from last furnishing, but within 1 year from last furnishing.

If you are furnishing to a public highway construction project, you should file suit to enforce your bond claim within 1 year from the date of final settlement. “No suit under this section shall be commenced after the expiration of one year after the date of the final settlement of the contract.” (Sec. 57-5-1660)

Retainage, Prompt Payment, Pay If Paid & Discharge Bonds

3.5% is the magic number on S.C. public projects. In accordance with statute, the amount of retainage to be withheld “must be no more than three and one-half percent” of a contract or subcontract for construction.

South Carolina’s statute does provide for prompt payment. The owner should remit payment within 21 days and the contractor should then pay its subcontractors within 7 days of receipt of payment from the owner.

“When a contractor or a subcontractor has performed in accordance with the provisions of his contract, the owner shall pay the contractor…within twenty-one days of receipt by the owner of any pay request based upon work completed or service provided under the contract, and the contractor shall pay to his subcontractor and each subcontractor shall pay to his subcontractor, within seven days of receipt by the contractor or subcontractor of each periodic or final payment…”

Pay if Paid clauses are a no-go in South Carolina, according to Sec. 29-6-230:

“The payment by the owner to the contractor or the payment by the contractor to another subcontractor or supplier is not, in either case, a condition precedent for payment to the construction subcontractor. Any agreement to the contrary is not enforceable.”

Lastly, Sec. 29-5-110 addresses discharging liens with the posting of a payment bond or other security.

“At any time after service and filing of the statement required under Section 29-5-90 the owner or any other person having an interest in or lien upon the property involved may secure the discharge of such property from such lien by filing … by cash or by a surety bond executed by a surety company licensed to do business in this State, and upon the filing … lien shall be discharged and the cash, securities or surety bond deposited shall take the place of the property upon which the lien existed and shall be subject to the lien.”

Questions about lien or bond claim rights in South Carolina? Contact us today!

Arbitration is Alternative Dispute Resolution

Posted on October 12, 2018 by - Credit Risk Management, In Other Commercial Credit News

Dispute Resolution Alternative: What is Arbitration?

Arbitration, like mediation and adjudication, is a form of alternative dispute resolution and is typically favored in lieu of litigation. Generally, in arbitration an impartial third party listens to each side of the dispute and makes a decision resolving the dispute.

It’s important not to confuse arbitration with mediation, which, admittedly, I initially did. The American Bar Association notes “Arbitration is different from mediation because the neutral arbitrator has the authority to make a decision about the dispute.” In mediation, the third party is present to facilitate the conversation, rather than offer resolution.

The American Arbitration Association explains arbitration as “A private, informal process by which all parties agree, in writing, to submit their disputes to one or more impartial persons authorized to resolve the controversy by rendering a final and binding award.”

In most contracts, construction & otherwise, you will find an arbitration clause. On its website, American Arbitration Association provides visitors with the following standard construction arbitration clause.

“Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association under its Construction Industry Arbitration Rules, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.”

Clause is Present, Suit Dispute

Despite the presence of an arbitration clause within a contract, one or more parties involved in a dispute may file a lawsuit. Once a lawsuit has been filed, someone may file a motion to dismiss the lawsuit, based on the arbitration clause within the contract. However, according to a recent article by Robert Cox of Williams Mullen, once the court is involved, it’s up to a judge to determine whether the dispute should be arbitrated by the court or by an arbitrator.

“A court resolving an arbitrability dispute must engage in a two-step inquiry… First, the court must determine who decides whether a particular dispute is arbitrable – an arbitrator or the court. Second, if the court determines that it is the proper forum to adjudicate the arbitrability of the dispute, then the court must decide whether the dispute is in fact arbitrable.”

Cox goes on to say a dispute is suited for the courts unless the language within the contract “clearly and unmistakably provides that the arbitrator shall determine what disputes the parties agreed to arbitrate.” Further, according to Cox, courts have frequently determined “… that incorporation of the American Arbitration Association’s (AAA) arbitration rules constitutes clear and unmistakable evidence that the parties agreed to arbitrate arbitrability.”

When Arbitration Won’t Be Arbitrated, Arbitrarily

There may be circumstances when a judge will determine an arbitrator should not preside over a dispute. According to Cox, several U.S. Courts of Appeals have used a test called “wholly groundless” to determine whether arbitration is appropriate. What is “wholly groundless”? Essentially, if the claim is frivolous or deemed unlawful.

