Lien Law: Use It or Lose It

Picture this. Your company has just completed construction of its new corporate headquarters. You are ready to make final payment to your contractor of $100,000 and convert your construction financing into a lower cost permanent loan. Although your understanding was that everyone had been paid, subcontractors and suppliers have recorded lien claims against the project in excess of half a million dollars, and your contractor says he's broke. Your lender refuses, however, to close on the loan until all claims of lien are cancelled. To get the claims of lien cancelled, your attorney advises that you may have to pay twice for the same work. Are you in Alice's Wonderland? No, you have just entered the Construction Lien Zone.

Picture this. Your company has just completed construction of its new corporate headquarters. You are ready to make final payment to your contractor of $100,000 and convert your construction financing into a lower cost permanent loan. Although your understanding was that everyone had been paid, subcontractors and suppliers have recorded lien claims against the project in excess of half a million dollars, and your contractor says he’s broke. Your lender refuses, however, to close on the loan until all claims of lien are cancelled. To get the claims of lien cancelled, your attorney advises that you may have to pay twice for the same work. Are you in Alice’s Wonderland? No, you have just entered the Construction Lien Zone.

A Claim of Lien is an encumbrance against real property created by state law for the purpose of securing payment for labor, materials or services expended to improve that property.1 Because owners are reluctant to pay for construction work in advance, and repossession of construction work, if it is not paid for, is impractical, construction lien laws were enacted to encourage building and development by providing a means by which contractors and others performing work on credit could secure their right to payment through the recording of a Claim of Lien against the owner’s improved property.

Despite good intentions, lien laws can result in an unwary owner or contractor having to pay twice for the same labor, materials, or services.2 Owners and contractors can reduce their risk of paying twice for the same work, however, by taking certain precautions generally available under their state’s lien laws. To avoid confusion–and because of the differences in state lien laws–this article focuses primarily on lien law in the State of Georgia. Many of the same concepts apply in other states as well. Because lien laws vary significantly from state to state, and the outcome may vary due to subtle differences in facts, the prudent reader should consult a competent construction lawyer for legal advice concerning their particular circumstances.

Brief Overview of Mechanics’ Liens

In the United States, mechanics’ lien rights have existed since Thomas Jefferson started construction of Washington, D.C. in 1791.3 As the country grew and construction became increasingly vital to the growth of the nation, the various states enacted mechanics’ lien statutes to encourage construction while preventing owners from “enjoying the labor and materials furnished by others without compensation.”4 The term “mechanic” generally means one who performs skilled work, while the term “laborer” is more often applied to someone who primarily performs physical work at fixed wages with relatively little skill or special training.5 Mechanics’ liens arise by operation of law, but require a contractual basis before there can be a valid Claim of Lien.

In Georgia, lien laws were enacted in the early 1800s to provide protection for masons and carpenters. The statute has been modified a number of times since then and now extends to cover a wide variety of persons, including, among others, registered architects and engineers, contractors, subcontractors, materialmen, suppliers and others who provide labor, materials or services for the construction or improvement of real property.6

Lien claims can be very effective in assisting claimants to collect unpaid compensation. However, because statutory lien rights are in derogation of the common law and can work serious hardship upon otherwise innocent owners, many states, like Georgia, require that lien claimants strictly comply with each and every provision of their state’s lien laws, or their lien may be unenforceable. Other states require only substantial compliance and liberally construe their lien laws to further the public policy of securing payments to subcontractors, suppliers and laborers.

A good knowledge of the applicable lien law is therefore critical to both enforcing and defending against a claim of lien. Knowledge of the lien law starts by understanding the available statutory procedures to identify, preserve, subordinate and waive lien rights. The following sections discuss the procedures available in Georgia.

1. Notice of Commencement and Notice to Contractor

Georgia, like many other states, has developed statutory procedures for identifying potential lien claimants at the start of the construction work. Once potential lien claimants are identified, the owner is in a better position to verify that all work has been paid for and that the property is protected from Claims of Lien.

In Georgia, an owner has the option of recording or causing its agent or contractor to record with the Clerk of the Superior Court in the county where the project is located a Notice of Commencement no later than 15 days after the contractor physically starts work on the property. The Notice of Commencement contains information relevant to the lien rights of potential lien claimants on the project, and should include the following:

(1) The name, address and telephone number of the contractor;
(2) The name and location of the project being constructed and the legal description of the property upon which the improvements are being made;
(3) The name and address of the true owner of the real property;
(4) The name and address of the person other than the owner at whose instance the improvements are being made, if not the true owner of the real property;
(5) The name and address of the surety for the performance and payment bonds, if any; and
(6) The name and address of the construction lender, if any.7

To be effective, a copy of the Notice of Commencement must be posted at the project site throughout the duration of the project.8 In addition, the contractor is required to provide a copy of the Notice of Commencement to any subcontractor, materialman or person making a written request to the contractor for a copy.

