If Your Contractor Doesn't Pay The Sub-Contractors, You Can Find Them Coming After You

If your contractor doesn’t pay his sub-contractrors, you can find yourself in a position where the sub-contractor is coming after your property and making you pay up, this cautionary tale from reader G warns…

We recently got a letter telling us that a lien had been placed on our house by a company that we’d never done business with. Confused and angry we searched the Internet to see if we could find out how and why this had been done. Eventually we came across Findlaw’s page on Mechanics’ Liens. The long and short of it is when you do home improvements your property is used as collateral for all related transactions. Even the ones you don’t make…

(Photo: girl_named_fred)


For example, let’s say you hire a contractor to build a deck for you and the contractor hires a guy to carry the wood from the lumber yard to your house. You don’t pay the contractor. The contractor can put a lien on your house. That’s logical and fair. Now let’s say you pay the contractor, the contractor pays the lumber yard, the contractor pays the rental company for the truck but the contractor spends the money he was going to pay the guy who helped him on hookers and blow. The sub-contractor then gets to go after not the contractor, but after YOU. Since your house is collateral against all transactions, it’s your house that gets a lien put against it.

In theory if you hired a GC to build a house for you and the GC doesn’t pay his crew or the suppliers you could have to pay for the house twice or you could be legally compelled to sell your house to pay the debt. You, of course, are then responsible for going after the contractor to get your money back.

If this all sounds fundamentally stupid, it gets better. According to the guy who actually filed the lien against our house (who is not a lawyer, but has filed countless liens in his life), most people simply pay the money to avoid the lien going active. It seems that what we had was called a “notification lien” it’s not the same as a lien lien. The notification lien basically exists to scare you into working out a deal with the person who placed the lien if
you don’t do that, they enforce the lien which is when your credit gets dinged and people can start demanding you sell your house.

Of course this all looks like a system designed to make the contractor not at all liable for their own bills and in practice it, apparently, works out that way a lot. In theory at least you have one big gun you can draw. In my state if you pay a contractor in full and they do not pay their suppliers and their crew resulting in a lien being placed against your property the contractor is guilty of felony theft by taking (as opposed to theft by fraud or murder by death). Unfortunately since a lot of the amounts we’re talking about here make getting a lawyer impractical most people either don’t sue or go to small claims court and never seek criminal prosecution.

Here’s some advice we got from the guy who filed the lien against us (who, according to my wife, could not have been any more friendly and willing to explain this entire process to us and who said, “nobody EVER finds out about this advice the easy way”):

1. When you draw up your contract include in it a clause that lists all subcontractor and suppliers, states that this list cannot be changed without prior notice and approval by you and requires all the people on the list to sign a lien waiver stating that if the contractor defaults on their bills they will will sue the contractor, not you.
2. Open a joint checking account with the contractor so that you can keep track of the accounting yourself.
3. Include in your contract a clause to see all receipts for all materials.

Apparently while a lot of people will balk at disclosing their markup, most would rather have work than not have work and “if they’re a reputable contractor, they’ve already signed contracts like this more than once.” You might want to consider simply paying the subcontractors yourself, however some information I found while perusing various legal forums on the Internet say that if you do that you want to make sure you draw up contracts that prevent you from looking too much like an “employer” to the IRS (you know, responsible for withholding payroll taxes and the such). There are two lawyers in my immediate family, but I’m not one of them, so you can take that with a grain of salt.

Obviously the other good consumer rules apply, check references. Use contractors you get through referral, check the BBB, etc. That being said, we did as much of that as we could and apparently in over a decade this is the first time something like this has happened between our contractor and the filer of the lien. Construction isn’t the most stable business and if it comes down to your contractor paying their mortgage or paying for $300 in lumber a lot will probably pick not living in a box by the river.

I hope this helps someone not get surprised like we did and gives them some idea what questions to ask if they do. Like most things, rules for this change from state to state (and Canada has it, too) so you’re best of consulting a local consumer/real estate law attorney to find out the ins and outs of your area.

Anyone ever been in a similar situation? What did you do? — BEN POPKEN

Comments

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  1. Crazytree says:

    The theory behind “mechanic’s liens” is that your property benefited from the work, in that the work was incorporated into your property… adding value.

    Therefore it is seen as a reasonable remedy to put a lien on your property in the amount of the benefit that your property received only.

    I have seen plenty of these types of situations where subs do not get paid. MOST OF THE TIME, it is because the homeowner used an UNLICENSED CONTRACTOR, and got ripped off. Rarely have I seen someone SAVE money by using an unlicensed contractor, in the end… with non-conforming work, overruns, scams and ripoffs… it almost always will cost you more.

