Alert: Virginia General Assembly Tweaks Mechanic’s Lien Notice Requirements

We’re pleased to welcome Christopher Hill back to the Construction Lien Blog for this guest post, bringing information about important changes to mechanic lien statutes in Virgina.  Christopher G. Hill is lawyer and owner of the Richmond, VA firm, The Law Office of Christopher G. Hill, PC, a LEED AP, and member of Virginia’s Legal Elite in Construction Law. He specializes in mechanic’s liens, contract review and consulting, occupational safety issues (VOSH and OSHA), and risk management for construction professionals. Mr. Hill authors the Construction Law Musings blog where he discusses legal and policy issues relevant to construction professionals.

I want to thank Scott for, once again, letting me guest post here at the Construction and Mechanic’s Lien blog.

I have discussed the picky nature of Virginia mechanic’s liens often over at my Construction Law Musings blog. Not only are the requirements and details strictly enforced, but the Virginia General Assembly seems to feel the need to tweak them in each of its sessions.

The latest change involves the use of a mechanic’s lien agent on residential projects. Beginning at the start of this month, July 1, 2010, a contractor can no longer depend on the failure of the owner to list a mechanic’s lien agent on the posted building permit. The new statute requires that a contractor go beyond merely reading the building permit and make a reasonable inquiry with the local building authority to determine the identity of the mechanic’s lien agent.

Another key change to this provision allows an owner to amend a building permit to add a mechanic’s lien agent at a date sometime after the beginning of construction. Based on this change to the statute, contractors must be constantly vigilant to any lien agent changes to assure that their required 30 day notices to the agent are properly filed because the owner is likely to bring a defense of failure to give notice by a contractor or subcontractor (regardless of if the trade is finished or not) should such notices remain un-filed or un-amended.

Aside from the obvious need to keep abreast of the changes to the mechanic’s lien statutes in Virginia, contractors and other construction professionals must also update their long standing policies for notices on residential projects. Consultation with an experienced construction attorney is key in assuring that you are both up to speed on legislative and judicial changes and that your business procedures take such changes into account.

Can I File a Mechanics Lien For This?

Lien laws vary from state-to-state, but across the country it’s a consistent principle that contractors and suppliers can only file mechanic’s liens for work they perform on a construction improvement project.

This begs the very important questions – what is a construction improvement project?    And beyond that, what is a construction improvement?

With respect to Virginia’s law on the issue, the Virginia Real Estate, Land Use and Construction Law Blog just posted on this topic:   The Line Between Furniture and Fixtures:  What Constitutes An Improvement, Part II. The post quotes a recent federal civil case, Summit Community Bank v. Blue Ridge Shawdows Hotel & Conference Center, LLC, whereby the judge distinguished between installed cabinets (which can be liened) and furniture delivered to the project (which cannot be liened) saying:

It is not sufficient for materials to simply add value to a building by their mere presence without any further connection to the building.

The law in Washington and Oregon is very similar to Virginia.  In both of these states, claimants may lien for work they perform in the “improvement of real property” or work used “in the construction of any improvement.”

Louisiana’s lien law is a bit more unique in this regard, and perhaps the most unique in the nation.   In Louisiana, claimants may file a lien whenever they perform services in connection with a “Work.”    A “Work” is defined as follows by the statute (LA RS 9:4808):

A work is a single continuous project for the improvement, construction, erection, reconstruction, modification, repair, demolition, or other physical change of an immovable or its component parts.

I once represented a claimant in a Louisiana action against it to remove a mechanics lien, whereby I submitted a memorandum to the court distinguishing “work” (little w” from “Work” required by the statute (big w).   I quoted the 1985 Louisiana Fourth Circuit case Lake Forest, Inc. v. Crilot Co., et al (466 So.2d 61) wherein a subcontractor’s lien against a property for excavation work related to the operation of a sand pit was challenged.

Interesting about this case is that there was no building or “improvement,” but the lien was found valid because the work was considered a “Work,” with the court explaining as follows:

Although “improvement” language is used in this general statement, La. R.S. 9:4808 contains a broader wording.  The definition of “work” as “a single continuous project for the improvement…or other physical change of an immovable…” appears to apply to this unique sand pit operation.