While the overriding purpose of the Notice of Commencement is to identify potential lien claimants who do not have a direct contract with the contractor (“Remote Lien Claimant”), a subtle effect of the law is that it cuts off the lien rights of any Remote Lien Claimant who fails to properly respond to a recorded and posted Notice of Commencement by sending both the owner and the contractor a Notice to Contractor9 within 30 days from the filing of the Notice of Commencement or within 30 days following the first delivery of labor, services or materials to the project, whichever is later. Remote Lien Claimants who fail to send a Notice to Contractor lose their right to enforce a Claim of Lien.

Owners may delegate the obligation to record a Notice of Commencement to their agent or contractor by agreement. No matter who records the Notice of Commencement, though, diligent owners should contractually obligate their contractor to post the Notice of Commencement at the jobsite and to provide copies of the Notice to potential lien claimants upon written request. It is also prudent for owners to verify that such obligations have been fully satisfied.

2. Preliminary Notice of Lien Rights

Georgia has another optional notice procedure in its lien law: the Preliminary Notice of Lien Rights.10 While seldom used, the procedure is available and thus warrants some discussion. Like the Notice to Contractor, identification of potential lien claimants is the underlying goal, but recording a Preliminary Notice has significantly different consequences. When properly recorded, a Preliminary Notice of Lien Rights will prevent a claimant’s lien rights from being cut off by a Contractor’s Final Affidavit (discussed later). A potential lien claimant’s Notice to Contractor has no such effect.

A mechanic or materialman may record a Preliminary Notice of Lien Rights with the Clerk of the Superior Court of the county where the project is located “within 30 days after the date [they] delivered any materials or provided any labor or services for which a lien may be claimed.”11 Within seven days of recording, the potential lien claimant must then send a copy of the Preliminary Notice of Lien Rights to the contractor or the owner by registered or certified mail.12

The notice informs the owner, lenders, title examiners and the public at large of the existence of the inchoate lien rights of the potential lien claimant on the project. Unlike a Notice to Contractor, however, a Preliminary Notice of Lien Rights does not need to be recorded within 30 days of the first delivery of labor, materials or services–any delivery will suffice. The Notice to Contractor and Preliminary Notice of Lien Rights may be combined in the same instrument, but to be effective, the instrument must still meet the requirements of both notice procedures.

Because a Preliminary Notice of Lien Rights effectively preserves lien rights from being cut off by a Contractor’s Final Affidavit, the owner–before disbursing final payment to the contractor–should affirmatively verify that all parties who have recorded a Preliminary Notice of Lien Rights have either been paid, waived their lien rights or had their Preliminary Notice of Lien Rights dissolved.

3. Demand to File a Claim of Lien

Georgia’s lien law also gives owners and lenders the right to send a potential lien claimant, who recorded a Preliminary Notice of Lien Rights, a demand by certified or registered mail to file a Claim of Lien.13 To be effective, the Demand to File a Claim of Lien must be sent after the contractor has achieved substantial completion, or the potential lien claimant’s contract has been terminated or abandoned.

If the potential lien claimant fails to record a Claim of Lien within 10 days after receiving the Demand, his Preliminary Notice of Lien Rights expires and is dissolved. Theoretically, the Demand allows owners and lenders to quickly clear title of Preliminary Notices of Lien Rights. In practice, however, an owner risks getting what he asks for when he demands that a Claim of Lien be recorded against his property. A Demand to File a Claim of Lien can serve as a reminder to potential lien claimants of lien rights they might otherwise have overlooked until it was too late to record their claim. Accordingly, owners should use the Demand procedure only with the greatest caution.

4. Lien Waivers

One of the most effective ways to protect an owner’s real property from liens is to require as an absolute condition precedent to the owner’s obligation to pay the contractor that interim and final lien waivers be executed by all subcontractors and suppliers contracting directly with the contractor, and by all Remote Lien Claimants providing a Notice to Contractor, a Preliminary Notice of Lien Rights, or both.

In Georgia, to be effective, lien waivers must be executed after performance of the work covered by the waiver; a future or prospective waiver of lien rights is unenforceable. A diligent owner should also require that the waiver be through the date it is signed, rather than for the amount of the payment. This provides greater certainty that lien rights are completely waived, since a specific amount may not always include pending claims or unbilled work.

In addition, the lien waiver must substantially conform to the statutory lien waiver form. Some construction attorneys endorse the view that the statute does not prohibit adding terms to a form that otherwise substantially conforms to what is set forth in the statute. However, the law is unclear whether a lien waiver form that contains additional (as opposed to different) terms from the statutory form is enforceable. Until this issue is resolved by the courts, the safer course is to include any additional terms in a separate instrument, rather than risk having a lien waiver defeated for failing to substantially conform with the statutory requirements.

