Nightmare Avoidance: How to Deal with Mechanics' Liens

As published in the Nashville Business Journal.

An owner's worst nightmare is having multiple mechanics' liens filed against a commercial project. Even if the owner pays the general contractor in full, an unpaid subcontractor or supplier has a direct right and claim to file a lien against the owner's property. This only applies to commercial projects, since under Tennessee law a subcontractor/supplier cannot file a lien on a house. Liens also can be asserted against commercial landlords for work performed through a tenant. It's not a legal defense to a lien that the owner has "already paid" the contractor.

Liens are filed in the register's office, and legally create a "cloud" on title, thus placing the owner in default under any mortgage or loan. Without doing anything wrong, if a lien claimant follows the law, the property also could be sold at auction. To prevent this, an owner can end up paying "twice." Is there a way to recoup such payments? Yes, but it depends on the solvency of the owner's contractor. There have been instances where an owner has paid an additional $500,000 to resolve liens when the contractor filed for bankruptcy. Liens also are like ants at a picnic: When one appears, there are bound to be more coming.

What should an owner do when faced with letters threatening to file liens, or when liens are actually filed? The worst decision is to ignore such actions or rely exclusively on a contractor to take care of the problem.

Write a demand letter placing the party (a tenant, general contractor) in default: Most construction contracts (and leases) contain strong provisions that make the threatening or filing of a lien a default, even if it's not the contractor's fault. Demand the immediate removal of the lien by a specific date. If the project is ongoing, threats can be made to withhold future payments, or use "retainage" to pay lien claims. An owner should never pay a lien claimant directly without first making written demands on the contractor.

Investigate and determine the validity of the lien. Tennessee law makes it very difficult to successfully assert a lien. A technical error, or a delay of even one day, can be legally fatal. Very basically, if the lien claimant contracted with the owner (or his agent), the only timing requirement is that a lawsuit be filed within one year.

However, if the claimant is a subcontractor/supplier, many statutory deadlines must be met. First, a notice of nonpayment (NNP) must be delivered to the owner and contractor within 90 days from the last day of the month when the services/materials were supplied to the project.

There are mandatory requirements that must be contained within the NNP. Many NNPs are legally deficient - which means the lien is invalid. For instance, an otherwise valid lien may become legally improper because the name listed for the owner on the NNP was "English Development Company," but the record title owner is actually "English Homes LLC."

If a proper NNP is timely delivered, and contains the correct information, the next statutory requirement is formally notifying the owner of a formal claim of lien and the filing of the lien in the register's office. Such a notice must be delivered to the owner within 90 days from the date that the materials were supplied, or 90 days from the date of the "substantial completion" of the entire project. The final statutory requirement is that a lawsuit must be filed and an attachment issued by the court within 90 days of the date that the notice of lien was given to the owner. If the attachment is issued on the 91st day, the lien is invalid.

One of the most frustrating aspects of a lien is that while it may eventually be proven to be invalid or grossly exaggerated, until the underlying dispute is resolved, the lien creates a cloud on title. This can seriously impact financing, refinancing, or the sale of the property. There are only three ways to remove a lien: (a) the claimant "voluntarily" releases the lien, either through payment or some kind of settlement; (b) a "bond" in the amount of the lien is filed, either by the owner or contractor; and (c) a court declaration that the lien is invalid (which can take more than a year).

By following these recommendations, liens can hopefully be quickly resolved.