A primer on mechanic's liens

Nothing seems to cause contractors and property owners more confusion than mechanic's liens.

Despite what many people seem to think, a mechanic's lien is not a court order that the owner must pay the contractor. It is probably best to think of it as being like a mortgage. A mechanic's lien serves as security that a contractor will get paid. The lien attaches to the real property on which the work was done. It entitles a contractor that is not paid—even for a small job—to sell the property at a foreclosure sale and use the proceeds of the sale to satisfy the amount due and owing to it.

A mechanic's lien is not a be-all and end-all. In fact, it may be worthless for the contractor. Many times, a mechanic's lien is behind a bank mortgage as security; if the property is sold at a foreclosure sale, the bank mortgage is paid off before the lien. If no money is left over after the bank is paid, there will be no money paid on the lien. The buyer at the foreclosure sale receives the property free and clear of the lien.

This is not to say that mechanic's liens are not valuable to contractors. Most of the time, the property will have some value after the first mortgage. Additionally, the contractor often does not have to file a foreclosure action right away. Instead, the contractor can let the lien sit for up to six years without foreclosing on the property. Often, the owner will want to refinance the project, sometimes years later, and the contractor's mechanic's lien will be paid as part of the refinancing.

By contrast, a mechanic's lien obviously causes problems for owners. The first obvious problem is the possibility of foreclosure by the contractor. Even if the contractor does not file a foreclosure action, the existence of the lien will likely violate the owner's loan agreement with its lender and prevent any refinancing unless the lien is addressed.

This means that in some cases, particularly when a mechanic's lien is filed by a subcontractor, an owner may be forced to pay for the same work twice (once to the general contractor and again to the subcontractor) or risk losing its property.

The first step in filing a mechanic's lien is to determine if the contractor has to serve a notice of furnishing on the owner of the project. A contractor that does not have a contract directly with the owner must file this notice if it wants to preserve its right to file a mechanic's lien. Typically, this means a general contractor does not have to provide a notice of furnishing, but a subcontractor or material supplier does. The purpose of this notice is simply to let the owner know the subcontractor is at the project and that the owner should make sure the subcontractor is being paid.

To preserve the contractor's lien rights with respect to all the goods or services it provides to the project, the notice of furnishing generally must be served within 21 days after the contractor has begun work or supplied material. All the information necessary for the contractor to complete the notice is on a document known as a notice of commencement, which the owner is required to file with the recorder's office in the county where the project is located. This notice also must be posted at the job site.

The subcontractor may also request a copy of the notice of commencement from the general contractor or the owner. Under Ohio law, the general contractor or owner must provide the copy within 10 days of receiving the written request. Thus, the prudent contractor will request a copy of the notice of commencement from the owner and general contractor as early as possible—ideally, before providing goods and/or services—in order to meet its 21-day deadline. The owner's failure to meet its 10-day deadline will extend the contractor's deadline; if the owner doesn't provide the notice at all, the subcontractor is not required to serve the notice of furnishing.

If the contractor is not paid, the next steps are to prepare and record an affidavit for a mechanic's lien with the appropriate county recorder's office. The contractor must record the affidavit within 75 days after its last work was performed or material furnished to the project. The owner does not have the opportunity to dispute the affidavit's validity before it is recorded and it is a public record.

The last step for the contractor to perfect its lien is to serve a copy of the affidavit on the owner of the project. The affidavit must be served within 30 days of being recorded at the county recorder's office. This is an often overlooked step and leads to the lien being invalidated when challenged in court.

A contractor should also be aware that Ohio law contains very strict rules on how a party is required to serve the various documents in order to preserve and perfect lien rights. The safest rule is to mail all documents to the owner or general contractor by certified mail, postage prepaid, return receipt requested. I also recommend sending a second copy by regular mail in case the intended recipient rejects the certified letter.

Mechanic's liens can be very complicated. When attempting to file a lien, it is a good idea to contact legal counsel with experience in this area well before the 75-day period expires. Remember also that the resolution of legal issues depends on the specific facts of a particular situation and the applicable law. If you have specific questions regarding a construction issue, please contact Tim McGarry or any other attorney at Nicola, Gudbranson & Cooper.

—Timothy L. McGarry
tmcgarry@nicola.com