Parting Thoughts

There are many benefits to arbitration. Arbitration may be a faster and less expensive process than formal litigation; plus, in binding decisions, an arbitrator’s decision will be upheld by courts.

I admit, the arbitration clauses are a bit foreign to me, but I found The AAA Guide to Drafting Alternative Dispute Resolution Clauses for Construction Contracts, published by American Arbitration Association to be quite insightful. It appears American Arbitration Association maintains an industry standard for arbitration clauses, though as a best practice you should seek legal guidance when drafting and/or signing an agreement.

Mechanic’s Lien and Bond Claim Rights in U.S. Possessions

Posted on October 1, 2018 by - Mechanic's Liens & Bond Claims

Securing Mechanic’s Lien and Bond Claim Rights in the U.S. Possessions – Guam, Puerto Rico & the Virgin Islands

Recent natural disasters have left two U.S. possessions, Puerto Rico and the Virgin Islands, in a vulnerable state. These possessions are now undergoing tremendous rebuilding endeavors.  As a result of this recovery, there is inevitable risk for any party involved with the construction process. Did you know that you may have lien or bond claim rights in Guam, US Virgin Islands and Puerto Rico? We don’t often discuss the U.S. Possessions on our blog, but today let’s review statutory requirements for each.

Guam

Private Projects

You should serve a preliminary notice upon the owner within 20 days from first furnishing. A late notice may be served, but the lien, when later filed, will only be effective for materials and services provided 20 days prior to serving the notice and thereafter. You should file the lien within 90 days from last furnishing materials or services. If a Notice of Completion is properly recorded and published, the filing of the Notice of Completion may shorten the deadline for filing the lien to 45 days from the filing. If you need to proceed with suit, file suit to enforce the lien within 90 days from filing the lien.

Public Projects

There is no statutory preliminary notice required, however, we recommend you serve a non-statutory notice. Serve bond claim notice upon the prime contractor within 90 days from last furnishing. File suit to enforce the bond claim after 90 days from last furnishing materials or services, but within 1 year from last furnishing materials or services.

Puerto Rico

Private Projects

There is no statutory provision for filing a mechanic’s lien or materialman’s lien. You should investigate to determine whether there is a payment bond on the project, and attempt to obtain a copy of the bond to determine coverage.

Public Projects

There is no statutory preliminary notice required, however, we recommend you serve a non-statutory notice. Serve the bond claim notice upon the prime contractor at least 30 days prior to filing suit, which is due within 6 months after final acceptance of the project. File suit to enforce the bond claim after 30 days from serving the bond claim notice, but within 6 months after final acceptance of the project. When contracting directly with the prime contractor, suit may be filed at any time within 6 months after final acceptance of the project

Virgin Islands

Private Projects

Serve notice of right to claim lien on the owner and general contractor any time after entering into a contract. The lien will attach to the funds unpaid by the owner to the general contractor any time after entering into a contract. File the mechanic’s lien within 90 days from last furnishing and file suit within  90 days from filing the lien.

Public Projects

There is no statutory preliminary notice required, however, we recommend you serve a non-statutory notice. Serve a bond claim notice in accordance with the terms and conditions of the payment bond. Frequently, a bond claim notice is required within 90 days from last furnishing materials or services. When filing suit to enforce the bond claim in accordance with the terms and conditions of the payment bond. Frequently, suit to enforce the bond claim is required within 1 year from last furnishing materials or services. It is recommended to withdraw a satisfied bond claim.

Federal Projects

Not furnishing to a private or public project?  Don’t worry! If you are dealing with federal construction projects, the Miller Act applies in all three possessions. For more information on the Miller Act check out this blog post!

Although it may not come up often, knowing how to secure your rights in the U.S. Possessions could benefit you down the road. As a best practice, if you are furnishing to a U.S. Possession, ensure you have ample time to confirm whether a bond has been provided as well as time for title work to confirm property ownership. You should also be prepared for hourly fees, simply based on remote location.

If you’re interested in learning more about securing mechanic’s lien or bond claim rights? Contact us!

