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…
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