A mechanic’s lien is a form of security increasing assurance of payment to builders, contractors and materials suppliers involved in building or repairing structures. Mechanic’s liens are meant to protect persons and entities who enhance value of real property through supply of construction services and/or incorporation of construction materials.
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A mechanic’s lien’s primary purpose is to increase the probability contractors and materials suppliers are paid, by offering lien holders the ability to seek payment not only from the party who hired them, but also from the real property on which they worked. Mechanic’s liens are an old legal concept dating back to colonial times.
A mechanic’s lien grants contractors and material suppliers the right to record a notice of lien in the chain of title to real property. For example, if you hire a contractor to work on your home and then fail to pay them, that contractor might be able to record a lien against your home and then possibly foreclose on that lien (i.e. get a court order to take your home away and sell it). Although plenty of mechanic’s liens ultimately go to foreclosure, most usually result in property owners making payment.
An Overview of the Lien Process
The law requires that every person who furnishes labor, professional services, materials, machinery, fixtures or tools to a construction project give written notice, called a “preliminary twenty-day notice,” of their statutory lien rights to the owner, construction lender, original contractor and the person with whom the claimant has contracted. The importance of the preliminary twenty-day notice is that it offers all interested parties, including lenders, the opportunity to become fully aware of every other party possessing potential lien rights against the property. If a potential lienholder transmits a preliminary twenty-day notice correctly and timely, they may proceed to record a lien on the property for non-payment for services or materials. That lien will extend not only to the property on which improvements were made, but also to the improvements.
The amount of time a claimant has to record a lien depends on whether the owner files a “notice of completion” of the project. Filing a notice of completion is optional for the owner of the property, but if one is filed, the claimant has 60 days to file a lien from the recording of the notice of completion. If a notice of completion is not filed, the claimant has 120 days from completion to record a lien.
“Completion” is defined as the earliest of the following events: (1) 30 days after final inspection and written final acceptance by the governmental body that issued the permit or, (2) cessation of labor for 60 days. In the event no building permit is issued or if the governmental body that issued the building permit does not issue a final inspection and written final acceptance, then “completion” is the last date on which labor, materials, fixtures or tools were furnished to the property.
There are different lien filing periods because the event of recording a notice of completion gives all interested parties exact notice of when completion occurs. Also, due to both the preliminary twenty-day notice and the notice of completion requirements, all parties know against whom to record the lien. The notice of completion also provides the benefits of allowing contractors and materialmen to receive their payments earlier. Additionally, it allows the lender to finalize a project early. However, regardless of whether an owner files a notice of completion, contractors and materialmen must continue to be aware of when completion takes place, since their lien rights hinge on action being taken in a timely manner after that date.
Once a lien is recorded, the lienholder must file a specific lawsuit – a judicial foreclosure action – to enforce the lien. Action on a lien must be taken within six months of it being recorded. Otherwise, the lien automatically expires and cannot be enforced. Before the lien can be satisfied from a sale of the property, however, a lienholder must obtain a judgment of foreclosure and order of sale. Only after this is done can the land and/or improvements be sold, and the proceeds used to pay a lienholder.
Lienholders must be aware that the owner may discharge a lien if the owner posts a surety bond in an amount equal to one and one-half times the lien. In this situation, the lienholder must proceed against the bond and obtain a judgment.
Who May Record a Mechanics Lien?
Not just anyone may record a mechanic’s lien. Arizona has specific statutes enumerating who may and under what circumstances. The statutes also describe a specific process involving staged notice followed by a requirement to record the lien (aka perfection), and if foreclosure proves necessary, the filing of a lien foreclosure lawsuit in the Superior Court of the county where the real estate is located. Any contractors asserting liens must be appropriately licensed by the Arizona Registrar of Contractors.
Arizona statutes identify the following parties who may be entitled to mechanic’s lien rights: direct contractors, subcontractors, material suppliers, equipment lessors and laborers. Design professionals, such as licensed architects and licensed engineers, are also protected if they have a written contract with the property owner or a written/oral contract with the architect who has a written contract with the owner.
On owner-occupied, one-two family residential projects in Arizona, only parties with a written contract with the owner-occupant – a concept called privity – may file a lien against the dwelling.
Who May Not Record A Mechanic’s Lien?
Generally, there must be a contractual connection between the lien claimant and either the project owner or the owner’s agent. Anyone furnishing labor, material, equipment or professional services on a project for the benefit or at the insistence of someone who is not the owner, the owner’s agent or his statutory agent is not entitled to a lien. This exclusion also extends to lenders, such as the instance where a contractor receives a loan from a bank to cover their operating costs during the project.
Other persons ineligible to record a lien include:
· A person who is required to give preliminary twenty-day notice and to show proof of service, but who fails to do so.
· A person who does not have a written contract directly with the owner-occupant of a dwelling where improvements have been made.
· A person’s statutory lien rights may also be nullified if the owner of the land stipulates in a contract between himself and the original contractor that the original contractor must furnish a payment bond in a sum equal to the full amount of the contract.
Mechanics liens are technical and driven by statute subject to interpretive case law. There are formalities that must be obeyed, the failure of which can invalidate a lien. Also true, persons who record wrongful liens expose themselves to a wrongful lien claim, which is also driven by statute.
If someone wrongly records a lien, they could be exposed to the greater of presumed statutory damages of $5,000 or three times the actual harm inflicted upon the property owner due to the presence of the errant lien. Both the construction professional and the project owner are well advised to seek legal counsel. Of course, if the project goes smoothly and payment is made timely, mechanic’s liens might never even come up in conversation.
Author: Gary Michael Smith is an attorney, arbitrator and founding member of Guidant Law Firm (Guidant.law). In addition to co-authoring the early 2000s edition of the Arizona State Bar Lien Law Manual, Gary also solo-authored The Orange Book: Practice and Procedure Before the Arizona Registrar of Contractors. He is also a founding director and current president of the Arizona Cannabis Bar Association. He can be reached at smith@guidant.law.
