The owner of a project called me to say: “I would like to know why you filed a lien on my building, and how did you arrive at the lien amount?”

It takes every ounce of self control I have not to say, “Well owner, I was bitten by a dog on my way to work and ended up at the hospital where they gave me 50 rabies shots through my belly button. If you multiply 50 by $20,000 each, you come up with a million bucks.”

THE REASON FOR A LIEN

It is true that I recently filed a lien on a project and the owner called with these two questions. But the stuff about the dog and the rabies is just something that I’ve always dreamed of saying.

The reason a subcontractor files a lien is because he has not been paid. However, an owner may not necessarily know if the owner’s GC has paid subcontractors. When an owner asks these questions it simply means that the owner doesn’t have safeguards in place that protect against surprise liens.

Should a subcontractor care if the amount they are owed is from the GC or the owner before filing a lien? Owners don’t want to be responsible for costs incurred by the GC, nor does the GC want to be responsible for extra costs incurred by the owner. Indeed, the GC doesn’t want to be responsible in any case and in most states is not responsible for paying the subcontractors if the owner doesn’t pay the GC first.

In a down economy, GCs may put subcontractors in the middle in money disputes. When I say, “middle,” I mean between the owner and GC. For example, the owner who called me said he was not aware of any of my extra costs. When I talked to the GC, he said, “we’ve submitted all your costs and they are in the owner’s hands.”

Who’s telling the truth and do I care? In this particular situation I happen to know that the GC is lying.

The plot then thickens after the owner calls and asks me to meet to go over our added costs. The owner wants to know how much of the costs are his and how much are the GC’s. These types of calls make you feel like you are in the middle of a dodge ball circle with the GC and owner both taking aim at your head.

Should I meet with the owner? Should I call the GC and tell him the owner wants to meet with me? Should I get in the middle of this? Should I duck or run? It’s pretty clear to me at this point that communication between the owner and GC is at an all-time low and most likely the GC isn’t making any money. The owner tells me they are preparing to close several condo sales and will soon finalize long-term financing on the remaining units.

LENDERS AND LIENS

Should I care about the relationship between the owner and the GC? My goal is to ensure my company gets paid. Should I care about the owner’s financing issues? Should I care about the condo units that have been pre-sold?

What I like about a lien is its ability to “cloud” the title of a property and the fact that a lien is legal. Most people who buy real estate purchase title insurance. Title companies do a great job of identifying things that cloud the title of a property.

Lenders don’t make a practice of lending money on real estate unless they are in “first position.” First position is simply the person (or organization) owns and has full control of the property. The first-position owner can sell the property, transfer it or foreclose upon it. The key word is “foreclose.” A lender will not knowingly accept second position to a lien that can be foreclosed upon, leaving the lender out of control.

Title insurance is simply a policy a real-estate buyer purchases that ensures the title to the property being purchased is clear, so that the lender can loan the money to the buyer knowing the loan is the “only” lien against the property. In other words the lender is assured the buyer can’t sell the property without the lender’s loan being paid off.

If, for some reason, a real estate transaction closed and a lien other than the lender’s lien ended up in first position and it was not reported by the title company, the title company would then payoff the surprise lien, giving clear title to the lender.

The contract between the GC and the owner on the project I filed a lien against requires that in the event of a subcontractor lien, the GC must put up a bond in the amount of the lien. This is known as “bonding around a lien.” GCs have a tendency to tell subcontractors that they will just bond around any lien the subcontractor files. Subcontractors need to learn to say “thank you” when this happens.

Let’s say you lien a job for $50,000 and the GC “buys” a bond in the amount of $50,000. The key word here is, “buy.” Bonds are not free, and what is most interesting is if a subcontractor’s lien rights have not expired, and the subcontractor releases the lien and then files another one for a greater or lesser amount, it will make it appear there are two liens on the property for a period of time. As well, while those two liens are on the property, the GC will have to buy another bond so that both liens are bonded.

GETTING THE PHONE TO RING

Of course, I’m not recommending that you do this, but I have to say that when the second lien hit the books, the phone really started ringing. As a side note to liens, another option a subcontractor has is to call a credit-reporting firm like Dunn and Bradstreet and report the GC and owner’s past-due balance and the fact that you filed a lien.

If you’re late on one credit card payment you are reported to a credit bureau. Why shouldn’t subcontractors report GCs and owners to credit agencies when not paid or paid late?

A lien is a tool that is designed to protect contractors and it is one of the most effective tools when used properly. The lien I filed got the attention of the lender, owner, GC, the GC’s bonding company and the attention of lenders loaning money to individuals who want to buy condo units.

It’s interesting when you think about how the lien affects so many aspects of the project. The owner, short-term lender, GC, GC bonding company, long term lender, condo buyers and condo buyers’ lenders are all aware of the lien and become concerned.

A timely lien has a global effect that a subcontractor could not otherwise achieve. Pressure is put on the owner from lenders and buyers. The owner applies pressure to the GC to get the problem resolved. Buyers of condos could bail out on their agreement to purchase a condo because there is a lien.

As more and more pressure is applied by all the involved parties, it forces people to start talking and once the owner and GC come to the conclusion that the subcontractor’s lien amount is valid, they end up paying because its pretty difficult to fight a valid lien.

As the residential market weakens, more and more subcontractors will find themselves not getting paid for various reasons. What most subcontractors don’t know is that in most states when a bank forecloses on a property the subcontractor liens become null and void. This is a subcontractor’s worst nightmare, since foreclosure by a bank means a total loss to the subcontractor in most cases.

When and Why

However, a subcontractor should never base his or her decision to file a lien on whether the bank will foreclose on the property. It’s a subcontractor’s duty to file a lien if he is not getting paid. Waiting to file a lien thinking that things will get better in this type of economy is a big gamble.

Subcontractors need to embrace their right to lien and they need to stop looking at the lien process as a last-resort collection tool. If every subcontractor automatically filed a lien when invoices are 30 days past due the wacky world of construction would become less wacky.

If a subcontractor is going to file a lien it should be done as soon as possible. You can’t come up with a good enough reason not to file a lien. Whatever reasons you do come up with are most likely based on some sort of fear, including the fear of retaliation.

What does a subcontractor have to fear if a lien is filed for what is truly owed them? After all, the reason there is a lien law in your state is to protect contractors and to create a cost-effective way of settling a dispute.

In the current residential economy subcontractors have to keep in mind that bank foreclosures are at an all-time high, which could invalidate a properly filed lien. If you don’t know the intimate details of the lien laws in your state you should learn them.

Remember: Teamwork begins with a fair contract