legalSOLUTIONS

Protection for Contractors

Through Mechanics Liens
and Other Means
By Samuel H. Levine

A
s the ongoing credit crisis continues to reshape the
financial markets, there is no doubt that banks,
contractors, landlords, and other organizations have
entered uncharted territory in this economy. Today’s volatile MECHANIC
market conditions present unique challenges and situations as LIEN CLAIMS
developers are out of funds, lenders have refused to lend, sales In the current economic climate, more and more trade contractors
activity has plummeted, and construction activity has halted. are asserting their rights through mechanics lien claims as
Consider the following example which has become all too a vehicle for payment. A mechanics lien is lien by one who
common in today’s environment. A condominium conversion furnishes labor, materials, or services for the benefit of the
loses sales momentum halfway through the project and abruptly project. The work can be for the improvement of an existing
halts construction. With the developer out of funds and facing building or for new construction. Mechanics lien statutes
bankruptcy and its lender considering foreclosing on the unsold carefully balance the rights of owners, original or general
units, how can trade contractors protect themselves and ensure contractors, subcontractors, and lenders. However, a properly
they will be paid for labor and materials already rendered to the perfected claim for lien can provide leverage for the trade
property? contractor to collect amounts
owed it.
In filing a mechanics lien
claim, contractors must act
swiftly and aggressively in
asserting their rights. If a trade
contractor is not being paid,
chances are that other trade
contractors and the lender
are also not being paid and
asserting claims against the
real estate, the owner, and the
developer. The decline in real
estate values ultimately means
there is less equity available to
support all of these claims.

NOTIFY OWNER AND

LENDER
The first step is for trade
contractors to notify the
owner and the lender of a
claim. In some states if an
owner receives a statutory
notice, it is required to
withhold the amount claimed
in the notice. Notice is
especially important when a

Samuel H. Levine is a partner in the Litigation and Construction Practice Groups at the law firm of Arnstein &
Aboutthe Lehr LLP. He has extensive experience in a broad spectrum of activities in the area of real estate and construction
Author litigation, with a particular emphasis on mechanics lien cases. He can be reached at 312. 876.7182 or
shlevine@arnstein.com.

34 | JULY2009 www.mcsmag.com
 trade contractor does not appear on an application for payment
or contractor’s sworn statement. Notice also puts the developer
and lender on notice of a claim. The lender can then assert
pressure against the developer or settle directly with the lien
claimant so that it can protect its own interest. A lender will
often settle in this manner as lenders do not want the mechanics
lien claim to impede their own ability to foreclose a mortgage.
RECORD A PROPER CLAIM
Second, the contractor needs to record a proper claim for the
mechanics lien. Care needs to be taken in drafting a claim
for mechanics lien. Since they are a special right given to a
contractor by statute, they are strictly construed. Dates of work
and the description of the real estate liened have to be accurate.
When multiple properties are involved, the claim may have to
be allocated against each property.
It is important that contractors and trade subcontractors
avail themselves of all possible remedies. Besides asserting a
claim for mechanics lien, a trade contractor may have a claim
against the party with whom he contracted based on breach
of the construction contract. The breach is the failure to make
payment.
There are also potential actions against a surety, on a
payment, or bond in connection with a project. Surety bonds
are frequently used by a general contactor or developer in order
to obtain a contract to build a project. The general contractor
or developer may provide a payment bond, a form of surety
bond, to ensure that subcontractors or suppliers are paid for
work done.
www.mcsmag.com
Some states, such as Illinois, have statutes which allow a
subcontractor to bring an action directly against the owner.
Illinois also has a construction trust fund statute which permits
it to sue a party which receives a waiver of lien from the
contractor but does not withhold payment for the party giving
the waiver. Illinois also has a prompt payment act which requires
the party upstream to acknowledge whether payment is due and
provides for additional interest if payment is not received within
15 days of acknowledgement of whether payment is due. Other
states have prompt payment statutes.
DON’T BE INTIMIDATED BY BANKRUPTCY
Finally, a contractor cannot ignore or be intimated by a
bankruptcy. Some states, such as Illinois, require that a
contractor perfect its claim for mechanics lien by serving
its notices and recording its claim for lien despite notice of
bankruptcy. The reason is that the claim relates back to the
construction contract which predates the bankruptcy. However,
suit cannot be filed without permission of the bankruptcy
court. It is important that a lien claimant pay attention to the
bankruptcy proceedings. For example, the proceedings may
provide an opportunity for real estate to be sold free and clear of
liens with the proceeds of the sale providing a fund for payment
of claims.
In times of economic stress, it is especially important for
contractors to make sound business decisions when entering
into contracts. A mechanics lien is not a substitute for good
credit practices. However, when a project goes under, it provides
an essential leverage to secure payment from the developer. ■
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