We conclude that this sand pit…was designed to improve Lake Forest’s property.  At the very least the operation was for the “modification…or other physical change of an immovable.”

Summary

Here is a short summary of this post.   It’s important to know what is and what is not an “improvement” to determine whether you can in fact file a construction lien for the work or materials you provided.   It’s also important to answer that question within the context of the laws applicable to your project.   Most of the stuff is black & white…but in some cases, there can be a little gray.

Christopher Hill Launches Great Resource for Virginia Mechanic Liens

Our friend at Construction Law Musings, Virginia construction attorney Christopher Hill, just add a really great resource to his top-notch construction law blog for those interested in construction liens.   A Mechanic’s Lien Page.

Before the lien page, Musings was already a great source of  information on Virginia lien laws.   The new page really organizes that data.

Here are a few of the articles you can find within the new section:

A Lien By Any Other Name Can Sound Just As Sweet (written by yours truly)

Q:  What can you lien?  A: What did you bring to the project?

Contracts, Liens and Notices

Enjoy.

(P.S. If you’re looking for information on Virginia’s lien scheme right here at the Construction Lien Blog, you can just check out our Virginia tag.    It even includes a post by Chris Hill).

Mechanics Lien – Is it like a Mortgage? Yes and No.

In most states, contractors and suppliers can file “Mechanics Liens,” whereby they acquire a privilege against the construction jobsite’s property.    The liens usually work like a mortgage on the property, such that it must be satisfied before a property is sold, transferred or refinanced.

While liens act a lot like mortgages, they certainly are not identical to mortgage instruments.

First, in most states, mechanics liens themselves expire.    Most states require that the contractor file a lawsuit to “enforce” or “foreclose” on the lien within a certain time period (sometimes short), to extend the life and effectiveness of a lien.   Here are some example timeframes:

In Louisiana, liens must be enforced within 1 year from filing.  In Washington, lien foreclosure is due within 8 months of filing.  In California, you must foreclose within just 90 days of filing!

Second, depending on the state, liens are given more or less “priority.”    Lien priority effects the order the instruments are paid in the event of a property sale or foreclosure.   In other words, if a property is foreclosed upon but sold for an amount less then the sum of all liens, and there are two mortgages and a mechanics lien on record, who gets paid and who doesn’t?

The answer to this question depends on your state.   In Louisiana and Washington, liens take a junior priority to mortgages and similar instruments.  In other states, however, the rules are or, depending on circumstances, can be different.    In Virginia, mechanics liens have priority over construction loan mortgages.   In Minnesota, depending on when the respective instruments are filed, a mechanics lien can take priority over mortgage-type instruments.

How Filing A Lien Can Be Helpful on a Bankrupt Project

Let’s face facts:  2009 has not been a great year for construction.

Contractors and Suppliers large and small are facing non-payment scenarios, and sometimes, while waiting for a prolonged payment some are getting feared news:  that the owner or general contractor is filing bankruptcy.

Christopher Hill, a construction attorney in Virginia, just this week published a short and easy-to-read article on JDSupra explaining how Virginia Mechanic’s Liens Survive Bankruptcy.   Mr. Hill summarizes his point with the following:

[I]n today’s climate, contractors should not feel that they are completely helpless in the bankruptcy fight.   Filing a mechanics lien…can put a contractor or subcontractor in as good a position as possible should the owner of a project file bankruptcy.

While the article regards the mechanics lien statutes in Virginia, many other states’ lien statutes operate the same way.

Generally speaking, mechanics lien statutes are written to protect those who contributed to construction projects.   Regardless of what errors in payment occur on a construction project, mechanics liens are the best tool for your company to protect its right to get paid.

But the right doesn’t last forever, and if you file incorrectly, the rules are uncompromising.

Get Started with Express Lien to file your claim of lien, and protect your company’s right to payment.

What Costs / Labor To Include In Your Lien?

