What a Mechanic’s and Materialman’s Lien Is and Why It Matters
The following is adapted from Quit Getting Stiffed by Karalynn Cromeens.
Although I had been filing mechanic’s and materialman’s liens (“liens”) for clients for a few years, I never took the time to understand what a lien was and why they are so very important. That was until I had my very first jury trial, and I had to explain a lien to the jury — to six people who did not know anything about construction, let alone liens.
The idea for liens in the United States came from Thomas Jefferson. Jefferson wanted to encourage tradesmen to come work in the new capital of Washington. A lien is a way for a contractor and a material supplier to secure their right to payment for the labor and materials provided to the property. Said another way, contractors and material suppliers are granted an ownership interest in the property they are improving with their labor and materials. The lien is filed against the property and says that the person who filed the lien has an interest in the property to the extent that they are unpaid for labor and/or materials supplied to the property.
The entire construction industry runs on credit. Knowing the definition of a lien is essential to running a profitable business.
What Is a Lien?
A lien is the vehicle used to make the amounts you are owed a secured debt. A lien is a piece of paper filed in the real property records that says, “Hey, I have an interest in this property because I have not been paid for my labor or the materials I used to improve the property.” It is a public record, there for the world to see.
The owner of a property does not want anyone else to have an interest in their property. If there are liens on their property, it means someone else has an interest in the property and the owner does not own 100% of their property. An owner cannot sell what they do not own and therefore cannot sell 100% of their property until all the liens are taken care of and released. So, before an owner can sell their property, they need to make sure it’s free and clear of all liens.
One of my favorite things to see is the name of a title company on the caller ID at the office. This means one of my client’s liens is going to be paid. The first step in the sale of a property is for the buyer and seller to enter into a contract for the sale of the property. During this contract phase, the buyer requires the seller to prove they own 100% of the property they are selling. The seller does this by providing the buyer a title report from a title company. This title report will list anything that affects the seller’s 100% ownership interest; specifically, it will list any liens against the property. For a seller to sell 100% of the property, they must resolve any liens listed on the title report. My firm’s name and number are on the lien, so the title company will call my office to find out exactly how much my client is owed to get a release of their lien, and the sale of the property can proceed.
What Do You Have without a Lien?
Without a lien, all you have is a breach of contract claim against the general contractor or whoever hired you. The real leverage to ensure payment is having a lien against the owner’s property. The owner is the general contractor’s customer, and you know everyone likes to keep their customers happy. A lien on their customer’s property will not make them happy. When you file a lien, you can sue the owner to enforce the lien, and you still have your breach of contract claim against the general contractor or whoever hired you. If you have a lien, even if the general contractor goes out of business, you will still be paid by the owner.
Who Can File a Lien?
Anyone who improves the value of the property with their labor and/or materials has the right to have a lien. This includes but is not limited to: material suppliers, tradespeople, contractors, architects, engineers, surveyors, landscapers, and demolition crews.
Constitutional versus Statutory Liens
There are two different types of liens: constitutional and statutory. A constitutional lien, as the name implies, comes straight from the Texas Constitution. Anyone who is hired directly by an owner to provide labor and materials to their property will have a constitutional lien. A statutory lien is what everyone who improves property and is not hired directly by an owner has. Statutory liens have very specific rules that must be followed for the lien to be valid.
What a Sham Contract Is, and Why It Matters
A sham contract is a mechanism that allows you to have a constitutional lien, even if you don’t have an agreement directly with the owner. If the owner and the general contractor are the same person, you can still have a constitutional lien. When this normally applies is when the property is owned by one company and the general contractor is a different company, but the same person owns or controls both companies. When one person owns or controls both the property and the general contractor, the contract between them is considered a “sham contract,” and the law says that you have a constitutional lien and do not have to comply with all the requirements of a statutory lien.
