Protecting Your Mechanic’s Lien Rights

03/17/2009 / Rob A. Stefonowicz

In difficult financial times, construction professionals must be mindful of all means by which to secure payment for the toils of their labor and skill, materials and machinery. Property owners likewise must be careful to ensure that the payments made for the improvements reach the intended recipients and that their property will not later be subject to liens. The mechanic’s lien laws in the state of Minnesota are designed to protect both construction professionals and property owners.

WHAT IS A MECHANIC’S LIEN? A mechanic’s lien is a statutorily-created interest in real property available to those making improvements to real property. This interest in the real property is created by following the procedures set forth in mechanic’s lien laws. A mechanic’s lien, if properly perfected under the law, is subject to foreclosure by the lien claimant. This is a significant and valuable remedy by which the unpaid construction professional may secure payment.

WHO HAS MECHANIC’S LIEN RIGHTS? Mechanic’s lien rights are available to those who furnish labor, skill, materials or machinery for an improvement to real property. Minn. Stat. § 514.01. Those with lien rights include design professionals, contractors, subcontractors, and material suppliers.

WHAT IMPROVEMENTS ARE LIENABLE? An improvement to real property is lienable when it is a permanent addition to the property that enhances its value. The mechanic’s lien statute includes a broad description of those improvements subject to lien, including the “. . . erection, alteration, repair or removal of any building, fixture, bridge, wharf, fence or other structure thereon, or for grading, filling in, or excavating the same . . . .” § 514.01. Routine repairs to simply maintain the value is not an improvement for purposes acquiring lien rights. The services of design professionals, including engineers, architects, and surveyors, are also lienable.

WHAT PROPERTY IS LIENABLE? Generally speaking, only private property, as opposed to public property, is subject to mechanic’s liens. The private property and property interests include, but are not limited to, buildings, lots, homestead property, agricultural property, leasehold interests, mortgagee interests, and interests in executory purchase agreements.

DISCLAIMER OR POSTING OF THE PROPERTY. An owner (landlord/tenant situation) who has not authorized the improvement may protect its interest in the property by providing written notice that the improvements are not being done at the request of the owner. Notice that the work is not authorized must be provided in one of two ways: (1) Written notice personally served or sent by certified mail within five days of knowledge of the improvements; or (2) Posting of the notice - and keeping posted - in a conspicuous place on the premises within five days of knowledge of the improvement.

IS PRE-LIEN NOTICE REQUIRED? The purpose of pre-lien notice is to warn the owner of the property that mechanic’s liens may potentially be filed against the property. General Contractors: Unless a statutory exception applies (discussed below), a pre-lien notice must be provided to the owner by every person who (a) enters into a contract with the owner for improvements; and (b) will use subcontractors or materials suppliers on the project. Accordingly, if a contractor enters into a contract with the owner, but does not intend to use subcontractors or material suppliers, no pre-lien notice is required. Subcontractors: Unless an exception applies, all subcontractors must give pre-lien notice.

WHAT ARE THE EXCEPTIONS TO PRE-LIEN NOTICE? Pre-lien notice does not need to be provided to the owner of the property if any of the following apply: Same Ownership: When the contractor is managed or controlled by substantially the same persons who manage or control the owner of the improved property. Multiple Dwelling: When the improved property consists of more than four family units (includes single-family lots) wholly residential in character. Nonagricultural and Nonresidential: Pre-lien notice is not required when the property improved is not agricultural and wholly or partially nonresidential if the work: (1) Is to provide or add more than 5,000 total usable square feet; or (2) Is an improvement to real property where existing property to be improved contains more than 5,000 total usable square feet; or
(3) Is an improvement to real property which contains more than 5,000 square feet and does not involve the construction of a new building or an addition to or the improvement of an existing building i.e., raw land – grading, excavating, etc.

HOW MUST PRE-LIEN NOTICE BE GIVEN? The manner in which pre-lien notice must be given depends on whether the construction professional is a general contractor or subcontractor/material supplier. General Contractors. If there is a written contract with the owner, pre-lien notice must be in the written contract. If there is no written contract, pre-lien notice must be delivered personally or by certified mail to the owner or authorized agent within 10 days after the work is agreed upon. Subcontractors/Suppliers: Pre-lien notice must be given to the owner or authorized agent either by personal delivery or by certified mail, not later than 45 days after the lien claimant has first furnished labor, skill or materials.

WHAT LANGUAGE MUST BE PROVIDED IN THE PRE-LIEN NOTICE? The mechanic’s lien statute provides the specific language that must be included in the pre-lien notice. This language must be followed exactly and must be in a certain font, capital letters and bold print. The pre lien notice language differs for general contractors and subcontractors. See Minn. Stat. § 514.011.