It’s been an interesting week on the web as it relates to mechanic’s liens, as I’ve run across a number of web posts about the types of services that can be included in a lien.

Let’s look at the matter theoretically.   Construction lien laws are normally drafted to protect contractors, who invest labor and expense into the improvement of a property.  However, since the laws also balance the property rights of persons or organizations, each state certainly does something to qualify what types of labor and expense can be represented in a lien, and which cannot.

The question here, therefore, is quite simple:   have you performed work or provided materials that can be the subject of a lien?

It’s one of the most important questions a contractor or supplier can ask when determining how to best collect on a non-paying account or project.   If you work does not qualify for a lien, for example, there is no need to even consider if notice is required and other lien filing requirements.

It’s important to consult the laws or your particular state to determine what type of materials and labor can be the subject of a lien, and which cannot.  However, two recently decided cases in Virginia and Kentucky are revealing of some general principals that are followed by most states.  The principal is essentially this:  you can only lien for labor and materials that actually go into improving the property.

What does this exclude?

In Virginia, Virginia Lawyers Weekly reports that a Hanover County Circuit Court invalidated a mechanic’s lien filed by a contractor that incurred costs in anticipation of construction of a steel building, but did not provide labor or materials actually employed in construction of the building.

The case is captioned Dallan Construction Co. v. Super Structures General Contractors, Inc, and can be downloaded here.

Similarly, in Kentucky, the Kentucky Court of Appeals held that “mowing, trimming, edging and street cleaning” did not “permanently improve the property,” and therefore, a mechanics lien was not allowed to be filed for the services provided.  That case is discussed at the South Carolina Community Association Law Blog, and is captioned Steeplechase Subdivision Homeowners Association, Inc. v. Thomas, Ky. Ct. App. 2008.

Open Accounts and Mechanics Liens

The following post was written by a guest contributor to the Construction Lien Blog, Christopher Hill.    Chris a construction attorney in the state of Virginia, leading the construction practice group at Durrette Bradshaw.  He publishes a construction law blog titled “Construction Law Musings.”   [Chris' profile at Construction Lien Blog]

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Scott Wolfe, one of the contributors to this blog asked me for a piece on Virginia Mechanic’s Liens.  Scott has written several good pieces on liens in the Commonwealth of Virginia, and I hope that this one proves as helpful.

In researching liens in the Commonwealth of Virginia, I ran across a question that should be on the minds of construction professionals in Virginia, particularly suppliers of materials.  The question is simply “On an open account (based on a credit agreement or other arrangement), is each delivery to a particular contractor its own “work” such that the 90 day clock runs from the completion of each delivery, or do all deliveries to a particular project constitute the “work” on that project such that the 90 day clock only runs from the last delivery to the job site?” (How’s that for simple!)

The answer to this question is (drum roll please!)- “It depends.” (I know, you are shocked at such a “lawyerly” answer.)

The Virginia Supreme Court weighed in on this question in United Savings Association of Texas, F. S. B. v. Jim Carpenter Company, Record No. 951470 (2006).  The Jim Carpenter case involved three different cases of liens that were filed by material men pursuant to various forms of open account contracts.  You can read the case to see the particular facts of the case but in essence the owners/general contractors on the project argued that the material men could not lien for any materials delivered to a particular project outside of the 90 day lien window and the material men argued that all of the materials were delivered to the same projects and therefore all constituted one continuous contract.

The Virginia Supreme Court held that the intent of the parties controls.  On the one hand, general deliveries to a contractor for general use (i. e. warehousing for use at some time in the future) each constitute a separate contract, each with its own 90 day clock.  On the other, if the material deliveries upon which the lien is based are all delivered for the benefit of a particular project then they all constitute one continuous contract and the 90 day clock does not start to run until the last delivery is completed.

What do you, as a construction professional, take from this case?  Be careful with your open accounts.  Make sure that when delivering materials to a job site based upon an open account you are exceedingly clear with your purchase order or takeoff language that certain materials are to be delivered to a certain project.  Failure to do so may lead a court to decide that the materials were a general delivery and cut off much or all of your recovery.

