If a contractor puts a lien on your house, you’ll have to fight to keep your house out of foreclosure. Here’s how to defend yourself.
Here’s a scary thought: Imagine you’ve just completed a home improvement project and paid the contractor in full for the work. Next thing you know, one of his subcontractors puts a lien on your house—a legal claim against your property that could force your house into foreclosure within a year to pay the debt if you don’t write a check yourself. Turns out the general contractor skipped out without paying the subcontractor, who’s now trying to collect his bill from you. The general contractor can also file a so-called “mechanic’s lien” if you haven’t paid him, even if you’re unhappy with his work.
What to do if this happens to you
A contractor will usually warn you before he files the lien and it’s worthwhile to either pay the bill (if he’s right that you owe it), negotiate a settlement (if there’s truth in both sides’ claims), or try to work it out somehow before he files the lien. If you can’t, and he drops a mechanic’s lien on you, here’s how to respond—and how to protect yourself from ever receiving one to begin with:
Have a construction lawyer look at the lien. “Contractors have to follow certain procedures for the lien to be valid,” says Tampa attorney George Meyer, who is chair-elect of the American Bar Association’s Forum on the Construction Industry. “It’s not uncommon to find that the lien is invalid because a deadline was missed or some other technicality is wrong.” You’ll pay around $1,000 to have an attorney review the lien and get it thrown out if it’s invalid, a process that usually happens within 60 days of the lien being recorded. But even if you get the lien thrown out, your headaches may not be over, because the contractor could sue you for breach of contract in a separate proceeding.
If the lien is valid, your lawyer will help you decide whether to fight the lien in court or negotiate a settlement. This depends largely on which state you live in. In some, proof that you’ve paid your bills—or proof that the contractor who filed the lien has breached his contract and doesn’t deserve to be paid—may be enough to fend off the lien in court. In other states, if you haven’t followed every payment procedure spelled out in the statutes, you may be required to pay the subcontractor even if you’ve already paid the general contractor for the work.
In either case you’ll be looking at legal fees for going to court that range from $5,000 to $15,000. So for small disputes, it may be worthwhile to negotiate a settlement rather than going before a judge, Meyer says. If you’ve paid your general contractor in full, then you can sue the general contractor to recover any losses incurred by a subcontractor’s lien—assuming the general contractor hasn’t gone bankrupt or disappeared—and file a complaint with the state contractor licensing board.
How to avoid the problem
The only way to protect yourself from a mechanic’s lien filed by someone who worked on your project is with a lien waiver. This is a legal document furnished by the contractor or subcontractor at your request. There’s no cost to you and no need for an attorney to review it first. By signing a lien waiver, a contractor or subcontractor agrees that they have been paid in full for work completed and that they no longer have the right to file a lien against your house. Problem is, you’ll need to get a waiver from the contractor and another from pretty much every subcontractor and supplier for each payment you make on the project. That’s a lot of paperwork—and something that almost no homeowner bothers with, according to Meyer. “My advice is to at least get waivers from the general contractor, and preferably from the subs and suppliers with the biggest chunks of your project too,” he says. To do that, you’ll need to discuss the matter with the contractor early in the process and add a line to the contract stating that no payments will be made without lien waivers from x, y and z contractors.
If you decide not to collect lien waivers from subcontractors and suppliers, you could ask the contractor whether he’d allow you to pay each of his subcontractors and suppliers directly. This won’t 100% protect you from liens, but it avoids a situation where the contractor stiffs one of his subs. The contractor may say no to this arrangement, so he can mark up the various elements of the job. Or he might be fine with it, since it saves him some housekeeping work—and means he doesn’t have to lay out the money required to pay their bills before receiving his pay from you. Always collect invoices and receipts from anyone you pay directly.
Since so few homeowners follow any of these measures, almost everyone is dependent on their general contractor to deliver quality work, and to pay his subcontractors and suppliers what they’re owed. In other words, it all comes down to hiring a good contractor. “Get referrals, check references, call the licensing board, call the Better Business Bureau,” says Meyer.