How Can Contractors Collect on a Mechanic’s Lien?
Mechanic’s liens were created to protect contractors and subcontractors who have supplied their labor and materials to a project so that their efforts are paid. Before a contractor can collect on a mechanic’s lien, he or she must be certain that all preconditions for recording the lien have been met.
First, as a contractor you must serve a 20-day Preliminary Notice on the owner, general contractor and lender. If you have a contract with the owner regarding the improvements and payment, a lien notice is not required. Otherwise, serve the Notice when you begin the work.
A special form is needed or you may be barred from collecting anything. You can file a late Notice but your lien rights will only go back 20 days. You can only file a lien if you ensure that the owner has “knowledge” that the work of improvement has begun. Knowledge can be imputed from having work being visibly performed.
Second, record the lien in the County Recorder’s Office where the real property is located. You may want to use a lien filing service to ensure the recording is done properly with the correct form. In recording your lien, pay attention to the following time periods:
After recording your Notice of Completion, you have 60 days to record your lien if you are an original contractor. If a subcontractor, you have 30 days.
If a Notice of Cessation is recorded and after 30 days have passed since this Notice was recorded, you have 60 days to record your lien, or 30 days if a subcontractor.
Should neither of the Notices be recorded, you have 90 days after you completed the work to record your lien.
Be aware that an owner can record a Notice of Non-Responsibility to protect the owner from liens.
The Notice of Non-Responsibility does not protect the owner in all circumstances. If the owner ordered the improvement work or there is a clause in a tenant’s lease that requires tenant improvements, then the Notice is irrelevant.
If Payment is Not Forthcoming
If you are not paid within 90 days after recording your lien or after filing your Stop Notice, you must file a lawsuit within 90 days of the day you recorded the lien. This is not 3 months, but 90 days.
Your lien may be challenged by the owner since he or she stands to lose the property. Be certain that you include in the lien only the value of the services and labor that are directly related to the work of improvement. For instance, the cost of putting up a temporary fence or safeguard that does not become a permanent part of the property is not entitled to be part of a mechanic’s lien.
If you prevail and get a judgment, the owner may seek to refinance to pay off the judgment or resell the property. If so, your lien is primary, after the lender.
A foreclosure suit can be costly and if there is no equity in the property, you can end up with nothing after the foreclosure sale since the lender is first to get paid. Also, if the liened property goes into foreclosure and is resold, your lien rights are extinguished.