The second best way to assure payment is to have a well-drafted, contractor-friendly written agreement signed by the general contractor and/or owner. Most of the contracts that contractors ask the attorneys at GRIFFITH LAW GROUP to read and review are not well-written and rarely favor the contractor. Most contractors fail to have a lawyer draft a form that the contractor can use regularly on jobs, big or small.
If these and some other techniques we discuss in other articles all fail, then the next best way to assure payment is to utilize the remedies available under Indiana’s mechanic’s lien statutes. Unfortunately, most contractors do not understand the mechanic’s lien rules and wait until the last day to file a lien, often resulting in errors that invalidate the lien. In this article, we review the basics of the mechanic’s lien statute and related laws. To be clear, there is a mechanic’s lien statute, plus other statutory remedies that are akin to but different from the lien law. We will briefly mention all these statutory provisions in this article.
The Mechanic’s Lien
So who can file a mechanic’s lien and on what? Answer: Any person performing labor or furnishing materials or machinery for the erection, alteration, repair, or removal of a:
- Building or Structure
- Walk or Sidewalk
- Any other earth-moving operation
The lien covers not just the portion of the real estate that the mechanic serviced or supplied but the entire land upon which the building, erection or other improvement is situated. So, a lien for a small dollar amount can be attached to a very large and expensive parcel of improved land.
The statute defines two types of real estate- Class 1 and Class 2 Structures, defined as:
Class 1 Structure
Building or Structure intended to be occupied by:
- The Public
- Three or More Tenants
- One or More Persons who act as Employees of Another
- Three or more Condominium Units
Class 2 Structure
Building or Structure intended to contain:
- One Dwelling Unit
- Two Dwelling Units
- Outbuilding (Barn, Garage, Pool)
- Anything NOT part of Class 1 Structure
The deadline for filing a lien is determined by the class. For Class 1 structures, a lien must be recorded in the correct county recorder’s office within 90 days after the last day on which the mechanic or supplier provided labor or materials. For Class 2 structures, the deadline is 60 days.
Luckily, the courts have loosened the rules on how the subject property must be described, making it easier to record a lien in a hurry, when a full legal description cannot be located quickly. By law, the legal description kept by the county auditor (or township assessor in some cases) can be relied on as the proper legal description of the subject real estate for purposes of filing a lien.
Then, within one year of filing a lien, the mechanic must file a lawsuit to foreclosure on the lien. Technically, there is no lien until a court enters a judgment in favor of the mechanic, and then the lien is effective retroactively to the date the lien notice was recorded. This explains why the lien document is called “Sworn Statement of Intention to Hold Mechanic’s Lien.” Again, the lien is officially established when the judgment is entered.
There is a special rule governing owner-occupied single- or double-family dwellings and additions (“Family Dwellings”). The statute requires a contractor to send the owner a “Pre-Lien Notice,” which is a written notice to the owner of the work or materials being supplied and the existence of the contractor’s lien rights. The purpose of this law is to give the owner of a Family Dwelling notice of subcontractors who might be able to file liens on the property, enabling the owner to make arrangements to have the general pay the subcontractors. Without information and knowledge about the subcontractors, there is no way for the owner to make sure that every mechanic is getting paid. This notice must be delivered to the owner within 30 days of the commencement of the work or the delivery of materials.
If an owner believes that a lien was wrongfully recorded or that the contractor is not serious about enforcing the lien, then the owner can give the contractor a notice requiring the contractor to commence the lien foreclosure lawsuit. If the contractor fails to file the lawsuit within 30 days, the lien is void. Some owners will call a contractor’s bluff by sending this “Notice to Commence Suit,” thinking that the contractor will not file the suit. Sometimes, however, the owner is wrong and is then named as a defendant in a foreclosure lawsuit triggered by the owner’s “Notice to Commence Suit.”
A mechanic’s lien foreclosure case is very much like a mortgage foreclosure case, where the court determines the validity of liens, determines damages and orders the subject property sold at a sheriff’s sale. Unlike a mortgage foreclosure case, an owner can post a bond to replace the surety represented by the lien, and the property is not subject to risk of being sold at a sheriff’s sale.
Notice to Owner of Personal Liability
The Indiana Code also contains a non-lien provision allowing a subcontractor to send a notice to the owner demanding payment for labor or materials supplied by the subcontractor, where the general contractor has failed to pay. If the owner gets the notice and makes payments to the general contractor for labor or materials supplied by the subcontractor, then the subcontractor has a claim directly against the owner. This is available to the subcontractor even though there is no contract between the subcontractor and the owner. This is a powerful tool that few subcontractors utilize or try to use too late, after the owner has already paid the general contractor.
Bonds & Insurance
There are a number of products- like bonds, insurance and sureties, that might provide funding to a subcontractor for labor or materials provided on a job, particularly where the owner or the general contractor goes bust and is insolvent. Again, as is often the case, contractors do not investigate these possible sources of remedy until it is too late. Consulting with knowledgeable counsel early is the best course for subcontractors trying to get paid on a job when payments are slow or late.