Do you know that you can lose your house if you pay a general contractor, but he or she doesn't pay the supplier(s) or the subcontractor(s)? I found out a supplier or subcontractor can put a mechanic's lien on your home and even force it to be auctioned off! How can we have laws that support a scoundrel taking the money and running, while the taxpaying homeowner might lose his or her home and end up living on the streets? This is so wrong; the laws have to be changed!

"Your understanding of this law could prevent you from paying twice for any phase of your project, and safeguard you from losing your house to a disgruntled creditor in a nasty foreclosure sale because a material bill or service bill was not paid."

I know that New York State has a lien law; but I don't know how it really works as Eagle Construction did not discuss it with me, at all. Also, Eagle's contract did not include the Homeowner Notice about the lien law, as required by NYS law. I was just sickened to discover that people could lose their home because of a 'lien law' that may exist in your state as well. What I was able to find in my research may not apply to you or your location, but it may someday. Mechanic's lien laws differ tremendously from state to state; there is no uniform lien statute.

Originally, a mechanic's lien was almost exclusively sought out by an actual mechanic. If an owner of an automobile contracted for repair services and failed to pay the bill, the mechanic could place a lien on the car's title. This meant filing a claim in a local magistrate's office. In essence, a mechanic's lien meant that the owner of the car must pay off the debt before the title could be transferred cleanly to a third party. If the owner decides to pay the bill voluntarily, the mechanic's lien is lifted. This practice eventually found its way into the construction world. Many projects require licensed subcontractors such as electricians, masons, and landscapers. All of these workers would require supplies from outside vendors. Now, any homeowner who employs outside labor and material for the improvement or repair of his or her home is vulnerable to this law; and a mechanic's lien can happen even with the best of contractors.

Simply put: a mechanic's lien is a legal process, which seeks to guarantee payment for contracted services rendered on an improved piece of property. The property itself becomes responsible for the debt. Depending on the laws of a particular state, anyone who provides materials or labor on a project, but doesn't get paid, can file a claim against the property within a certain amount of time after project completion. A mechanic's lien extends to both the structure and the land beneath it. Until the debt is paid, the landowner does not own a clear title; and the people who are owed money can force the property's sale at auction if something isn't worked out.

Most homeowners are shocked when they find out that they might still end up owing laborers, carpenters, suppliers, or equipment lessors, even if they paid the prime contractor in full. Basically, lien laws are more concerned about those who provide labor or materials to an improvement project than it is about the possibility of the owners having to pay twice for the same work, or even lose their home to pay for such debts. Meanwhile, the prime contractor has taken all the money and disappeared. There have been numerous situations where a contractor has been paid in full; but did not pay someone, leaving the homeowner holding the bag (the debt).

The laws are frequently complicated and confusing, but it is also complicated and confusing to keep track of all of your potential lien claimants. The list of prospective claimants can include any material supplier, such as those furnishing concrete, lumber, roofing; subcontractors such as electricians and plumbers; and even laborers that your contractor employs to clean up the job. Wait! We're not done yet. On top of these people, it's possible for you to still be socked with a mechanic's lien if a subcontractor fails to pay his / her material supplier, subcontractor, or another individual who furnished labor for your project. Wouldn't it just be easier to hold the prime contractor responsible for paying his own bills? No wonder we have so many multi-millionaire homebuilders in America.

Because these laws are based on state statutes and civil codes, you should contact your local consumer agency for an explanation of lien laws where you live; or consult a local attorney for specifics in your area or other questions you may have on this issue.

Any supplier or subcontractor who does not contract directly with the homeowner may be required by law to provide the homeowner with fair notice that describes the goods or services that are being contributed within 20-30 days of when the goods and services were first contributed.

Preliminary Lien Notices
Depending on your jurisdiction, you may receive preliminary lien notices. Don't panic! This does not mean that a lien has been filed against your property. It is a notice that a subcontractor or supplier has provided, or will be providing, goods and services to improve your property, and could file a lien claim if they are not paid. It's also useful to you because it gives you contact-information for subcontractors and suppliers, and it allows you to track who has a potential claim against your property.

In California, subcontractors and suppliers must provide you with this notice in order to maintain their right to file a lien. If they don't provide you with the notice, they lose the right to file a lien. Watch the timing, however. A subcontractor or supplier can give you the Preliminary Notice before delivering supplies or starting work, and up to 20 days after delivering supplies or starting work. Also, don't expect a 20-Day Notice from a prime contractor. Since they have a direct contract with you, they aren't required to send a Notice.

Heading Off Problems

There are some steps that an owner can take – both before and during an improvement project. The main idea is to make sure that everyone is paid.

• You may consider title insurance (which doesn't EXCLUDE mechanic's liens). In fact, most banks or other lending institutions require homeowners to buy title insurance as a safeguard against liens.
• Check with your local courthouse to see if the prime contractor has a history of litigation.
• Check with suppliers and workers about the payment history of the prime contractor.
• Possibly place your payments in an escrow account (as per your contract and to be released only with your signature) until the work is completed. Personally, I don't think this option (alone) gives you enough protec­tion, especially if it's an escrow account set up by your contractor.

