Last week we discussed several types of tax liens often filed against individuals and businesses. Another form of a lien commonly filed is the Mechanic's Lien. A Mechanic's Lien is a legal document filed with the county recorder or county clerk stating that a contractor, sub-contractor or supplier provided certain goods and services (most often labor and supplies) for the construction or renovation of a building and has not been paid. The Mechanic's Lien, like a property tax lien, is placed against the building and the land for which the services were provided, therefore preventing the property from having a clear title. As a result, a Mechanic's Lien could be an indication that, at least in the short run, a subject will not be able to raise the funding or secure the capital needed to make a short term business investment, as a Mechanic's Lien will affect an individual's credit score and ability to draw on equity accumulated in their property. In addition, a Mechanic's Lien could be a larger indicator that a subject has a history of being slow in making payments or defaults on debts.
Mechanics' Liens are terminated when a Release of Mechanic's Lien is filed with the county clerk or county recorder.
A Mechanic's Lien is not necessarily an adverse filing. While the specifics vary by state, contractors are often allowed to file a Mechanic's Lien before any services have been provided in order to secure their payment as long as a 20 Day Notice of Filing has been provided to the property owner. To determine if a particular Mechanic's Lien fits this situation, look at the date the Mechanic's Lien was filed, the date of completion for the project listed on the document and the date payment is due.
When attempting to determine if a Mechanic's Lien was filed under more adversarial circumstances (i.e. the property owner refusing to pay for services rendered), check to see if the lien was filed significantly after the work was completed, or if the release was filed only after an extensive period of time. It is also useful to search for litigation between the contractor and the property owner resulting from claims of non-payment or poor workmanship. In fact, a Mechanic's Lien is the first indication that a lawsuit could be filed. It is the contractor's notice to the property owner, essentially.
In addition, it is important to note that the recording of a Mechanic's Lien does not necessarily mean that the property owner did not provide payment for the services provided. Often times a contractor will hire a subcontractor on a project on the terms that the subcontractor will get paid from the money paid to the general contractor. If the property owner pays the contractor, but the contractor does not pay the subcontractor a Mechanic's Lien can be placed against the property. This is because legally, the property owner is responsible for ensuring that all subcontractors are paid.
To get more information on Mechanics' Liens in your state, check with the Department of Consumer Affairs or equivalent. To see an example of a Mechanic's Lien, click here.