Construction season is in full swing in the upper Midwest. Buildings are going up and roads are going down. As inevitable as the change in the seasons, a contractor is not going to be paid for its work on a project. One way for the contractor to collect on money owed is to file a lien.
What Is A Lien?
A “lien” is a claim made by a specific person upon a specific property as security for the performance of an act. Put another way, a lien is a claim by a contractor that work was provided by the contractor to the property that increased the property’s value and the contractor ought to be paid for that work. The lien is an encumbrance on the owner’s property. The person filing the lien against the property is known as the “lien claimant.”
A lien is not the same as a contract dispute. It is quite possible the lien claimant is a subcontractor who was not paid by the general contractor. The purpose of the lien is to secure the debt owed to the contractor by attaching the claim to the property. If the general contractor does not own the building, and the subcontractor does not wish to involve the owner of the building in the dispute, then the subcontractor should pursue other means to collect the debt owed.
Legal Authority For A Lien
Liens are creatures of statute. This means that the lien must follow the checklist provided by the state legislature in order to be valid. For the purposes of this article, the statutes we are following are in North Dakota. (Minnesota has its own separate statute where the construction lien is called a “mechanics lien.” Same concept, different name. As a historical footnote, North Dakota used the term “mechanics lien” until 2009.) If the lien does not follow the statutory checklist, it could be deemed invalid. And worse, the lien claimant could be forced to pay the property owner’s legal fees for fighting to remove the lien.
The idea of a construction lien is very basic, but putting the lien into practice is much more difficult. Failure to include any item from the checklist could make the lien invalid.
First, there must be a permanent improvement to the property by the lien claimant. An improvement could be anything from prepping the site (including demolition), to pouring a foundation, to plumbing, to painting, to landscaping. The use of vehicles, tools, and equipment improves the property, but the contractor’s vehicles, tools, and equipment are not permanent improvements to the property. The value of these cannot be claimed.
The legal description of the property and the owner’s name must be included in the lien. The owner could the legal owner of title or every person who could be an agent, guardian, or even subcontractor of the owner.
The lien can only be for the unpaid amount of the contribution to the value of the property. For example, if a contractor makes $50,000 worth of improvements on the property and is paid $30,000 for the work, the contractor can only claim a lien in an amount of $20,000. A lien against the property for the full amount of contribution, or $50,000, would be invalid.
The lien can only include the value of contribution actually made to the property. If the contractor is working under one contract, but the contract covers two or more separate pieces of property, each with a unique legal description, then the contractor has to determine which improvements were made to which parcel before claiming a lien on either. This is referred to as “mingling” of charges. The contractor may have to file two (or more) separate liens to cover each property.
Timing Of A Lien
A lien may be filed against the property as soon as the first item of material or labor is furnished to improve the property. The lien must state the date of first contribution and last contribution. If the contractor started work on the property April 1 and finished work on the property September 20, then the lien must state these dates.
A lien is only valid for three years after the first contribution was made to the property. If a contractor begins work on a project on June 3, 2016, any lien must be enforced by June 3, 2019. Failure to file the lien in that time means the contractor is barred from recovery of unpaid contributions.
Providing Notice Of The Lien And Enforcement
The lien claimant must provide notice to the owner before the lien is filed. The lien claimant must record the lien against the property at the county recorder’s office. If the owner wishes to contest the lien, the owner can send a demand to the lien claimant to enforce the lien in court. Then the lien claimant has 30 days to file a lawsuit in court to enforce the lien and file a notice of lis pendens (Latin for “a pending lawsuit”) with the county recorder. Failure by the lien claimant to file a lawsuit with the court after demand by the owner will invalidate the lien.
Resist Any Temptation To Overstate The Amounts Owed
It is important that the lien claimed by the contractor is only for the amount owed. “Any owner that successfully contests the validity or accuracy of a construction lien by any action in district court must be awarded the full amount of all costs and reasonable attorney’s fees incurred by the owner.” N.D.C.C. § 35-27-24.1. This holds true even if the contractor is successful in obtaining some, but not all, of the value of the lien.
If you are a contractor and have a question on whether you are entitled to file a lien against property, or you are a property owner and have a question on how to remove a lien, contact the Business Law Team at SW&L by calling 701-297-2890, or send us an email below.
The information contained in this article and on this website is for informational purposes only and not for the purposes of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem.