Paying Twice for the Same Home Improvement

Here's a scenario with which I can relate from personal experience.

In 1980, we entered into a contract to build a Geodesic Dome home with a general contractor ("Ken") who, himself, lived in a Dome and had been building such structures for several years. We visited some of the homes he had built, saw his own home and were impressed with his ideas and concepts on the utilization of space within the Dome. Incidentally, we had been having difficulty in finding an experienced builder who would undertake the construction of a Dome. (We had previously, had difficulty in obtaining construction financing for the first such home in our area. That issue was, by then, resolved.)

We agreed on a total price - which was to increase from time to time as we made modifications in the plans or simply thought of something else that was necessary. Hint: Be wary of changes. They add up very quickly!

Construction on the home went slowly but steadily. The bank made periodic disbursements to Ken until the structure was ready for final inspection. At that point, for reasons which remain irrelevant and unclear, Ken failed to show up to order the inspections and do the minor touch-ups that are a part of the construction process. We never saw him again; he had apparently suddenly gone out of business! Ken was owed about $3,000 and the bank had that sum ready for disbursement.

In the absence of the contractor, I arranged for the final inspection, obtained the approvals for electrical service and occupancy and we were set to move in. Then we started to receive calls and bills from the plumbing contractor, the company who fabricated and installed a spiral staircase and the company that had made and installed kitchen cabinets. The totals owed to these three sub-contractors amounted to an aggregate sum of $6,800. Recall that the bank was holding $3,000; there was an additional $3,800 due to companies and individuals who had performed services or material incorporated in our home and who were legitimately entitled to get paid.

Here is where the concept of a Mechanic's Lien comes into play.

(The discussion that follows is general and does not apply in every particular to construction in every state. States have varying laws and procedures and a good rule is to have an attorney conversant with your locality's laws and practices review any construction contracts - or any other major contracts - before things go sour!)

A mechanic's lien has nothing to do with "mechanics" in the usual sense, although it could apply to work done on a vehicle. In this case the lien arises out of work performed on real property. It's a legal claim against property being improved, and it can be filed by anyone who provides materials or does work on the project and doesn't get paid. The property itself becomes responsible for the debt, and the people who are owed money can force its sale at auction if something isn't worked out. Normally, it does not get to that point.

Homeowners are often shocked when they find out that they might still end up owing laborers, carpenters, electricians, materials suppliers, or equipment lessors, even if they pay the contractor in full. The whole point of the mechanic's lien procedure is to make the improved property the ultimate guarantor of payment for all contributors to the project.

The law is more concerned about those who provide labor or materials to an improvement project without getting paid than it is about the possibility of the owner having to pay twice for the same work. After all, the owner can turn around and sue the contractor to recover the funds. Often, however, the reason that the contractor failed to pay his suppliers is that he has run out of money!

Consider the contractual rights of the contractor and sub-contractor or material supplier vis-à-vis the property owner. The contractor has an agreement, a contract, with the owner. If there is a breach of performance, the owner may sue. The parties are, in lawyer-talk, in privity. On the other hand, the property owner has not contracted with the supplier of labor or materials, may not have had any role in the selection of that supplier and, often, may not know of his identity or even existence. There is no contractual tie between the parties and, therefore, no basis for a lawsuit between them for non-payment.

Generally, the mechanic's lien works this way. (As I have explained, there are variations, particularly with time frames and details among different states; thus the explanations that follow may not apply completely to your particular jurisdiction.) First, a contributor to the work performed (a supplier or subcontractor) who does not contract directly with the homeowner must provide the homeowner with notice that describes the goods or services that are being contributed. The notice must typically be delivered anywhere between 20 to 60 days of when the goods and services were first contributed. This notice is extremely valuable to the homeowner; the name and even existence of the potential lien holder is now known.

If the charges for the services or material are not paid (usually by the primary contractor) the supplier files a Notice of Lien with the Clerk of the Court or County Clerk or Recorder's Office in the county where the real estate is located. The contributor then has a period of time -- typically between 60 days and a year -- in which he or she can either work out the payment problem or file an action against the owner to enforce the lien, which may ultimately lead to the property being sold at auction. If the enforcement action isn't filed by the statutory deadline, the lien becomes invalid.

Usually, mechanic's lien enforcement lawsuits are rarely filed within the mandatory period, which should mean that the lien has no further effect. Even so, an old lien on a property can negatively impact the owner's ability to sell the property because many title insurance companies will refuse to clear title when the property is sold unless the lien is affirmatively removed, either by a release or by court order. Fortunately, in most states, getting a court order is simple and straightforward when it is clear that the claimant missed the enforcement action filing deadline. However, even if the corrective action is not complicated, it will cost money.

What can a homeowner do to protect himself against liens filed by a person or company with whom there is no direct contractual relationship?

First, the supplier must have identified himself to the owner, by the initial Notice, as a provider of materials or labor. Then, before making payments to the primary contractor (with whom the owner does have a contract), the property owner should obtain a release from the potential lienor stating that the latter's charges have been paid. An alternative is to make the payment check for the amount of the sub-contractor's charges jointly to both parties. This will ensure payment.

As I have stated, each state has variation to the rules on establishment, release and enforcement of liens against property. For this reason, an attorney can be the best and least expensive way to be protected.

What happened to our home and liens? The supplier of the spiral staircase and the maker of the kitchen cabinets had filed valid and timely liens. We paid them both, in full, from the monies held back by the bank and with our own additional money. The plumber did not file a lien and we probably did not have to pay that company; on the other hand, this was a plumber in our community, the work was done and, morally, the company was owed the money. We paid it.