Alaska Mechanic’s Liens and Bond Claims

Posted on September 24, 2018 by - Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

Here’s What You Should Know About Alaska Mechanic’s Liens and Bond Claims

I’ll admit, I know very little about Alaska. Juneau is the capital, there’s a folk song titled Anchorage, and on a clear day you may be able to see Russia. But something I know very well? Mechanic’s lien and bond claim rights! In this post I will review the statutory requirements for securing lien and bond claim rights for projects in Alaska.

Alaska | Private Projects and the Notice of Right to Lien

For those furnishing to private projects in Alaska, a Notice of Right to Lien may be served upon the owner or the owner’s agent prior to furnishing. The Notice of Right to Lien obligates the owner to provide notice before filing a notice of completion and places a burden of proof on the owner to show that they did not know of or consent to the furnishing of materials or services.

The Notice of Right to Lien may be recorded any time after entering into a contract or first furnishing, but within 15 days from the recording of a notice of completion. Recording the notice prevents the owner from shortening the period in which the lien must be filed. The owner, lender or prime contractor may request an accounting of the amount due and a description of materials and services provided, in response to the Notice of Right to Lien. If a party makes this request, you must respond within 5 days.

Alaska | Private Projects Lien & Suit

A mechanic’s lien should be filed within 120 days from last furnishing and within 15 days from the filing of a notice of completion. The filing of a notice of completion will not shorten the lien deadline if a Notice of Right to Lien was served, but the owner failed to provide notice of the filing of the notice of completion, or if a Notice of Right to Lien was recorded.

If you need to enforce your lien claim, you should file suit within 6 months from the filing of the lien. An extension to file suit can be filed within 6 months from filing the lien, extending the deadline for suit to enforce the lien to 6 months from filing the extension.

Alaska | Private Projects and the Stop-Lending Notice

In addition to mechanic’s lien rights, a stop-lending notice may be an available remedy on private projects. Just as with mechanic’s lien rights, a Notice of Right to Lien may be served upon the owner or the owner’s agent and the lender prior to furnishing materials or services. Serving the notice is not a prerequisite to serving a stop-lending notice, however, a lender receiving the notice must notify the claimant if the lender is not providing construction financing.

You should serve the stop-lending notice upon the lender, owner, and prime contractor at any time after payment is due. Once served, the lender is required to cease providing construction financing. A lender who disburses construction financing after receiving a stop-lending notice is liable to the claimant. If necessary, file suit to enforce the stop-lending notice and notify the lender of the action within 90 days from the date the lender received the stop-lending notice.

Alaska | Public Projects and the Bond Claim

Generally, there is no required preliminary notice for securing bond claim rights, though a non-statutory notice is recommended. For public projects in Alaska, a payment bond may be required for general contracts exceeding $100,000 and, under certain conditions, a municipality may exempt contractors from the requirement to obtain a bond for projects not exceeding $400,000. If a payment bond has not been issued, the public entity may withhold final payment to the general contractor until the contractor files a certification that all persons who supplied labor or materials have been paid.

If a payment bond has been supplied, serve a bond claim upon the prime contractor within 90 days from your last furnishing date. If you have contracted directly with the prime contractor, the bond claim notice is not required, but is still recommended.  If needed, file suit to enforce the bond claim after 90 days from last furnishing materials or services, but within 1 year from final settlement of the contract.

“Alaska the Questions Here”

(Get it… Alaska = I’ll Aska the Questions Here… No? OK then)

There are a couple other points of interest. There are other types of liens available, including liens on dump or mass of mineral, mines and oil wells, mills and machines.  Please keep in mind, these liens are separate from mechanic’s lien remedies, and may require additional title work and attorney time. Specifically, mines and oil wells often span multiple parcels, counties & even states. Additionally, liens can be bonded off. Under Sec. 34.35.072, if a lien has been filed, the property owner or contractor can record a payment bond in the amount of 1.5 times of the lien claim amount, and the property will be freed from the lien.

Questions about securing rights in Alaska? Contact us!

Protect Lien Rights: Who is Served Iowa Preliminary Notice

Posted on September 21, 2018 by - In Other Commercial Credit News

Mechanic’s lien rights are available on commercial and residential projects in Iowa, however, securing lien rights requires compliance with statute. One sub-subcontractor failed to serve its preliminary notice on the owner and the GC, as prescribed by statute, and its lien was invalidated.