THE MECHANIC’S LIEN STATEMENT. The mechanic’s lien statement is the document that must be prepared and filed and served to preserve one’s lien rights. Contents? The contents are specified in the statute. Timing? The lien statement must be prepared, served and filed within 120 days after the last contribution to the project. Minor or inconsequential work does not extend the timing. Filing and Service Requirements? The lien statement must be filed in the county where the property is located. The owner must be mindful of whether the property is Torrens (registered) property or abstract property, as that will dictate whether the lien statement is filed with the registrar of titles or the county recorder. A copy of the lien statement must be served personally or by certified mail on the owner or the owner’s authorized agent or the person who entered into the contract with the contractor. If by certified mail, service is effective upon the mailing. Single or Multiple Lien Statements? When improvements are made on two or more adjoining lots, one lien statement is permitted if work was provided pursuant to one contract. It is permissible, however, to apportion the work and file multiple lien statements. If the lots are adjoining, but work is done pursuant to multiple contracts, separate lien statements are required. Inaccuracies and Failures to Comply? Inaccuracies in the lien statement can prove fatal to the lien rights. Knowingly overstating the sums claimed due in the lien statement will void the lien. Errors in the filing and service requirements can also void the lien.

MECHANIC’S LIEN FORECLOSURE ACTION. Timing? A lawsuit to foreclose the lien must be filed and served within one year from the date of the last work or materials provided as asserted in the mechanic’s lien statement. The complaint initiating the lawsuit must be first filed in the county where the property is located and then served on the parties. Parties? The parties include the owner as plaintiff and all other persons who claim an interest in the property, including other mechanic’s lien claimants, mortgagees, judgment lien holders, etc. Related Claims? In addition to the underlying foreclosure action, the complaint may include related claims such as breach of contract, account stated, quantum meruit, or misrepresentation. Common Defenses? (1) Failure to provide pre-lien notice; (2) Failure to timely file and serve the lien statement; (3) Failure to timely initiate the foreclosure action; (4) Overstatement of the lien; (5) Defective work, breach of warranty, negligence, breach of contract, slander of title; or (6) Priority disputes. Attorney’s Fees and Costs? A successful lien claimant is entitled to reasonable attorney’s fees, costs and interest.

DETERMINING LIEN PRIORITY. Attachment and Effect. Mechanic’s liens attach and take effect from the date of the first actual and visible beginning work on the property. All mechanic’s liens, regardless of the contractor, will relate back to the first visible improvement on the site. In other words, all mechanic’s liens have equal or coordinate standing relating back to the first work performed or materials furnished. The exception to the relation back is visible staking, engineering, land surveying and soil testing. Liens versus Mortgages. If a mortgage is recorded after the visible improvements have commenced, the mechanic’s lien will have priority unless the lien claimant had actual notice of that unrecorded mortgage.

FORECLOSURE SALE. Judgment. After adjudication on the merits (no right to a jury trial), a certified transcript of the judgment must be delivered to the sheriff. Notice of Sale. Must be properly served, posted and published six weeks before the foreclosure sale. Sale. Conducted by auction in the county where the property is situated. Report of Sale. Sheriff prepares the report that then must be filed with the court. Order Confirming Sale. An order is prepared by the court based on the report of sale. Sheriff’s Certificate of Sale. Filed with the appropriate county office (recorder or registrar) within 20 days of the order confirming the sale. Redemption. The owner of the property may redeem from the foreclosure sale within six months of the date of the order confirming sale. The failure to redeem extinguishes the owner’s interest in the real property. If the owner does not redeem, junior lien claimants or creditors may redeem within successive seven-day periods in the order of the priority of their liens. Junior lien claimants or creditors must file a Notice of Intent to Redeem during the owner’s six-month redemption period. If junior creditors fail to redeem, the interest is extinguished.

PAYMENT ISSUE AND LIEN WAIVERS. Owner’s Right to Withhold Funds. To avoid the risk of paying for the same work twice, an owner may withhold from the contract as much of the contract price as is necessary to discharge the liens of any subcontractor or material providers until lien waivers are provided. The owner has the right to withhold payment for 120 days after completion of the project unless lien waivers are provided. Lien Waivers. A lien wavier must be supported by consideration and be signed by the party to whom payment is due. Criminal Penalties. The mechanic’s lien statute provides that a general contractor’s failure to use the proceeds received from the owner to make payment to unpaid subcontractors shall constitute theft and is punishable under Minn. Stat. § 602.52. Civil Penalties. A person injured by the failure of a general contractor to use the proceeds to pay unpaid subcontractors has civil remedies under the mechanic’s lien statute and can possibly recover “damages, together with costs and disbursements, including costs of investigation and reasonable attorney fees, and receive other relief as determined by the court, including equitable tracing.” Minn. Stat. § 514.02, subd. 2.