Posted in Finance, Accounting and Economics Terms, Total Reads: 232
Definition: Mechanic's Lien
Mechanic's Lien a security interest that could be acquired in property by the lien claimant who spends material or labor working on that property. Mechanic's liens are typically used by subcontractors and suppliers, and are a legal claim against property worked upon. This lien exists for both real and personal property. Mechanic's liens serve to secure and ensure payments for material, labour and services, be it on personal or real property.
A mechanic’s lien forms a guarantee of payment to builders, construction firms and contractors that build or repair property. It is also known as construction lien, and in specific cases as materialman's lien, supplier's lien, laborer's lien, design professional's lien, artisan’s lien etc. Loosely, the mechanic’s lien defines the rights of a craftsmen/labourers/suppliers/architects in placing a lien against property for the value of services/materials rendered.
A mechanic's lien safeguards the interest of the workers, and is meant to duly benefit of those who have supplied labor or materials that improve the property, it ensures that workmen are paid first in the event of liquidation or insolvency. Generally mechanic’s liens provision is for the workers/sub-contractors who do not have a direct contractual agreement with the property owner.
A Lien is defined as an official claim or charge against property/debt or payment owed for services rendered. A lien carries with it the right and not the obligation if necessary, to sell the property to obtain the money owed.
A mechanic’s lien is thus similar to a mortgage or security agreement. The contractor/sub-contractor/labourers/material suppliers can file a mechanic’s lien on a property if they are not paid. If the payment is not done, foreclosure action can ensue, in spite of insolvency of the debtor. Legally, the property owner holds the ultimate responsibility for payment of dues, although a mechanic’s lien usually arises when the prime contractor has not paid his subordinates. In the event of bankruptcy by the debtor, the lien claimant will the secured creditor and will have first rights on the security property
To have an enforceable lien, the holder of the lien must comply with statutory requirements for maintaining and enforcing the lien:
• Providing the required preliminary lien notice to the property owner
• Filing notices of commencement of work.
• Filing notices in the required public records offices of the intention to file a lien if unpaid.
• Filing the notice or claim of lien in the required public records offices within a specified period of time after the materials have been supplied or the work completed.
• Filing a lawsuit to foreclose the lien within a specified time period.
A mechanic’s lien is attractive as lien secured by real property can be enforced by selling the property to pay the lien. In minor disputes, a mechanic's lien is not cost-effective, since capital is going to be tied up in litigation.
Property owners should make sure that their general contractors pay their employees or sub-contractors to avoid a mechanic's lien. By taking a few proactive measures, such as notice of commencement, releases of liens etc., property owners can ensure their properties are protected from the burdens imposed by such mechanic’s liens. Other pragmatic measures to avoid mechanic’s liens are: paying with joint checks, and lien waivers.