Mechanic’s Lien Rights & Iowa Commercial Projects

If you are furnishing to a commercial project in Iowa, you should serve the preliminary notice upon the contractor within 30 days after first furnishing materials or services. If you have contracted directly with the owner or prime contractor, the preliminary notice is not required.

Should you need to proceed with a lien, you should post the lien to the Mechanics’ Notice and Lien Registry within 90 days from last furnishing materials or services.  (The administrator will serve a copy of the lien upon the owner.) If posting a lien to the Mechanics’ Notice and Lien Registry after 90 days from last furnishing materials or services, serve a notice of the lien upon the owner.  The lien will be enforceable for the amount owed by the owner to the prime contractor at the time the notice of the lien is served.

To proceed with suit, post suit to enforce the lien on the Mechanics’ Notice and Lien Registry within 2 years from the 90-day lien filing period or within 30 days from the receipt of a demand to commence suit.

Iowa is Specific and a Recent Court of Appeals Decision Confirms It

Iowa statute is quite specific; if you fail to serve a required preliminary notice, you will not have lien rights.

572.33 Requirement of notification for commercial construction.

2. A person furnishing labor or materials to a subcontractor shall not be entitled to a lien under this chapter unless the person furnishing labor or materials does all of the following:

a. Notifies the general contractor or owner-builder in writing with a one-time notice containing the name, mailing address, and telephone number of the person furnishing the labor or materials, and the name of the subcontractor to whom the labor or materials were furnished, within thirty days of first furnishing labor or materials for which a lien claim may be made. Additional labor or materials furnished by the same person to the same subcontractor for use in the same construction project shall be covered by this notice.

b. Supports the lien claim with a certified statement that the general contractor or owner-builder was notified in writing with a one-time notice containing the name, mailing address, and telephone number of the person furnishing the labor or materials, and the name of the subcontractor to whom the labor or materials were furnished, within thirty days after the labor or materials were first furnished, pursuant to paragraph “a”.

John Lande recently wrote a recap of the LM Construction, Inc. v HGIK Hospitality LLC case, in his article Sub-Subcontractor Loses Mechanic’s Lien Rights. In this case, the general contractor was hired to build a hotel. The general contractor hired a subcontractor, who in turn hired a sub-subcontractor to install drywall.

During construction, the subcontractor was removed from the project and the general contractor began working directly with the sub-subcontractor. Once the work was completed, the general contractor refused to pay the sub-subcontractor, and the sub-subcontractor filed a lien.

According to Lande, the sub-subcontractor served its preliminary notice upon the owner but not upon the general contractor.

Iowa statute states “notifies the general contractor or owner-builder in writing” so, the sub-subcontractor tried to argue the notice it served was upon the owner-builder, which would satisfy statutory requirements. Unfortunately for the sub-subcontractor, the court determined the property owner was not an owner-builder, and since the sub-subcontractor did not serve the general contractor with a copy of the notice, no lien rights existed.

There was some confusion between the parties on the ladder of supply, based upon contractual language. Allegedly the subcontract identified the subcontractor as a general contractor, which as Lande observes, is a bit misleading. Because contracts and contractual language can be muddled or misinterpreted, Lande provides the following advice:

“Contractors should take time at the beginning of a project to identify the hierarchy between contractors, and identify the contractor with a contract directly with the property owner. This due diligence will reveal the identities of the parties who need to receive notice to protect a contractor’s mechanics’ lien rights.”

This is good advice for any party on any project in any state. Knowing the parties within the ladder of supply is critical for lien rights, however, it should be equally as important to credit granting decisions. Knowing in advance that the general contractor was tangled up in liens on other projects would alert you to take precautions when contracting for the project – even if your direct contract was with a sub.

Articles, Blogs & Commentary Are No Substitute

Parting advice from Lande “… [K]eep in mind that the mechanics’ lien law is full of traps for the unwary. Articles and blogs about the law are no substitute for consulting with a knowledgeable attorney, because the circumstances of your situation may have a slight difference that has important consequences for your mechanics’ lien rights. You should always consult with an attorney about mechanics’ lien questions.”

I say it often: when in doubt, seek a legal opinion!

Progress Payments Have Stopped, Now What?

Posted on August 31, 2018 by - In Other Commercial Credit News

Progress Payments Have Stopped, Now What Should You Do?

