For more than 100 years, Massachusetts, and most other jurisdictions, have recognized that contractors, subcontractors and suppliers who work on private construction projects need extra protection to ensure that they are paid. Unlike public construction projects, where a surety bond is statutorily required in almost all cases, private projects rarely are bonded, thus leaving contractors exposed to the perils of unscrupulous parties and harsh economic realities. The mechanics lien statute, first enacted in 1855, is meant to provide some essential protection.
A lien is an involuntary encumbrance on real estate, much like an involuntary mortgage or real estate attachment. Like a mortgage, once a lien is properly asserted, the contractor can foreclose on the property in the event of non-payment of labor, material, project management, rentals and so forth. Not surprisingly, few liens ever go to foreclosure as a landowner will rarely let its property be sold out from under it, preferring to strike a deal with the lienholder or bring pressure to bear on the general contractor to satisfy subcontractor/supplier liens. Accordingly, liens have always been a heavy club — if properly asserted.
Before 1996, the lien statute, (Massachusetts General Laws c. 254), was so complicated that contractors frequently lost their lien rights before they even realized there was a problem. The statute had strict requirements for recording based upon stated completion dates in contracts. The absence of a contractual completion date, or an extension of the completion date without a subsequent recording in the County registry, often resulted in an inability to lien. All subsequent recording deadlines keyed off the date of the initial lien filing forcing a party to pursue its lien rights even if the project was proceeding satisfactorily. In 1996, the Legislature extensively rewrote the statute, ostensibly to make it easier to follow and to better reflect the realities on the ground. Though better, contractors, subcontractors, and suppliers should be aware that multiple pitfalls still exist.
As in the prior statute, in order to claim a lien, the parties must have a written contract. Although many construction projects are performed on a handshake, you cannot lien based on an oral contract. While there are multiple other reasons why oral construction contracts are not recommended, one of the more significant reasons is that in the event of a problem, you have no lien rights. One benefit of the new statute is that it broadened the definition of a contract to mirror Massachusetts law outside of the lien statute, so that even an exchange of written letters or a signed proposal, for example, may be sufficient.
Rather than rely on an artificial date in a contract, the recording deadlines are now based on milestones in the life of a usual construction project. A contractor may record his lien at any time after a contract is signed (even if there is not yet a problem) up to 90 days after the last person (of any trade) provided labor and materials for the project. Thus, if you are in a trade that completes its work early in the life of a project, such as a site contractor, you may still have the right to claim a lien months after you completed your work, i.e. while the painters and finish carpenters are still working. These deadlines may be altered in the event a notice of termination or notice of substantial completion is recorded (in the form provided by the statute).
As a subcontractor/supplier, your right to recovery is limited to the amount due under the prime contract at the time of the lien. Thus, the longer you wait, the less money may be available to satisfy your lien. Lower-tier subcontractors/suppliers can overcome this danger by serving a written notice of identification, which is a form set forth in the statute letting the owner and general contractor know you are on the job. After service of such a notice, the amount available to be liened is measured from the date of the notice and not diminished by subsequent payments from the owner to the prime contractor. This also ensures that you get notice in the event a notice of termination or notice of substantial completion, which is especially important as those notices alter filing deadlines.
Of equal importance, you now have a longer period to commence foreclosure proceedings than was allowed under the previous statute. This reflects the hope that the parties will negotiate a resolution before having to file suit. As protection for owners, there is also an expedited procedure available to challenge defective liens.
Notwithstanding the greater protection for contractors, the lien statute remains extremely technical with little margin for error. The forms provided in the statute must be followed exactly and the deadlines imposed cannot be extended. To lien, you will need the legal description of the underlying property, which is sometimes difficult to ascertain especially where title to the property may be in the name of someone other than with who you contracted. Of course, you will still need to prove the merits of your case.
The lien only attaches to the property interest of the party that contracted for the project. Consider the practical implications if the project "owner" is a leaseholder. For example, the project may be a tenant fit-out where the project "owner" is the tenant, not the landlord. In that case, with minor exceptions, the lien can only attach to the leasehold interest of the tenant, not to the underlying ownership interest of the landlord. If the tenant is a month-to-month tenant, the lien may be virtually worthless. Even if there is a longer-term lease, most leases prohibit assignments. It is doubtful whether a foreclosing lienholder may involuntary take over or sell a leasehold interest. As it is very common for a party to take title to property under one name, perhaps a trust, and manage it under another name; the potential to undermine the lien statute is ever present.
So, what can you do to maximize your protection? Always insist on a written contract. As a contractor, obtain the legal description of the underlying property at the commencement of the job. You want to know who, legally, you are dealing with. If you are contracting with a tenant, consider building greater protections into your contract such that you are never too far out, i.e. weekly payments, right to suspend if no payment, etc. If you are a lower-tier subcontractor or supplier, make it part of your standard procedure to issue a notice of identification at the beginning of the project. Document everything.
Owners can also protect themselves. Make sure that your contract mandates that the contractor dissolve any liens, which may be recorded, at the contractor's expense. Consider requiring the purchase of a blanket lien bond (a bond that is in place to cover potential liens over the life of the project). When substantial completion occurs, record a notice of substantial completion. If you terminate the prime contractor, record the notice of termination. These recordings start the clock ticking for filing of liens, allowing an owner to bring closure to a project.
The mechanics lien statute is a powerful tool. It is not a cure-all and lien rights are easily lost. Consult with your attorney early in the process to ensure that you are doing everything possible to protect yourself.
This article is intended to serve as a summary of the issues outlined herein. While it may include some general guidance, it is not intended as, nor is it a substitute for, legal advice. Your receipt of Good Company or any of its individual articles does not create an attorney-client relationship between you and Sheehan Phinney Bass + Green or the Sheehan Phinney Capitol Group. The opinions expressed in Good Company are those of the authors of the specific articles.
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