  2. ptkdude says:

    Seems to me that this is an easy way for a subcontractor to get paid twice. Say the contractor pays him, but he wants more. He says the contracter didn’t pay him and puts a lien on your house.

  3. Crazytree says:

    Smart owner/builders will ALWAYS get a “lien release” form signed by the subs upon completion of the work. Although there are some questions as to whether such a contract is supported by consideration and enforceable as such… it is much better than not doing it at all.

  4. Crazytree says:

    @ptkdude:

    Most states proscribe large penalties for the unlawful filing of a mechanic’s lien… attorney’s fees, etc. This does not include civil penalties for fraud. As for subs getting paid twice, I have never seen this. I have however seen subs who get partial payments for substandard work putting the lien on for the full balance… as this is a common occurrence.

  5. Crazytree says:

    ^^^
    prescribe not proscribe sorry!

  6. ptkdude says:

    @Crazytree: My point went directly to the comment in the article that most people just pay it because it is cheaper than getting a lawyer.

  7. TPK says:

    “fundamentally stupid”

    Priceless… I’ll have to remember that.

  8. ColinColin says:

    You should always be holding back a % from the final bill for 30+ days to ensure all subs are paid before you give out the final $.

    If the contractor your hiring balks..find another contractor.

  9. mac-phisto says:

    Open a joint checking account with the contractor so that you can keep track of the accounting yourself.


    you can’t be serious. really? i know a lot of reputable contractors – enough that i could rebuild my house a dozen times w/o using the same one twice. i don’t know a single one that would ever agree to this. ever. plus, it seems to me that you are just increasing your liability by becoming joint on an account used to pay subs.

    get referrals, check licensing, MAKE SURE THEY HAVE INSURANCE!!!, only use reputable contractors. i know saving a few grand seems like a great idea, but you get what you pay for. that few grand could end up costing you a lot more in the long run.

  10. timmus says:

    Open a joint checking account with the contractor so that you can keep track of the accounting yourself.

    Agreed; this sounds insane.

  11. Crazytree says:

    Joint checking with the GC could also render you vicariously liable for any misconduct by the GC… IE the favorite GC game… disappearing with your money. This can be especially disastrous if he kites a bunch of checks from YOUR JOINT ACCOUNT.

    Love this website very much, but this is just the latest example of “not so great” legal advice that has been featured here. Sorry. :[

  12. bhelverson says:

    The “why” is pretty simple: There is a strong public policy that laborers should get paid for their work. In this case, the worker benefits at the expense of the homeowner. Unfair, perhaps, but that’s the underlying rationale (at least according to the law books). This is a real problem that often works against the homeowner.

    However, there are strict statutory requirements and deadlines to bring and enforce a mechanics lien. If the lien is filed, it must be properly served on the homeowner and then “perfected” (by bringing suit to enforce the lien) within a set time or the lien automatically expires. To be sure, read your State statutes.

    One recommended alternative is to write the check to the contractor AND the subcontractor, so both are required to endorse the check. Of course, this requires you to know that the subcontractor exists. Another alternative is to withhold final payment until the time to file a lien (3 months in my State) expires.

    Oh, yeah, I ain’t your attorney and this ain’t legal advice.

  13. TheZenArcher says:

    First, not only am I not an attorney, I’m not a homeowner and I’ve never dealt with contractors of this type. So I’m about as unqualified as a person could possibly be to say anything. But I’ve always wondered if it would be possible to do the following: whatever your job is, whether or not it involves subcontractors, when you receive the quote — say $9,000 — why not offer to pay $10,000 on condition that you will pay nothing until after completion, including materials. Sure, you’d probably be hard-pressed to find a contractor willing to do this, but if I were a legit contractor I’d go for it… Wouldn’t that help weed out the bad apples? Or am I not only stupid, but ignorant?

  14. Sudonum says:

    Laws vary by state, as a matter of fact they can vary GREATLY. Many states require a contractor or sub-contractor to file a “Notice of Commencement” of some sort. This lets the homeowner know that there is a person or entity out there who will be starting work on you home. In FLA this has to be filed with the County Clerk. In LA it needs to be sent to the homeowner. Check the laws in your state to see what kind of notice needs to be used. If proper notice is not given then they cannot file a lien. Most un-educated contractors do not file notices, and un-licensed ones are prohibited from filing a lien or notice of any kind.

    When work commences, have a sign-in sheet and require all persons working on the site sign in and out, even delivery men. Include the name of the company they work for. This can also help with your insurance of someone tries to file a claim against you.