Progress payments are payments made as work progresses under a contract, upon the basis of costs incurred, percentage of completion accomplished, or a specific stage of completion. Progress payments may be made from the owner to the general contractor, the general contractor to its subcontractors/suppliers, the subcontractor to its suppliers, etc.

Progress payments have positive potential, as they can eliminate the need for various parties to finance a project. Unfortunately, if the progress payments stop, progress on the project may stop.

No Payment, Now What?

Julie Weller of Faegre Baker Daniels advises a contractor has two choices when an owner stops making payments: “It can either continue to perform the work or cease the work…” As you’d imagine, neither of these options is appealing for a multitude of reasons.

Weller’s article, Progress Payments: What to Do When the Money Stops Trickling In, focuses on the owner/general contractor dynamic. Ordinarily, NCS would recommend moving forward with a mechanic’s lien or bond claim, but Weller recommends carefully reviewing the contract and determining whether payment is “clearly due and owing.”

What’s in the Contract?

Contract terms can be tricky. Hidden among long legal sentences and paragraphs of tiny font you may find provisions regarding payment, suspension and termination.

Weller recommends carefully reviewing these provisions, as they may include notice requirements, and if ignored, the general contractor could be in breach of its contract.

“If the contract expressly states that the contractor must give notice of intention to stop work, the contractor must do so or it will be in breach of contract. Many contracts require the contractor to continue performance despite any ongoing dispute, even those that relate to payment. The contractor should consider the consequences if it does not make payment to its subcontractors – its failure to pay its subcontractors, despite not being paid by the owner, could be a breach of its contract with the owner and its contract with the subcontractors.”

Many of our clients, typically subcontractors and suppliers, come to us with the same story, “The GC says the owner isn’t paying him, so he can’t pay us.” This inevitably leads to the review of contracts for contingent payment clauses, and to  mechanic’s lien filings or enforcement of arbitration clauses. If I could plead a case to general contractors, I would beg you to continue paying parties you have hired!

Next Up: “Clearly Due & Owing”

Yikes, very few things are “clear” in construction, unless we consider mud to be clear. In her article, Weller states that an owner will not be held in breach of contract if the payment is not “clearly due and owing.” Further, in the long run on sentences & tiny font of the contract, there may be provisions allowing the owner to withhold money.

Weller provides the following situations which may permit the owner to withhold payment:

  • Defective work not remedied
  • Claims filed by a third-party
  • Failure of the contractor to pay its subcontractors
  • Reasonable evidence that the work cannot be completed for the remainder of the contract sum
  • Damage to the owner or another contractor
  • Reasonable evidence that the work will not be completed within the contract time, and the unpaid balance is not enough to cover damages for the anticipated delay
  • Persistent failure to carry out the work in accordance with the contract

It’s worth noting, the owner should only withhold the amount that corresponds to the circumstance. This means, if the owner is withholding payment because the contractor hasn’t paid its subcontractor, the owner can only withhold the amount of the subcontractor’s claim. Another example is if the contractor has successfully completed the foundation, but has failed to complete the piping, the owner can only withhold money for the incomplete piping.

A Demand to Commence Suit May Shorten Your Deadline

Posted on August 27, 2018 by - Credit Risk Management, Mechanic's Liens & Bond Claims

Did You Receive a Notice to Commence Suit? Your Suit Deadline May Be Shorter Than You Think

The mechanic’s lien and bond claim processes follow the same basic three steps: serve preliminary notice > file/serve mechanic’s lien/bond claim > file suit to enforce the mechanic’s lien/bond claim. You, the creditor, initiate the preliminary notice and lien/bond claim actions & you may initiate suit. However, you aren’t the only party that may initiate suit.

Notice to Commence Suit

In many states, the statute provides a remedy for an owner to shorten the deadline for a lien claimant to file suit: the owner can file a Notice to Commence Suit. When properly notified by an owner or the court, any lien claimant who receives a Notice to Commence Suit must proceed with suit by the deadline stated, or they will lose their lien rights. This process allows the owner to “thin out” those who may not have a valid claim.