Make sure your written contract includes the following:

• Since many fail to do so, insist that your contractor furnishes you with a list of all subcontractors, laborers, and materials suppliers to be used by your prime contractor.
• A schedule that demonstrates when specific construction activities will start and end (such as the framing, drywall work, or painting) and the projected payments tied to the contract price of these activities.
• Match up which subcontractors will be performing these construction activities.
• Match up which suppliers are providing materials necessary for these activities.
• Depending on local laws, you may be able to add a release-of-lien clause to your contract. This very important clause needs to be worded so it requires the contractor, all subcontractors, and suppliers to furnish a certificate of waiver of lien upon each payment. Read each of these carefully - some are contingent (totally meaningless until a check clears). The release-of-lien clause should also state that you are to receive a notarized final release and waiver of any mechanic's liens (called an unconditional release) from all subcontractors, suppliers, and the contractor upon completion and final payment.
• Alternatively – add clauses, which state that the contractor must provide you with a sworn statement that every firm / person involved in your project has been paid, and give you permission to withhold all ensuing payments to the contractor until he / she provides such proof. According to the FTC, this protects you from liens that may be placed on your property if all suppliers and subcontractors haven't been paid.

Pay as you go: One of the biggest mistakes is to pay huge sums of money in advance of work being performed. A system that offers the consumer better protection – more leverage and time to hear from a sub or supplier who didn't get paid – is to make progress payments as a percentage, or specific stages of completion. If you are financing your project, the bank or lending institution may require that the contractor, subcontractors, and suppliers verify that they have been paid, before releasing funds for subsequent phases of the project.

A few methods you can use to make sure potential lien claimants have been paid:

It helps to be organized. You should collect all papers on your project in one file, including any written notices of goods or services provided by contributing suppliers or subcontractors.

THIRD-PARTY MANAGEMENT

Many banks, escrow companies, construction management firms, and consulting architects are set up to provide detailed project accounting, and pay construction draws as an agent for the owner. This option generally is reserved for larger-than-average projects and comes with a hefty fee. Be prepared to drop an additional 5% to 10% of the total contract value for this service. (Title insurance may be a better option.)

JOINT CHECKS (Credit-Card Payments Are Preferable)

Joint checks are one method of lien prevention. When the contractor presents a bill for materials or labor, compare it to the schedule of payments in your contract and the Preliminary Notices you've received. Make sure that work was provided as described and then write a number of checks – each check being jointly made out to the general contractor and to a particular subcontractor, or to a (sub) contractor and a materials provider, and so forth. Make it so both parties will have to endorse the check. The idea here is that the check may be cashed only if the ultimate beneficiary endorses it, which will help assure payment and eliminate the risk of a mechanic's lien. This is a common practice, especially near or at the very end of a project. However, common as it may be, this route is not particularly popular with either the homeowner or contractor due to the need for additional management on both sides. It can also be disadvantageous to the owner and contractor in that it diminishes the prime contractor's monetary control over subs and suppliers. An alternative is to issue joint checks for services that put you at the greatest financial risk; the big-dollar items such as lumber, kitchen cabinets, roofing (when doing the entire house) or windows (when doing whole house window replacement). Keep in mind that joint checks are not issued in lieu of obtaining lien releases.

LIEN RELEASES

The release system is designed to allow property owners to track when potential lien claimants have been paid. You may ask your prime contractor to get lien releases (waivers) from everyone who the contractor is responsible for paying. A lien waiver is a receipt that states workers and suppliers will not ask you for money you already have paid the contractor. Don't settle for a contractor's promise that he will pay everybody. If you can't get the lien waivers, select another contractor; or ask your present contractor to choose subcontractors from whom lien waivers can be obtained. In any event, don't make any payments or let them start construction without receiving lien releases, of one type or other, from subcontractors and suppliers. That way, too, you will have names and addresses.

The Lien Law - Types of Lien Releases
Partial Releases of Lien: As each payment is made for a particular phase of your job, you should receive a partial release of lien for all materials and labor to date. Upon completion of the entire project, make sure you receive a notarized unconditional release of lien.
Conditional releases of lien are those that are contingent upon a specified action. Many conditional releases are contingent upon checks being paid out by the bank they are drawn on – A contractor will give you a conditional release in exchange for payment in full by personal check. Once the check clears the bank, the release becomes unconditional. Check your local laws to see if this is an option for you.
Unconditional (full) releases of lien don't have any contingencies. By signing them, the supplier of materials or labor acknowledges that he has been paid in full. Some "unconditional" releases state that unresolved claims for extras and change orders are not included. An unconditional release can be immediately secured by paying in full with a certified check.