It is important to remember that a lien waiver is not a general release of claims; it only waives lien rights. A person signing a lien waiver may still have a claim (or multiple claims) against the person with whom it contracted. As a result, diligent owners may want their contractor to execute a waiver and release of all claims through the date of each pay application in addition to executing a lien waiver.

Lien waivers should be executed and returned with each invoice or pay application in connection with any improvement to real estate, not just major construction projects. Taking lien waivers for improvements such as painting, landscaping, equipment installation and the like may very well avoid subsequent problems with lien claims. Although a lien waiver is not necessary for repair or maintenance work, the difference between repair and maintenance work and construction work is not always readily apparent. When in doubt, the safest course is to ask for a lien waiver.

Georgia’s lien waiver form does not have to be witnessed or notarized, but it is common to require one or the other in case the party waiving lien rights later claims forgery. Having the waiver notarized can also facilitate dismissal of a lien action, as it will be treated by the court as an affidavit requiring no further evidentiary foundation.

5. Affidavit of Nonpayment

If an interim or final lien waiver has been provided to the owner or general contractor, but payment has not actually been received, an Affidavit of Nonpayment or a Claim of Lien must be recorded before the expiration of 30 days from the date of signing the lien waiver, or the waiver becomes binding against the potential lien claimant for all purposes, irrespective of whether payment was actually made. Thus, in the event of nonpayment, a lien waiver does not assure that the property is free and clear of a Claim of Lien until at least 30 days after it was executed.

6. Bond to Discharge a Lien

Owners generally want Claims of Lien removed from their properties as quickly as possible to avoid breaching their loan or lease agreement or delaying the closing of their permanent loan, among other reasons. There are several options for canceling a Claim of Lien short of paying the total amount claimed to be due. For instance, a Claim of Lien may be cancelled or dissolved: (1) as a result of a negotiated compromise and settlement with the lien claimant; (2) by the lien claimant’s voluntary cancellation; (3) by order of a court; (4) by failing to timely bring an action on the Claim of Lien; or (5) by recording a lien transfer or dissolution bond.

In Georgia, the owner or the contractor “employed to improve the property” has the right to file a bond “before or after foreclosure proceedings are instituted.”14 “Bonding off” a Claim of Lien (discharging the lien by filing a bond) is often the preferred route because it clears title quickly, conveniently and economically without waiving any dispute the owner or contractor may have about the amount claimed to be due. Although the bond effectively discharges the real property from the lien, a lien claimant must still commence an action for the recovery of the alleged debt within 12 months from the time the claim became due.15

Because the contractor is usually in a better position than the owner to resolve a claim by a subcontractor or supplier and to obtain a lien dissolution bond, owners commonly include in their construction contract with the general contractor an obligation that if a Claim of Lien is filed, the general contractor must bond it off. The obligation may be conditioned upon the owner having made proper payments to the contractor for the lien claimant’s work–or it may be unconditional, requiring the contractor to bond off any and all liens, irrespective of whether the owner has paid the contractor for the lien claimant’s work.

7. Claim of Lien

In Georgia, if payment has not been received for labor, materials or services, a lien claimant must file his Claim of Lien within three months (not 90 days) from the time the last materials, labor or services were delivered or supplied to the project, or its lien rights are deemed forever abandoned. A Claim of Lien recorded either before or after the three-month period is unenforceable, even if consented to by the owner. In states such as Georgia which strictly construe lien statutes, lien claimants ignore such details at their own peril.

To preserve a recorded Claim of Lien, the claimant must bring an action against the person with whom it had a contract within 12 months from the date the claim became due. An action can be combined against both the owner and the person or entity with whom the lien claimant had a contract only if venue against both is proper in the same county. Otherwise, the lien claimant must first obtain a judgment against the person or entity with whom it had a contract before filing a second action against the owner to perfect the Claim of Lien.

Contrary to the ordinary meaning of the terms, a claim comes due on the last date that labor, materials or services are furnished, not the date that payment is contractually required to be made. Therefore, payment terms such as “net 30” are ineffective for extending the time for recording a Claim of Lien. As a result, a prudent owner should obligate its contractor to keep detailed and accurate records reflecting the dates that work was performed and by whom. Preferably, the records should include the lien claimant’s own daily reports and time records.

Perfection of the Claim of Lien is usually accomplished through filing a lawsuit, although there are some cases in Georgia where Claims of Lien perfected in arbitration were enforced. Once a Claim of Lien is perfected against an owner’s real property, it becomes an encumbrance against the property that can either be foreclosed upon, causing a judicial sale of the property, or more commonly paid when the property is sold or refinanced.