Ohio Example

Although each statute may vary, here is an example of the Notice to Commence Suit in Ohio. Ohio has one of the longest periods in which a claimant can commence suit: 6 years from filing the lien, unless, the claimant has been served with a Notice to Commence Suit. A claimant has 60 days from being served with a Notice to Commence Suit to proceed with suit. If the claimant fails to proceed with suit, the lien is void.

If the lienholder fails to commence suit upon the lien within sixty days after completion of service upon him of the notice to commence suit, or if the action is commenced but dismissed with prejudice before adjudication, the lien is void and the property wholly discharged from the lien. When a lien is void by reason of failure to commence suit within sixty days after service of the notice to commence suit, the claim upon which the lien was founded is not prejudiced by the failure, except for the loss of the lien as security for the claim. – 1311.11 Notifying Lienholder to Commence Suit

Ohio ties with South Dakota, which also provides claimants 6 years from last furnishing materials or services to file suit. But, in South Dakota, if the claimant receives a demand to commence suit, the claimant must file suit within 30 days from receipt of the notice.

44-9-26.   Forfeiture of lien for failure to commence suit upon demand–Cancellation by register of deeds. Upon written demand by the owner, the owner’s agent, or contractor, served on any person holding a lien, requiring the person to commence suit to enforce the lien, the person shall commence suit within thirty days after such service or the lien is forfeited. The register of deeds shall cancel the lien of record, if the owner, the owner’s agent, or contractor files no sooner than the fortieth day following service of the written demand:

             (1)      An affidavit stating that the person holding the lien has not commenced suit to enforce the lien within thirty days after the service of the written demand;

             (2)      A copy of the written demand that was served on the person holding the lien; and

             (3)      Proof of service on the person holding the lien.

Florida & Georgia Examples

Generally, for private projects in Florida, a lien claimant should file suit to enforce its lien within 1 year from the filing of the lien. However, the property owner can shorten that 1-year period to 60 days, if it files a Notice of Contest of Lien.  (You can find the following in FL’s statute, section 713.22 Duration of Lien)

NOTICE OF CONTEST OF LIEN

To: (Name and address of lienor)  

 You are notified that the undersigned contests the claim of lien filed by you on  ,   (year)  , and recorded in   Book  , Page  , of the public records of   County, Florida, and that the time within which you may file suit to enforce your lien is limited to 60 days from the date of service of this notice. This   day of  ,   (year)  .

 Signed: (Owner or Attorney)  

 The lien of any lienor upon whom such notice is served and who fails to institute a suit to enforce his or her lien within 60 days after service of such notice shall be extinguished automatically. The clerk shall serve, in accordance with s. 713.18, a copy of the notice of contest to the lien claimant at the address shown in the claim of lien or most recent amendment thereto and shall certify to such service and the date of service on the face of the notice and record the notice.

Georgia is quite like Florida. In fact, the suit period in Georgia is also shortened to 60 days, with the filing of a Notice of Contest of Lien. What’s the difference? Well, the verbiage for the Georgia Notice of Content of Lien is slightly different than Florida’s. Florida statute says to file suit within 1 year from filing the lien and Georgia statute says to file suit within 365 days from filing the lien – note the difference – it is more than semantics!

You can access Georgia’s statute on the Notice of Contest of Lien here: O.C.G.A. § 44-14-368

Summons & Complaint, Answer & Cross Claim

Another action that can change your suit deadline is when another claimant files suit to foreclose on the property. When filing suit, the plaintiff must notify all other parties with an interest in the property that an action to foreclose is being filed. This filed document is often referred to as a Summons and Complaint.

At first glance, the Summons and Complaint may cause the unwary to believe they are being sued. The Summons and Complaint is a legal action which requires all lien claimants to join in the foreclosure action within a specific time frame, by submitting an Answer and Cross Claim.

Frequently an Answer and Cross Claim is required in as little as 20 days from receipt of the Summons and Complaint. If a lien claimant does not respond by the deadline, lien rights may be lost.

Litigation: Mapped Out

Litigation can get quite confusing, here’s a mapped view of an average litigation.

*This chart is for demonstration purposes only and is in no way a guarantee of any particular outcome. NCS does not engage in rendering legal advice. All options should be reviewed by your corporate counsel.

Seek Legal Guidance!

When a Notice to Commence Suit or a Summons and Complaint is received by your office, in response to a lien that was filed on your behalf, we recommend taking immediate steps to retain the services of an attorney to protect your rights.