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Mechanic's lien rights for design professionals

Mechanics lien rights for A/Es

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Do you know your lien rights? Mechanic’s liens are powerful tools that can help you collect your unpaid fees. But some clients may want you to waive your lien rights in their contracts.

For workers on a project, one of the most effective instruments for collecting unpaid fees is the mechanic’s lien. These liens create a security interest—a claim, really—on a title to property to help ensure payment for labor or materials provided to improve the property. In simple terms, the lien attaches to the title of the property on which a project is located, so that if the owner of the property fails to pay someone who has improved the property, the property is encumbered with that debt. The owner can’t borrow on or convey the property until the encumbrance is removed.

The first mechanic’s lien statute in the U.S. was enacted in Maryland in 1791, giving rights to the builders and artisans constructing Washington, D.C. (In those days, the word “mechanics” referred to skilled workers and artisans.) Now, contractors, subcontractors, material suppliers, equipment renters, workers, surveyors and other parties who contribute services or materials to a construction project have a right to such a lien in every state. (Readers in Canada should see the sidebar, “Builders liens in Canada.”)

Property owners have a powerful incentive to quickly resolve a mechanic’s lien because a property typically cannot be sold while a lien is in effect. Anyone doing a title search would see there is a “cloud” on the title, and any new owner would be held responsible for addressing liens attached to the property.

Are mechanic’s liens available to design professionals?
Generally, yes. Mechanic’s liens are governed by state statute. While most states treat A/Es the same way they regard contractors and material suppliers, a few restrict the application of mechanic’s liens by A/Es. A very few states—Alabama, Ohio, Kentucky and Vermont—largely bar design professionals from lien rights.

In a half-dozen states, A/Es are treated somewhat differently. California, for example, allows A/Es to file a mechanic’s lien and a design professional lien, which covers services provided prior to construction. In Utah, pre-construction service liens are available as well as construction service liens.

Are lien rights and requirements the same for A/Es in every jurisdiction?
No. Where allowed, rights and requirements vary significantly as to who can obtain a lien, when and how a lien must be filed or recorded, what information must be provided, and what notices must be given.

Depending on the jurisdiction, lien rights often hinge on the A/E’s project role and who hired them. Some lien laws provide lien rights only to parties in direct contractual privity with the real property owner. For example, in some places, while a prime consultant may have lien rights, a subconsultant mechanical engineer may not. Or an A/E might not have lien rights if they perform services where the client only holds a leasehold interest on the property, e.g., when a restaurant leases space from the owner and then hires an architect to design the space.

Mechanic’s lien rights often hang on whether or not the A/E’s services are considered to have improved the property. Whether something is an “improvement” for the purposes of mechanic’s liens can be a tricky question of fact and law. The A/E who provides professional services (as compared to materials or labor) before construction actually begins may hear the owner argue that the design services did not actually improve the property. Similar issues can arise if a project is terminated before construction. Again, each jurisdiction handles these situations differently.

On what types of projects can a mechanic’s lien be recorded?
Private projects, mostly. But states differ on the types of property on which a mechanic’s lien can be filed.

Federally-owned public lands are not generally subject to mechanic’s liens. Instead, under the Miller Act, general contractors on federal projects furnish payment bonds to protect those who supply work or materials to such projects.1  Often, A/Es who provide services can make claims under the payment bond required by the act.

Most states have similar statutes (“Little Miller Acts”) for state and local public works projects, but each state differs. The requirements for notification and filing also differ from those on private projects.

How can you preserve your rights?
The enforcement of lien rights is typically governed by strict timelines set by state provisions, so you must promptly follow the required procedures or risk voiding the lien. Some statutes require exact language, even in specific fonts (honest!).

Be aware that the more participants who have liens on a property, the more the value of the lien is diluted. There is also a priority order associated with lien rights. In most states, priority is set by timing—those providing value first get paid first. Additionally, if the owner has filed for bankruptcy protection, those who have filed a lien are often given priority to receive payment over other parties.

What if your client wants you to waive your lien rights by contract?
If the client wants you to give up the right to file a lien in the future, we strongly suggest you refuse.

You might, however, agree to sign a release of lien rights (which, unlike a waiver, cancels a lien) under certain circumstances. For example, you could agree to release your rights after you’ve been paid all your fees. Just make sure that any release you sign is related to payment of invoices, and not a general release for any and all claims arising from third-party claims. Before giving up any of your rights, talk to your lawyer.

 

" If the client wants you to give up the right to file a lien in the future, we strongly suggest you refuse. 

 

In any case, a waiver may not be enforceable in your jurisdiction. Several states, including California, Florida, Nevada, New York and Texas find a contractual waiver of lien rights to be unenforceable. Other states may allow it or have no explicit law, or have a law that’s unclear.

It may also be possible, in states where you have lien rights, to strengthen those rights in your contract. Your lawyer may be able to suggest language to add to your contract to accomplish this. This is especially important if the client isn’t financially robust or has a less-then-stellar credit history. (Although you might ask yourself why you’re working for these clients.)

The bottom line
Lien laws can be powerful weapons in your collection arsenal. They can also be useful when pursuing a fee claim, by putting pressure on the owner from third parties such as lenders, investors and buyers.

Like most weapons, however, they should be considered as a last resort. All too often, the client will countersue, alleging errors or omissions in your services as a legal maneuver to cancel payment, and it’s far better to employ preventive measures to avoid the problem in the first place. That means negotiating contract language with "teeth" and following a consistent, well-designed billing and collection system. (See the sidebar, “Resources.”)

Regardless, get the advice of a lawyer knowledgeable about construction law and liens for design professionals in your jurisdiction.

Finally, get involved. If your jurisdiction bars lien rights for A/Es or if the state law is weak or unclear, work with your state and national professional associations to gain or strengthen those rights.

Builders liens in Canada

In Canada, mechanic’s liens are also referred to as builders or construction liens.

In common-law provinces, statutes require owners to retain a certain amount as a "holdback" for the benefit of the subcontractors and suppliers to the contractor. The holdback is retained until the contract reaches substantial completion, when it’s released to the contractor. In Québec, the legal or construction hypothec is comparable to builders and mechanic’s liens.2 Canadian design professionals have rights to liens in certain circumstances.

Because each jurisdiction is different, it’s important to be familiar with the laws in your province or territory: Builders Lien Act (BC), Builders’ Lien Act (AB),The Builders’ Lien Act (Sask),Builders’ Liens Act (Man),Construction Act (ON),Mechanics’ Lien Act (NB),Builders’ Lien Act (NS),Mechanics’ Lien Act (PEI),Mechanics’ Lien Act (NFLD),Builders Lien Act (YT),Mechanics Lien Act (NWT),Mechanics Lien Act (NU), Civil Code of Québec (QC).

 

 

Resource and Footnotes:
Andrew J. O’Brien and Ted Betts, “Construction Legislation Reform in Canada: Prompt Payment,” The Canadian Bar Association, April 23, 2018

1  The Miller Act (40 USC §270(a)) was enacted to require that general contractors on federal projects furnish payment bonds for the protection of those who supply work or materials to such projects.

2  Article 2726 of the Civil Code of Québec provides that a legal hypothec is acquired “in favour of persons having taken part in the construction or renovation of an immovable. It exists only in favour of the architect, engineer, supplier of materials, workman and contractor or subcontractor for the work requested by the owner of the immovable, or for the materials or services supplied or prepared by them for the work.”

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