You can see and print samples of Conditional and Unconditional Waiver and Release Forms at http://www.cslb.ca.gov/Resources/GuidesAndPamphlets/LienReleaseForms.pdf. I'm sorry. California's again. I can't help it that California has the most informative websites.

In California and many other states, a contractor must provide a waiver for all work for which the contractor has been paid (in the absence of a performance or similar bond) before accepting any further payment from the owner for additional work. In some states, neither the contractor nor the subcontractor may "waive" his or her mechanic's lien rights until payment is actually made.

Double-check your local laws for limitations, etc.:

• You may be allowed to withhold the next payment until you get lien releases for the previous payment.
• You may be able to insist on unconditional releases with each payment, if you are willing to provide the contractor with a certified check, a cashier's check, or a credit-card payment.

Before you make a payment, you should first get a signed conditional release from every possible lien claimant associated with that phase of the project. However, never make any payment unless you (and a qualified third party) have inspected the work and are satisfied! After you receive the conditional releases, make the appropriate payment for the work that was done. The contractor should then obtain, for you, an unconditional release signed by each of the claimants paid for that portion of the work. Note: No lien release is binding unless the claimant executes (signs) and it is delivered, so make sure that the actual claimant signs the unconditional release.

Before you write the contractor that one final check after the project is finished and passes official inspection, it's only prudent to check in with anyone who sent you one of those notices. You might also want to check in with the last workers and subcontractors, even if they haven't sent you any notices yet (especially if they still have time to do so). Then you'll know which waivers to look for at your last meeting with the contractor. Make sure that you receive a notarized "unconditional" release of lien (final release and waiver of any mechanic's lien rights) when the job is done to your satisfaction and you make the final payment. – The contractor can secure these from every firm / person by paying each in full with a certified check.

DIRECT PAYMENTS

Direct payments may not be a good idea. Sometimes a contractor who runs short of cash at the end will ask the owner to pay the last accounts directly (getting receipts, of course) and deduct them from the contractor's final check. You might be all right paying subcontractors and suppliers directly, but not the contractor's own employees: You don't want to look like an employer yourself; and you don't want to interfere with the contractor's special responsibilities, such as withholding income taxes, and paying insurance and Social Security.

ANOTHER STRATEGY...

that you may employ (in California, anyhow) is to file a Notice of Completion with the County Recorder's office after work on your project is completed. This notice reduces the amount of time a contractor, subcontractor, or materials supplier can file a mechanic's lien against your home.

There is a lien on your property - now what?

There are a number of reasons that a lien might be invalid; for example, the work was not completed or the supplies were not incorporated into the structure. If a lien is placed on your home, you may want to consult an attorney for help in releasing the lien or identifying these issues.

Often, many lien claims are invalidated because the contractor, subcontractor, or materials supplier has failed to meet the required timelines for filing the claim.

• Check to see if the Preliminary Notice was given to you within the strict timeframes.
• Check to see if the lien claimant filed the mechanic's lien in time. The mechanic's lien is null and void, if it was not recorded within the appropriate timeframe.
• Check with the Superior Court to see if the subcontractor or materials supplier filed a timely Lien Foreclosure Action. A lien foreclosure action is a lawsuit to foreclose the mechanic's lien. The lien claimant must file a lien foreclosure action within [so many] days of the date that he or she recorded the mechanic's lien. Often a lien claimant with a valid claim will fail to follow through, voiding the lien.

Be aware that, although anyone can record a mechanic's lien, unlicensed contractors (in Calif.) cannot foreclose on a mechanic's lien if the work is valued at more than $500.

Why should you make sure a lien is removed?

Even if a contractor, subcontractor, or materials supplier doesn't act to foreclose on your property, the lien may stay in the county records as a "cloud" on your property title until you take action to remove it. This cloud can make it difficult or impossible to borrow against, refinance, or sell your property.

Although the lien claimant should remove an invalid lien, there is no guarantee that they will comply. If you contact them and they won't voluntarily release the lien or reach a settlement, then you have a couple other options.

1. One option would be to purchase a Mechanic's Lien Release Bond. A property owner, general contractor, or subcontractor may record a mechanic's lien release bond, which frees the property of the mechanic's lien. Once such a bond is recorded, the real property described in the bond is automatically released, giving you a clear title and; more importantly, any action to foreclose on the lien is released as well. The bond acts as a substitute for your home as the object to which the mechanic's lien attaches. In other words, once you have a mechanic's lien release bond, the person chasing you for the money must now chase the bonding company. Unfortunately, most bonding companies would require cash collateral in addition to the bond premium.
2. If the contractor, subcontractor, or materials supplier fails to follow any of the strict timelines mentioned above, you can file a petition with the court for removal of the lien. If you prevail and the Court orders removal of the lien, the Court can also order the lien claimant to reimburse you for attorney's fees.

California has A Homeowner's Guide to Preventing Mechanic's Liens and some other very helpful guides and pamphlets at http://www.cslb.ca.gov/GeneralInformation/Library/GuidesAndPamphlets.asp.