It isn’t uncommon for credit managers to provide services or products to customers on credit. But when subcontractors complete work only to discover that their payments won’t arrive as agreed, credit managers need to act. On construction projects, one good place subcontractors and suppliers can start is obtaining mechanic’s liens.
Timely filing is key
Most states have specific time constraints on when suppliers and subcontractors can file mechanic’s liens. For example, Colorado statutes require claimants to notify owners and contractors no more than 10 days prior to filing liens.1 While statutes vary from state to state, this time frame is generally a good rule of thumb.
But don’t delay too long. In Colorado, for example, creditors must file mechanic’s liens within two to four months, depending on project completion or when work was last performed. If you wait too long, you’ll lose your right to file.
Deciphering mechanic’s liens
Not everyone can file a mechanic’s lien. Most states, including Colorado, restrict use to individual or corporate subcontractors and suppliers. This means property owners may hire and pay contractors, but if contractors fail to pay suppliers or subcontractors, properties could still be subject to mechanic’s liens.2 Some attorneys advise creditors file construction contracts or bonds with county recorders prior to commencing work and obtaining liens.
Not every state requires lien notification. Colorado is one of only nine states requiring such notice.3 This is important because overlooking this step could result in losing your right to file. Subcontractors or suppliers must notify both contractors and property owners within 10 days before filing a notice of intent.
The notification provides parties opportunities to settle or resolve disputes before commencing proceedings to implement liens. While negotiation isn’t a prerequisite, in general, it’s good practice to seek a mediated or negotiated arrangement prior to formally requesting a lien.
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With a notice of lis pendens, you indicate your willingness to begin foreclosing on the property to satisfy the lien.4 The notice allows a judge to validate your claim and ensure you’ve met all filing requirements.
Other lien-filing issues
You must consider other issues, including whether contractors have bonds to ensure contract term compliance with homeowners or lenders. Making sure you’ve collected the appropriate documents prior to filing your first notifications could result in quicker settlements, particularly when contractors have performance bonds in place. Best of all: You may be paid by exercising the rights of your bond.
1 US Legal. “Colorado Construction Lien Law.” Accessed March 7, 2017. Source.
2 Arnold & Arnold, LLP. “Construction Law and Mechanic’s Liens.” Accessed March 7, 2017. Source.
3 Zlien. “Notice of Intent to Lien.” Accessed March 13, 2017. Source.
4 Mickley, Sean A. “Lienors Beware – The Effect of a Lis Pendens on Your Construction Lien.” Gould Cooksey Fennell, 6 September. Accessed March 13, 2017. Source.