8. Contractor’s Final Affidavit

One of an owner’s best methods for quickly and effectively eliminating lien rights is to require its contractor to execute a Contractor’s Final Affidavit contemporaneously with the final disbursement of the contract price. A Contractor’s Final Affidavit is a sworn statement that “the agreed price or reasonable value of the labor, services, or materials [for the improvements] has been paid or waived in writing by the lien claimant.”

As discussed above, a Contractor’s Final Affidavit effectively cuts off all lien rights that have not previously been preserved by recording either a Claim of Lien or a Preliminary Notice of Lien Rights. A contractor’s false swearing that all potential lien claimants have been paid does not invalidate or affect the enforceability of the Contractor’s Final Affidavit. As a result, the owner, its lender and its title company may rely upon the Contractor’s Final Affidavit to cut off any lien rights that were not recorded prior to execution of the affidavit.

9. Owner’s Defenses to a Claim of Lien

In the event a Claim of Lien is actually filed against an owner’s property, there are a number of possible defenses an owner can assert, including, but not limited to:
(1) Failure of the lien claimant to comply with each and every provision of the lien law;
(2) Failure to file a Notice to Contractor within 30 days of first delivery of labor, materials or services;
(3) Failure to provide the statutory information required by the Notice to Contractor;
(4) Failure to send a copy of the Notice of Contractor to the owner or agent of the owner and to the contractor;
(5) Failure to file a Claim of Lien which conforms in all respects to the statutory requirements;
(6) Failure to file a Claim of Lien within three months from the delivery of the last material or the last provision of labor to the project;
(7) Failure to send a copy of the Claim of Lien to the owner or contractor;
(8) Failure to file suit against the person primarily liable within 12 months from the time the claimed amount became due; and
(9) Failure to file a notice of action within 14 days of filing the lawsuit.16

In addition to the defenses listed above, the owner may also claim that the combined amount of the lien claims exceeds the contract price of the improvements made or the services rendered. However, this defense is difficult to prove and requires a showing that payments were properly disbursed to all persons providing labor, materials and services, not merely to the contractor.

CONCLUSION

Although lien laws are complex and can be a trap for the unwary, with a little bit of foresight and planning, owners can utilize the statutory scheme to protect their property and construction projects from unexpected encumbrances and Claims of Lien. Through the affirmative use of bonds, lien waivers and final affidavits, owners can significantly reduce their exposure to liability for a contractor’s nonpayment of subcontractors and material suppliers.

ENDNOTES


  1. Black’s Law Dictionary 981 (6th ed. 1990.) 

  2. Payment of the full contract price to the contractor, standing alone, is not a complete defense to the foreclosure of a materialman’s lien. Mayer Elec. Supply Co. v. Federal Ins. Co., 195 Ga. App. 191, 192, 393 S.E.2d 270, 272 (1990). 

  3. Daniel F. Hinkel, Georgia Construction Mechanics’ & Materialmen’s Liens § 1-2 n.2 (3d ed. 1998). 

  4. Id. at § 1-1. 

  5. Steven G.M. Stein, 3 Construction Law § 9.03[6] (2004). 

  6. O.C.G.A. § 44-14-361 (2004). Georgia’s lien statute also applies to registered land surveyors, registered foresters, machinists and manufacturers of machinery, railroad construction contractors, and suppliers furnishing rental tools, appliances, machinery, or equipment for the improvement of real estate. Id

  7. O.C.G.A. § 44-14-361.5 (2002). 

  8. The posting may need to be in a conspicuous location, although this issue has yet to be addressed by statute or the courts in Georgia. 

  9. Id. at § 44-14-361.5(c). A Notice to Contractor must set forth:
    (1) The name, address, and telephone number of the person providing labor, services, or materials;
    (2) The name and address of each person at whose instance the labor, services, or materials are being furnished;
    (3) The name of the project and location of the project set forth in the Notice of Commencement; and
    (4) A description of the labor, services, or materials being provided and, if known, the contract price and anticipated value of the labor, services, or materials to be provided or the amount claimed to be due, if any. 

  10. O.C.G.A. § 44-14-361.3. 

  11. O.C.G.A. § 44-14-361.3(a)(1) 

  12. O.C.G.A. § 44-14-361.3(b). 

  13. O.C.G.A. § 44-14-361.4. 

  14. Id

  15. Stonepecker, Inc. v. Shepherd Constr. Co., Inc., 188 Ga. App. 513, 373 S.E. 2d 295, 296 (1988). 

  16. L. S. McReynolds, Guide to Using the Georgia Mechanics’ and Materialmen’s Lien Statute 12 (1999).