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MN Contractors: Avoid Mechanic's Lien Pitfalls and Get Paid

Many general contractors and their subcontractors believe mechanic's liens are legal instruments that ensure they will be paid for their work, if not immediately at least when the uncooperative property owner refinances or sells. Maybe, if you understand how they work, follow the rules, and recognize when they are the right collections tool. 

A mechanic's lien is a security instrument to ensure payment to contractors and suppliers for their contributions to the improvement of real property. A mechanic's lien is not a judgment and does not give the contractor or supplier who records it a direct right to demand payment. But, based on a recent court ruling, liens must be filed by licensed attorneys, not non-attorney collection agencies.

Mechanic's Lien Shortcomings
Contractors should understand the shortcomings of using a mechanic's lien as a collection tool. First, a mechanic's lien expires one year after work is completed. It cannot be renewed. Second, if the property owner doesn't pay, the contractor must initiate a foreclosure proceeding before the lien expires to recoup what's owed them, a costly proposition at best. At worst, there may be little or no money left for the contractor after recovering the legal fees and paying off any mortgages or other liens against the property.

In Minnesota, contractors are required to give clients a written notice that a lien can be recorded against the property if they don't get paid. The notice tells property owners that they have the option to pay subcontractors and suppliers directly and withhold that amount from their payment to the general contractor. The contractors' obligation to provide this notice comes with firm deadlines. Miss a deadline and you've got nothing. These notices are mandatory and cannot be waived. If not executed to the letter of the law, your lien rights (such as they are) are lost.

The Minnesota Department of Labor and Industry encourages property owners to have general contractors provide a list of the subcontractors and suppliers who will contribute to the project. The law allows property owners to pay subcontractors and suppliers directly to avoid a lien on their property if the general contractor doesn't pay them. Most general contractors don't want to divulge to their clients precisely what they pay, so do yourself a favor; collect progress payments, pay subcontractors and suppliers timely, get signed lien waivers, and give your clients the lien waivers if requested.

Tips for Getting Paid
So what can a contractor do to preserve its right to lien a property? First, if you are a general contractor, make sure your contract contains the notice provision. Licensed contractors don't have the option of providing it in a separate document or at a later date. Subcontractors and suppliers are required to provide a separate pre-lien notice to property owners within 45 days of their first contribution to the project. To be effective, the subcontractor/supplier notice must be given to the property owner before the owner pays the general contractor for any of the subcontractor's work or the supplier's materials.

Second, plug the deadlines into your construction management software so you don't miss them. And don't wait until the last minute; the law does not provide extra time for any excuse. Finally, if you are still waiting for your money nine months from your last day of work, it might be time to discuss with your attorney filing a suit to foreclose on the lien. You still have some time to decide if it's the right course of action. Wait much longer and there might not be enough time to file the suit.

Ask Our Attorneys
Mechanic's liens can be powerful tools to get you paid for your work, if you follow the rules. In many cases, however, they are not the most efficient or effective collection tools for residential construction debts because they expire after just a year and foreclosing a lien to get your money is costly. Before you file a mechanic's lien in an effort to get paid, talk with one of the attorneys at Minnesota Construction Law Services. We may have less expensive and more effective alternatives to put the law on your side, and get your money quicker.

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