This article is in response to property owners getting a certified notice from contractors who manage their lien rights. Here are some insights:
Managing lien rights in the construction industry is common, and is a good business practice. The subcontractors and material suppliers that provide materials and labor on credit without securing their lien rights take on an unnecessary business risk.
It used to be that a contractor could file a lien on a property to secure their contribution to the property improvement without prior notice to the property owner. In other words, if someone completed work on a property, they could file a lien on the property the minute they completed the work and the lien would stay on the property until the contractor was paid; this could be done without any prior communication to the property owner.
In many cases, a property owner is not aware of the subcontractors that have contributed to the project, let alone if they’ve been paid. Obviously, the ability to lien a property without prior notice to the property owner is quite concerning. That is the reason for serving a preliminary notice (or prelien notice) to property owners.
The government has since changed the law, requiring that contractors first send a preliminary notice as a “heads up” to the property owner prior to filing a lien. This notice informs the property owner of their rights to pay subcontractors and suppliers directly. The notice may also suggest that property owners collect lien waivers with each payment. In addition, the preliminary notice serves the property owner as a record of which subs and suppliers have contributed to the project.
It is not a wise practice for contractors to give up their lien rights. Sometimes things get turned upside down without it being the fault of any party. Many contractors don’t know how to manage their lien rights or the importance of it until it is too late.
We saw this in 2008 when the market collapsed and many contractors went out of business. Contractors and suppliers are creditors for construction as they supply labor and materials to build a job and they aren’t often paid until after the job has been completed. [Imagine as a contractor you do four jobs a year each at $50,000 a job. You have to front the labor and materials to complete the job. Now imagine that you don’t get paid on one of those. You have put the capital into the labor and materials to build a project and never get paid back. There goes all your margin for the year and what you use to feed your family.] By managing lien rights, a contractor has something to fall back on if they aren’t paid. If they don’t manage their lien rights, they can be out of tens to hundreds of thousands of dollars.
And it isn’t that companies and contractors are malicious as much as sometimes business doesn’t go as planned. For this reason it is important that contractors take the necessary steps to manage their lien rights, as well as have open communication with the property owner whenever possible (ie a preliminary notice or a notice of intent).
Also noteworthy, the issue most property owners have with receiving a preliminary notice or a notice of intent to lien isn’t with the construction company or supplier but with the lien law itself. All of the verbiage contained in the notice is required by state law, and the notice is required for the contractor to maintain their lien rights.
If you are going to pay your bills, this should not be an issue at all. Pay for the work you had done and collect lien waivers from those working on your project; this way there will not be a lien filed, so nothing to worry about.