I once had a client who was a painting contractor, Jason. Jason was just starting out, and he did a good job and took great pride in his work. Jason’s biggest and only client at the time was a spec home builder, Huge Homebuilder (“Huge”). Huge was building five different communities all at the same time, and Jason was their interior painter. Jason was paid by the square foot plus materials. The relationship was going well; Huge was a little slow to pay, but there were no big issues. After about a year, Jason started to notice he was always broke at the price he was charging. He should have been making decent money — not anything crazy, but enough not to be broke. After some investigation, Jason discovered that Huge was shorting the square footage they paid him for. Jason would never double-check the square footage he was being paid for; he just trusted that Huge would pay him the right amount. After a review of all of the work he had done for Huge over the last year, it turned out Jason had been shorted over $100,000. He came to my office on the verge of a mental breakdown and had no idea what to do.
After a review of all of the information, I formulated a plan, and it was one of my best. Turns out that Huge did not own any of the properties that Jason worked on; rather, all of the properties were owned by different companies that had the same name as the subdivision. At first glance, it appeared that Jason did not have any lien rights because he was not hired by the owner and did not send timely notice. But upon further investigation, it turned out that the same people who owned Huge owned each of the subdivisions, so the contract between Huge and the owners was a sham contract. Jason therefore had constitutional liens on all of the properties he had worked on. Jason could only have valid liens on the houses that had not sold. It was over fifty liens in three different counties, but we filed them all. We also filed a lawsuit to foreclose the liens and claims against Huge for the amount owed on houses that we could not file liens against.
Almost every day, we got a call from a title company that one of the houses we had liened was going to closing. They needed to know how much Jason was owed so they could make sure he was paid in full for that property and release the lien. At the end of the day, Jason got everything he was owed. It was a long road, but it was worth it. Jason had leverage because of the liens he could file due to the sham contract between Huge and the owners of the properties.
Where Liens Need to Be Filed
Liens attach to the property where the work was done, so the affidavit claiming a lien must be filed in the county where the property is located. Specifically, liens are filed in the real property records. If a property is in more than one county, the lien needs to be filed in the county where a majority of the property is located. When I file a lien against a property that is in more than one county, I will file it in both counties just to be safe.
You Need the Help of a Qualified Attorney
You cannot just file your lien. To have a properly perfected lien, you will need the help of a competent attorney. There are steps that you can take along the way to decrease the attorney’s involvement, but to do it correctly, you will need to hire an attorney that is familiar with liens. If your lien is invalid, not only will you not get paid the money you are owed, but you may have to pay attorney fees incurred to remove your lien or even a $10,000 penalty for filing a fraudulent lien.
What Is Required to Have a Valid Lien Is Different in All Fifty States
The requirements for a valid lien are different in all fifty states, so those lien packages you can buy online that are the same no matter what state you live in most likely will not get you a valid lien in the state of Texas. Texas has some of the most complicated rules for filing a valid lien. You may think that you are saving money filing a lien with an online service, but in most cases, any liens they file are invalid, and you will not only lose that money but also have to pay someone else’s attorney fees.
Not all attorneys know how to file a valid lien, so you need to interview law firms before you hire one. The attorney that prepared your will is not the one you want to file your lien. Ask the firm what their collection strategy is. Is it just sending letters and filing liens, or will they make phone calls? Ask them how successful they are at collecting liens without filing a lawsuit. Ask how often you will be updated on the status of your file. Ask how fast they return phone calls. Interview a few firms and find the one that is the best fit for your company.
I had a long-time client that thought they could save money by using an online lien-filing service for a project for which they were owed $30,000. They used the service and filed the lien, then called my office to file the lawsuit to enforce the lien. After a complete review of all the documents provided by the lien-filing service, we told the client we would not recommend filing a lawsuit to enforce the lien. The lien was filed late, and the notice was not sent properly. Because of this, the lien was invalid. We were able to collect the amount the client was owed via other collection strategies, but they had given up valuable leverage by failing to have a lien.
For more information on lien and collections rights, you can find Quit Getting Stiffed on Amazon.
Karalynn Cromeens, author of Quit Getting Screwed: Understanding and Negotiating the Subcontract, and creator of The Subcontractor Institute, has been a licensed attorney for over sixteen years. She has spent her entire legal career in construction law, advising countless clients on how to avoid litigation.
Karalynn is on a mission to educate and inform subcontractors about the importance of understanding their lien and collections rights, sparking change and leveling the playing field in the construction industry.
This book focuses on laws in the State of Texas. Lien and collection information for all 50 states, as well as materials referenced in the book, can be found at subcontractorinstitute.com.