As with everything else to do with the picky issues with mechanic’s liens, all of the other requirements (150 day look back, notice, etc.) apply and good legal assistance is a must.

If you are interested in more thoughts on Virginia construction law, please check out my Construction Law Musings blog and join the conversation.

I Didn’t Just Waive My Lien Rights, Did I?: Assessing State Laws

Are you waving goodbye to your lien rights in your contract? Can owners do that? Recently Express Lien reported that Virginia law permits a contractor to waive its lien rights in any project. While this certainly is not uniform across all states, there are a number of states which follow this line of thinking.

The existence of these laws can undermine a contractor’s true security in getting paid on a job, while providing assurances to consumers and builders that financing will not be held up by downstream contractors.

In Nevada, recent law effectively made it possible to limit lien rights during contracting. John Foust and John Ralls of Howrey LLP offer the case of Dayside, Inc. v. First Judicial District Court, 75 P.3d 384 (Nev. 2003) as an example of this unique legal protection. In that case, a contractor signing a standard form contract, which contained a waiver of lien rights clause was prevented from asserting its lien claim. The court found that a knowing assent to a clear and unambiguous term, waiving lien rights, was an enforceable clause which was not adverse to public policy.

In the book Fifty State Construction Lien and Bond Law By Robert Frank Cushman, Stephen D. Butler, Laurence Schor, the authors illustrate that the State of Alabama has permitted contractual waiver of lien rights prior to the work being initiated. The book, which can be found on Google Books, illustrates that Alabama further provides builders with the right to obtain a list of all other contractors working on the job from the general contractor.

On the contrary, states such as Pennsylvania have taken steps to ensure that contractors’ rights are not upended through contract. Joshua Lorenz of Meyer, Unkovic and Scott addresses the effect of a 2006 law, taking effect January 1, 2007, which unanimously passed through the state legislature with the intent to prevent contractual waiver of lien rights. Joshua’s analysis was that the law would have an immediate impact upon construction lending, title insurance and delays on projects.

A second opinion by Michael Zukowski, of Kirkpatrick & Lockhart states that in some instances, where contractors post a payment bond, or for residential construction under $1,000,000.00, a contractor may still expressly waive its lien rights prior to beginning work. Regardless, Pennsylvania’s stance clearly prevents builders from running amuck of the mechanic’s lien statutes.

Florida also prevents the pre-performance waiver of lien rights. An article by Jeffery Wertzman indicates that contractors cannot contractually release these rights until after they have actually performed the work to be released.

In 1994, New Jersey’s legislature passed sweeping reform to its mechanic’s lien statutes. The effect of these laws, among other things, abolished lien waivers during contracting as against public policy. Peter J. Smith of Connell Foley, LLP opines further in his article which can be found in the firm’s publications section.

Similarly, Illinois law expressly prohibits the waiver of lien rights during contracting. Heidi Hennig Rowe, of Schiff Hardin LLP’s Chicago practice, opines that the Illinois mechanic lien statute provides no avenue for a project owner to prevent a contractor from liening its project during contracting. Seemingly becoming the majority position, contractors’ rights are once again protected in the Midwest.

Virginia Contractors CAN Waive Lien Rights

We’ve posted in the past about how difficult it is for Louisiana contractors to waive their rights to lien in a construction contract.   In that post it was explained that under Louisiana law, a party cannot waive a right that it may only possess in the future.

The question of whether a party can waive its right to lien at the time of contracting is treated differently from state-to-state.

It seems that in Virginia, a party absolutely can waive its right to lien a project at the time of contracting.  United Masonry, Inc. v. Riggs Nat’l Bank, 233 Va. 476, 357 S.E.2d 509 (1987).

The availability of lien waivers are explained in Fullerton & Knowles’ Construction Law Survival Guide.

Contractors in Virginia should be cautious before signing a construction contract that they do not waive their right to lien the project in the event of non-payment.  While the law prohibits these type of clauses in other states, in Virginia contractual lien waivers are allowed.

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

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.

Express Lien Can Help
Express Lien 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.

Express Lien 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.