It’s Mechanics’ Lien Time

There is no question that the U.S. economy is under stress from several factors. One sector where stress is turning into distress is commercial construction. In September, Experian reported that while construction, and in particular commercial construction, has reached new heights, credit stress is building in commercial construction projects throughout the United States.

Growing delinquency rates and owner cash flow problems mean trouble for contractors working on commercial construction projects. That makes this a good time for contractors that do not typically utilize mechanics’ liens to consider whether to use the protection that mechanics’ liens provide contractors.

This blog previously covered the intricate rules that apply to residential mechanics’ liens. There are generally fewer requirements for commercial construction projects than residential projects. Contractors on commercial construction projects generally can perfect a mechanics’ lien without providing any pre-lien notices, with one exception.

Subcontractors of subcontractors (so-called “sub-subcontractors”) must send a one-time notice to general contractors within 30 days of commencing work to protect their right to file a mechanics’ lien. The requirements of the pre-lien notice for sub-subcontractors are spelled out in Iowa Code Chapter 572.

Any contractor that is working on a commercial project should therefore ascertain early in the job whether they are working for a general contractor or a subcontractor. This is not always easy to do, but a sub-subcontractor that fails to provide the pre-lien notice will lose the right to file a mechanics’ lien.

After providing the pre-lien notice, if required, then a contractor can file a mechanics’ lien within 90 days of the last labor or material provided for the job. If a contractor waits longer than 90 days to file the mechanics’ lien, they may still be able to file the lien but they will need to follow additional requirements.

The mechanics’ lien is then a powerful tool for the contractor to ensure payment of outstanding invoices. If the lien is properly filed then it becomes a lien against the real estate, like a mortgage. An owner or a bank will need to deal with the contractor to clear title to either sell the property or replace financing on the project. Contractors can then require payment as a condition of releasing or subordinating their lien rights.

Finally, if the owner is unable to pay, then the contractor can use the mechanics’ lien to foreclose against the real estate. After the foreclosure, the contractor can force the sale of the real property and use the proceeds to pay the contractor’s bills, including reasonable attorneys’ fees.

The mechanics’ lien filing process is intricate, and small mistakes can have major consequences. Contractors, particularly contractors not accustomed to filing mechanics’ liens in Iowa, should consult with legal counsel about the process for filing a mechanics’ lien. If done correctly, a mechanics’ lien can protect a contractor even in turbulent economic conditions.