Mechanics’ Liens, despite the potentially misleading name, give contractors* a right to repayment for the labor, materials, and services provided to the client for constructing or modifying buildings and structures. When an owner defaults on a project, contractors and subcontractors often find themselves scrambling to get paid for services they provided under the terms of a binding contract. When payment becomes an issue, smart contractors engage counsel early in the process, when payments become an issue, to preserve their rights, and secure a higher position in the payment order to mitigate their losses. Contractors with perfected liens may institute foreclosure proceedings to secure payment.
This makes retaining expert counsel as early as possible pivotal once a project goes bust. The foreclosure lawsuit seeks to attach a lien to new buildings, repairs, rebuilds, or improvements in order to extract value out of the structure after a foreclosure sale. These liens have broad coverage, and arise through a process governed by state statute. State statute also dictates the order of repayment.
*The word “contractor” is used throughout this article as a convenient term for categorizing builders, subcontractors, suppliers, and any other business providing a specialized service into one group.
How Do You Establish a Lien?
Many states make liens an available option on the date upon which contractor begins work, or provides similar services, on the building. Maryland is unique because the contractor must petition the court of the county in which building is located to schedule a hearing. The contractor must first serve the owner with a Notice of Intent to Lien within 120 days following the completion of work. Then, the petition to establish the mechanics’ lien must be filed with the court within 180 days following the completion of work. In addition, the petition must contain a legal description of the building that is the target of the lien (usually, a mailing address satisfies the requirement to identify the building). After a successful hearing before the court, the judge will issue an order declaring a lien exists as of that date.
What Does a Mechanics’ Lien Cover?
The lien applies to a building and any appurtenant land (land necessary for the ordinary and useful purposes of that building). Maryland statute provides landowners the opportunity to draw the boundaries of appurtenant land, limiting the lien’s coverage and binding all parties seeking to establish a lien. A lien can also attach to property interests besides buildings. A contractor can establish a lien over a tenant’s interest in a lease if the work (where ordered by the tenant) improves the building by at least twenty five percent (25%) of its value, permitting a foreclosure on the leasehold in the event of default. If an owner of leased property ordered the work, the contractor need only show their work improved the building by fifteen percent (15%) of its value. A contractor can easily establish a lien over multiple buildings if they are all covered under a single work contract, even if the contractor has only commenced work on one of them. This situation commonly arises during construction of a subdivision.
Maryland statute liberally defines what constitutes a new building suitable for a lien. As long as the building is used and occupied for habitation or some trade or business, it most likely is suitable for a lien. The only type of building expressly excluded from a lien, is one owned by the state. The state’s immunity from suit justifies this treatment, meaning virtually all attempts to establish a lien on state property fail.
Establishing a lien on repairs or improvements can at times prove a little more difficult, but not impossible. Under Maryland law, the contractor has to show that the labor and supplies expended improved the building’s value by at least fifteen percent (15%). Maryland case law is generally permissive as to the valuation method the parties use to arrive at that fifteen percent threshold. Generally, an appraisal of the building after the improvement’s completion suffices.
As far as geography is concerned, a lien applies in the county in which the building it covers sits. If a contractor wants to establish a lien on buildings that span more than one county, they must file petitions in each of the relevant counties.
In What Order of Importance are Mechanics’ Liens Paid?
Maryland follows a “first in time, first in right” scheme in deciding who gets paid first out of the proceeds of the sale of a building. The payment order depends on the order in which claimants were issued their court orders establishing a lien. There are some exceptions, though, that bypass this process. Below are a handful of examples of these kinds of exceptions.
Most residential homebuyers have an advantage over contractors, for they are able to take the property free of the lien on any buildings. When a homebuyer contracts to buy a home prior to construction, they take the property free of the lien. This is generally the case when a homebuyer enters into a contract to purchase the property before the contractor filed a petition to establish a lien. Yet, a properly filed petition will put a purchaser on notice that a mechanics’ lien will be perfected later. The burden then falls on the contractor to show the purchaser had knowledge of the lien at the time title to the property was transferred.
Other government-imposed liens can also supersede a mechanics’ lien. For example, a tax lien always comes before a mechanics’ lien. Bankruptcy too can frustrate contractors’ efforts to perfect their liens. A mechanics’ lien has to be established at least ninety (90) days before the filing of the bankruptcy petition in order for the contractor to remain a secured creditor. Otherwise, the contractor falls to the bottom of the payment order with general creditors.
What sets apart a secured contractor from an unsecured contractor is their diligence in filing their petition as soon as they start work. Diligent contractors will account for all their manpower and supply costs, and retain counsel in the county they are seeking a lien. This way, smart contractors can protect their interests and preserve their rights over other creditors, and recover the payments due to them first if principals default.
Joseph M. Fiocco is a legal extern with JDKatz, P.C., completing his third year of law school at the University of Maryland Carey School of Law.