How To Protect Against Mechanic's Liens

Last week we wrote about how if your contractor doesn’t pay his sub-contractors, you can find them coming after the value of your house, a process called a mechanic’s lien.

Bankrate says you can protect yourself by including in the contract a, “release-of-lien addendum or by placing your payments in escrow until the work is finished.”

Several commenters also advised holding back 10% for 30-90 days each time the contractor asks to get paid, until you have confirmation that the subcontractors were paid for that phase. And of course, always use a licensed contractor with good referrals and BBB record. — BEN POPKEN

Don’t let bad contractors nail your budget [Bankrate]

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

Comments

Edit Your Comment

  1. Nor-Cal says:

    *IF* you can get your escrow company to go along (what you need a lawyer for), this is a start.

    Have the escrow company make the checks payable to BOTH the prime and sub contractor(s), along with the release. Genrals/primes hate this sine they lose what they think is their leverage over the subs, but that’s not really you problem as a homeowner/builder/developer.

    If it’s a larger construction, you’d want a gatekeeper to make sure all the subs are kept track of. This can help avoid a Prime contractor from pulling more fast ones. Of course, requiring a list of all subs from the general is good, too.

    Also, look into getting a bond against this sort of mechanic’s lien. Negotiate with the prime/general on this.

  2. AcidReign says:

    …..My parents had this situation happen to them years ago, when I was growing up. They used a neighbor, who was a contractor, to remodel their den. Several months after the job was finished, and paid for, the subcontractor who did the shutters threatened to put a lien on the house if he was not paid immediately for his work!

    …..My uncle, who is a lawyer, wrote a friendly letter to the neighbor contractor, something to the effect of threatening to sue his ass off, and the lien was dropped. This made for some interesting neighbor relations!

    …..The neighbor contractor, who played fast and loose with his finances, eventually lost his house and business during the runaway interest rates of the late 1970s.

  3. Sudonum says:

    Most Contractors are not going to go for the escrow deal. If they are honest bucinessmen they are paying suppliers and subs for work done on your behalf as that work is completed. They want to get paid accordingly. There has to be some additional reward or incentive for me to wait to get paid upon completion for a large project (anything over $5-10k depending on the circumstances). And don’t tell me that working on your project is incentive enough. I am not a lending agency.

    As I said in the previous post, get a “Partial Lien Release” from each sub and supplier as the progress payments are made.

    Also as Nor-Cal stated, you can get a Completion or Performance Bond. An additional benefit of this type of bond is that it provides some insight to the reliability of the contractor. The bond rate is set by the bonding company based on the performance of the contractor. The higher the bond rate, the greater the risk, the more likely the contractor is going to have problems. A contractor with a low bond rate is a contractor that completes their work with happy customers. Be aware that it is customary for the homeowner to purchase the bond. The cost is usually less than two percent of the contract amount. This is coverage in addition to the liability insurance carried by the contractor.

    One last tip, use AIA contract documents.
    http://www.aia.org/docs_default
    They provide pretty good protection for all parties and you don’t have to use an architect to use the documents.

  4. I also reccommend paying for the work in the first place. ;)

    You’d be shocked how many people feel absolutely no obligation whatsoever to pay for $2000 of parts and another $500 of labor ONCE THE WORK IS FINISHED, and then are shocked – SHOCKED! – when they get taken to court or a lien is filed.

  5. Crazytree says:

    As I was the one to bring up such a release in the original story, I will reiterate one problem you may face when getting a lien release form.

    First of all, let me say that getting the release is a great idea, and by doing so you are in a better position than 95% of the homeowners out there.

    But a lien release that is not supported by consideration, IE no payment at the time of the lien release signing, it may not withstand judicial scrutiny.

    Of course, whether or not a sub is going to fight you on this is another story.

  6. KenTwerty says:

    Check you local laws and recent court cases. Contractors are untouchable around here. Even in court 99% of the time the judges will side with the contractor.

    You could higher a contractor to put a swimming pool in yourback yard. That contractor could come in and build a barn.

    In the end you will end up paying for that barn.

  7. Sudonum says:

    @Crazytree:
    I was a project manager for a large GC who did major hotel renovations. We worked directly for the owners. We would pay our sub-contractors every two weeks. Every other Friday I would get an envelope at the job site with each subs check in an envelope. Attached to each envelope was a Partial Lien Release. I would have the sub sign the PARTIAL lien release and then give them the check.

    In many cases the sub would give me a suspicious look and ask “How do I know this check is any good? If I sign the release and the check bounces then I’m screwed”.

    I would have to calmly state that any lien release is conditional upon the check clearing.

    The part that I loved about those situations is that 9 times out of 10 the sub had not filed proper notice with county, state or owner. They couldn’t file a lien anyway

    Oh, and one more item. The liens from the subs have to made out to the owner of the property, not the contractor.

  8. I have suffered this problem when a roofer failed to pay for my, and dozens of other homeowner’s, materials. I had a mechanic’s lien on my home. I even got a civil judgement against the contractor, but his bankruptcy trumped me and I never saw a dime except a tiny tax write-off when I couldn’t collect.

    I will insure that there is a payment clause in any future improvements. There are a couple of other ways I’ve heard of:
    1) make checks out to the contractor and supplier
    2) ask to pay the supplier yourself

    But the best method is the release of lien.