Are Your Payments Proper?
The owner of any construction project runs the unfortunate risk that its general contractor will not live up to its end of the bargain. If the contractor has not been paying its sub-contractors or suppliers, the owner may wind up in a situation where it faces liability for liens that exceed the contract price. If this occurs, the owner is faced with the unpleasant situation where it may pay twice for the same work. If however, the owner follows the specific procedures of Florida’s construction lien law, the owner’s liability for liens will be limited to the contract price. Put another way, if all of the owner’s payments to the contractor have been “proper”, the owner will have no liability for any lien amount that exceeds the contract price, including change orders. If there is no fixed contract amount, like a cost plus contract with no guaranteed maximum price, the owner’s liability for liens will be limited to the reasonable value of the improvements made.
The specific procedure for making proper payments is found in F.S. 713.06, however there are three key areas an owner needs to focus on. First, the owner must ensure that all potential lienors have been paid prior to making a progress or partial payment to the general contractor. This can be accomplished by obtaining a lien release from both the general contractor and all lienors who have served a Notice to Owner and an affidavit from the general contractor stating that all lienors have been paid to the extent of the payment being made by the owner to the general contractor.
Next, the owner must ensure that all potential lienors have been paid in full prior to making final payment to the general contractor. This is accomplished by requiring the general contractor to provide a final contractor’s affidavit stating that all potential lienors have been paid, or listing those that have not been paid. If the affidavit lists any unpaid lienors, the owner must ensure that they are paid prior to making payment to the general contractor. The owner has no obligation to pay any lienor who has not served a Notice to Owner, and may rely on the affidavit to this extent. It is important to note that the owner may not rely upon the affidavit if it omits unpaid lienors that have served a Notice to Owner. It is critical that the owner obtain final lien releases from all lienors who have served a Notice to Owner prior to making final payment to the general contractor.
Finally, the owner must not make any payments to the general contractor after the expiration of the Notice of Commencement. The owner must also ensure that the legal description contained in the Notice of Commencement is correct, as an incorrect legal description may render payments improper. If the Notice of Commencement is about to expire and the project is still ongoing, the owner should amend the Notice of Commencement to extend the effective period.
In sum, if the owner follows the procedures outlined above, it will limit its liability for liens to the contract price. If the owner makes any improper payments, it may wind up paying twice for all amounts improperly paid, which may result in payment of amounts in excess of the contract price. As such it is critical that the owner ensure that these procedures are strictly followed throughout the project, from the preparation of the Notice of Commencement, all the way through to final payment.