Virginia’s Payment Chain & Why It’s Important to Lien Early

On January 10, 2009

Email This	Comment (1)
Print	Trackbacks

       

By statute, the deadline for contractors to file mechanics liens on projects in Virgina is 90 days from the last providing of services or materials.  However, because of Virginia’s unique “payment chain,”  subs and suppliers should file their liens as soon as problems become apparent.

The “payment chain” rules can be quite complex, but its theory is simple:  The property owner must pay for the project only once.

In other words, if the owner pays the general contractor for work before a lien is filed, the lien against the property owner will fail.

So while the Virginia statues provide contractors with 90 days to file their liens, the practical deadline for filing a subcontractor’s mechanic’s lien is before the GC is paid.

What This Means
In previous posts (here, here and here), we’ve written about some mistakes contractors make when collecting on non-paying projects.  Over and over again, it seems contractors wait too long to file their liens, accept promises of future payments, and fear filing a mechanic’s lien to avoid staining relationships.

While in some states a small amount of delay is bearable, the “payment chain” in Virginia makes it deadly.

Across the United States, the best way to protect yourself from a non-paying project is to lien, and lien early.  The “payment chain” in Virginia makes this more the case.

Understanding the Payment Chain
While the theory behind the “payment chain” is simple, as with any other legal concept, the details are more complex.

Here are some questions that are often asked concerning this concept:  What if the property owner partially pays the GC?  How does this actually function in practice?   How do I know whether the owner paid the GC?  What rights do I have if I lien too late?

Fullerton & Knowles, a construction law firm in Virginia, Maryland, Pennsylvania and Wash. D.C. published a Construction Law Survival Manual on its website with answers to these questions.  You can find the particular discussion of the “Payment Chain” at this link.

Things You Can Do To Prevent Payment Chain Problems
The “payment chain” rules apply by default on every construction project.  However, there are features within the Virginia Code that subcontractors can use to bypass these rules.

The Code of Virginia’s Section 43-11 provides that by sending certain notices to the property owner and/or general contractor, the subcontractor can protect itself from a “defense of payment.”   In other words, by notifying the owner and contractor that certain materials or services were provided, the subcontractor or supplier puts the upper tier parties on notice that they deserve payment.

The require notices do require some administrative expense, however, as the code requires that 2 notices are actually sent.  Fuller & Knowles describe the notices and their benefits on its website, as follows:

First, a “Pre-registration” notice is sent to the owner and/or the general contractor before labor and materials are supplied to the project. After labor or materials are supplied, the claimant must provide a second notice with a statement of account and affidavit. The claimant supplying a subcontractor can elect to send the notice only to the general contractor. This will not obligate the owner, but will still obligate the general contractor. The potential benefits are:

1. The Section 43-11 notice can partially take the claimant out of the defense of payment system.  The owner and upstream contractors become directly obligated for payment, to the extent they are holding money at the time they receive the second notice and statement of account. The owner and general contractor essentially provide an involuntary guarantee or joint check agreement after receipt of the second notice.
2. A Section 43-11 notice will probably also provide priority over other mechanic’s lien claimants. In a “partial defense of payment” situation, the 43-11 notice claimant can take the entire fund held by the owner and general contractor. Other mechanic’s lien claimants will receive nothing until the 43-11 claimant is paid in full.
3. There is also an extended deadline for the Section 43-11 claim second notice. A claimant may still have Section 43-11 rights, even after the deadline for mechanic’s lien filing. A claimant probably also still has Section 43-11 rights, even if the claimant has waived lien rights.
4. It is way to avoid problems and legal fees altogether. If the owner and general contractor know they may become obligated, the claimant is likely to receive payment without legal assistance. The owner and general contractor are aware of the players on the project and are motivated to see payments properly applied.

Zlien Can Help
Zlien files mechanics liens in the State of Virginia, as we also prepare and send all Virginia construction lien notices.

Fuller & Knowles state that the 43-11 notices are underutilized by contractors because of administrative expense.   Quite frankly, its also because the notices are confusing, and in the middle of operating your construction company it’s difficult to keep up with sending, tracking and managing these notices.

Zlien solves this problem.

You give us the project data, and our propriety web-based software recommends certain notices and documents, and with the click on a button we’ll prepare these documents, send them for you, track them, and manage them through your client login panel.

Give us a shot, and let us show you how to Lien Smarter.