Lien Laws & Out-of-State Construction Projects (Part I)
Like everyone else, your construction company is likely feeling the pressure of our prolonged economic downturn with no end in sight. Some states, but perhaps not yours, are starting to show small upticks in economic activity, possibly leading you to consider joining the tides of contractors looking for work in other states. As your company ventures into other territories, you apply your existing lien law knowledge to out-of-state projects. However, as your out-of-state job approaches completion, something goes horribly wrong. Perhaps there is a change order dispute with a sub who liens the project, causing the owner to withhold payment from you.
Naturally, you attempt to lien the project too. But the out-of-state lien law is drastically different than the one you know, resulting in an inadvertent failure to perfect your company’s lien rights. Even worse, your sub perfected its rights and was paid by the owner to satisfy their lien, so now you must defend the inevitable claim from the owner for sums paid to the lienor.
What went wrong? Your unfamiliarity with the out-of-state lien law gave your sub an unfair advantage when it perfected its lien for sums to which you believe it was not entitled. Your company’s ability to resolve the payment dispute was compromised by the loss of benefits otherwise provided by that particular state’s lien law. Unfortunately, this scenario happens all too often. As contractors expand their business into other states, they seldom consider the differences in lien laws from state to state.
Although lien laws differ significantly, most generally address the same topics – so, with a little advance research, you can learn about the most pressing provisions and perfect your company’s rights in the future. This is the first in a series of blogs that will list various subjects usually covered by lien laws that you should research in foreign states before you begin a construction job there. Today we will begin with differences in the protected class of lienors.
You should identify the entities entitled to lien rights. There is general uniformity throughout most states on this issue, with only a few variations. Most lien laws afford rights to contractors, subs, subsubs, and material suppliers. Some lien laws also provide rights to individual laborers. In some states the protected class of lienors differs depending on whether the project is residential or commercial.
It’s important to discover how far lien rights extend down the hierarchy of contracts. For example, most lien laws protect design professionals, but some do not. Some states give lien rights to certified appraisers, but most do not.
So, determine the class of potential lienors before the project begins. This will help you identify the entities from which you must obtain appropriate releases as the project progresses.
In the next blog in this series, we’ll discuss differences between states in contract requirements to the extent they involve lien rights.