    When your contractor asks for a “draw” (a payment), have him/her submit a written request listing the percentage of work completed on each phase or by each sub-contractor. Tell him/her that you want a “Partial Lien Release” for each sub or supplier paid in that phase of the work.

    Keep a running tab, at the end of the job prior to “Final Draw” ask for “Final Lien Releases” from all companies on your sign-in sheet. If the contractor does not provide them do not pay him/her.

    Always withhold 10% of each draw. Hold this money from the contractor for 30-90 days after completion, the maximum time period you can negotiate from your contractor.

    I am not a lawyer but I am a contractor. Any contractor worth hiring will not have a problem with any of this.

  15. Youthier says:

    My husband almost filed a lien against a house once right before we were married. He had not been paid by the contractor for three months of work (yes, this was stupid of him but the contractor was someone he had considered a very close friend). He needed his paycheck and he had no money to hire an attorney himself and honestly, didn’t have the time to wait for the money at this point.

    He approached the homeowners and told them what it had come down to. They forced the contractor to pay my husband or they would and then take this douche to court (they had money and time).

    And yes, the contractor pretty much lost his business over this. And my husband never associated with him again, professionally or personally.

  16. traezer says:

    I used to work for a company that sells construction supplies. we put liens against property all the time when we didnt get paid for the supplies.

  17. holterbarbour says:

    Another point about mechanics’ liens is they are very hard to get rid of, even in bankruptcy. Mechanics’ liens take priority over almost every other kind of debt, and have first dibs on any liquidation payouts.

    As the name would imply, Mechanics’ Liens are not limited to builders, and can be applied by pretty much anyone that adds value to your property, be it your home, your car, or a painting you have restored.

  18. Crazytree says:

    Mechanic’s liens take priority over everything but tax liens and some Mello-Roos liens in CA.

    Also there are time limits, as has been mentioned… have to file X days after a Notice of Completion is posted, or Y days if none is posted.

  19. tylerk4 says:

    Another thing to consider when hiring a GC is not only his liability insurance, but his workers’ compensation insurance. In California for instance, if a contractor is not licensed, bonded or insured for workers’ compensation, the injured employee of that contractor may “sue” you (the property owner) under the administrative court system set up to adjudicate workers’ compensation claims in CA.

    I work for an Applicant’s attorney, and we unfortunately are forced to do this often.

  20. Nygdan says:

    The system isn’t really all that stupid. You hired a dude to do work, he, as your hire, got other people to do the work. You are the top level here, so of course your house has to be part of the collateral. Seems like it would be fair to at least require that the subs have to sue the contractor first though, rather than jump a level. But the overall rationale here seems to be, you started the work, it was for your benefit, therefore its your mess. If the subs don’t get paid by the contractor, you need to pay them or force the contractor to pay them.

  21. LAGirl says:

    i do bookkeeping for a general contractor. i create lien releases all the time. all of our subcontractors MUST sign an ‘unconditional’ lien release when they receive payment. it basically says that they have received payment in full for all materials, work performed, etc. i send a release form with the check, they must sign + date it and send it back to me. it then goes in the file with the invoice. if it’s a sub who we haven’t worked with before, they must sign the release before receiving payment.

    before you hire a GC, find out up front if they generate lien releases. you can also ask them for signed copies from all their subcontractors.

    also very important: make sure your GC + subs all have current/valid worker’s comp + general liability insurance. CYA in case any accidents happen on the job.

  22. Flame says:

    I would say to remember to include a clause in the contract requiring the general contractor get a surety bond to ensure the payment of the subcontractors.

  23. Flame says:

    P.S. This is not to be considered as legal advice in anyway, just something I read about previously.

  24. capturedshadow says:

    A friend got his roof fixed and this very thing happened. He had to pay the sub-contractor, after he had paid the contractor. The contractor was legit, and bonded and insured so my friend went after the bonding agent. It took more than a year, but he got his money back. Licensed contractors have to be bonded and insured for just this reason.

  25. mdkiff says:

    As a construction lawyer, my unofficial advice (b/c laws are different in every state) is to include a provision in your contract that says that the contractor is required to discharge any and all leins t

  26. JohnMc says:

    I agree with mdkiff. Or more directly, you as the primary contracting party should require the general contractor that you personally meet and have the subs sign a release that any payments come from the GC and they wave their right to place a lein.

    The subs beef is with the GC not you the homeowner. Built 3 houses doing this. Subs don’t like it but these days they are agreeing as there is not much work out there.