This outline discusses and explains some general information about mechanic's liens and using them to collect unpaid accounts. The "Question & Answer" section(Section V) lists some commonly asked questions and some fast and general answers. If you cannot find an answer to a question in the main outline, check the Question & Answer section. If the answer is not there, feel call Blake Nelson at (952) 941-4005.

I. WHAT IS A MECHANIC'S LIEN?

A. Definition: A mechanic's lien is a remedy created by statute to secure payment for labor, skill, materials or machinery furnished in the improvement of specific real property on behalf of another person.

1. In other words, if someone is not paid who performs work or provides materials for building on or improving real estate, that unpaid person may claim a lien against the real property in question.

2. There are certain steps a mechanic's lien claimant must follow to be entitled to claim a lien against the subject property. However, if these steps are followed, there may be serious consequences for the property owner.

B. Consequences: If a builder, remodeler, subcontractor, material supplier or other entity validly perfects a mechanic's lien in connection with a parcel of real property, that entity will have the right to foreclose upon the property and sell it in satisfaction of its unpaid bill. Unless someone pays the bill or otherwise settles the matter, the property could be taken away from the owner and given to the contractor (subject to any senior liens).

1. Although a lien claimant has the right to foreclose if it follows certain rules and meets certain deadlines, it is not usually as easy as the foregoing indicates. A mechanic's lien foreclosure can be and often is a very complicated and time consuming legal proceeding. The cost and hassle commonly associated with mechanic's lien foreclosures will sometimes deter a lien claimant from actually commencing a foreclosure.

2. There is usually a reason that the property owner is not paying the lien claimant's bill. For instance, maybe the electrician did a poor job and the owner does not think the entire bill is warranted. Alternatively, the owner might have already paid a lump sum to the general contractor who neglected to pay the electrician. In that case, the electrician has claims against the owner's property and the general contractor directly. In turn, the general contractor has potentially gained a windfall, and the property owner might be faced with paying twice for the electrician's work.

3. A mechanic's lien foreclosure requires a lawsuit. The lien claimant sues the homeowner and anyone else with a legal interest in the real property (i.e. mortgage holders, other mechanic's lien claimants, a condominium association holding a lien for unpaid dues, etc.). In the lawsuit, the lien claimant asks the court to order the real property to be sold in satisfaction of its claim for payment. If the lien claimant is successful and the case is not settled, the court will order the property to be sold in satisfaction of the debt.

4. If the property is sold, any liens or encumbrances superior in right and/or time to the foreclosing claimant's mechanic's lien (such as the first mortgage) will remain as liens against the property. In other words, a victorious lien claimant will take the real property subject to any senior liens. A "senior lien" can be generally defined as one filed prior to yours. However, all valid mechanic's lien claimants have equal priority, regardless of who filed their lien first.

C. The Rules: There are certain rules a general or subcontractor must follow in order claim a lien and attempt to foreclose in pursuit of payment. These will be generally met if the lien claimant:

1. Provides labor or materials in connection with building upon or improving real property;

2. Has a bill for those items that has not been paid in full;

3. Subcontractor: Provides adequate "pre-lien notice" to the owner (if required by law) within 45 days of beginning work on or contributing materials to the property.

General Contractor: Provides pre-lien notice in its written contract with the property owner. If there is no written contract, pre-lien notice must be provided by personal service or certified mail within 10 days after the work is agreed upon.

A pre-lien notice informs the property owner that the entity providing the notice might be entitled to file a lien if its bill is not paid. It also tells the owner that, if necessary, he/she may withhold payment from the general contractor sufficient to pay the subcontractor directly. If a pre-lien notice was required and an entity did not provide it, that entity may not enforce a mechanic's lien;

4. Files with the county recorder or registrar of titles a mechanic's lien statement referencing the real property in question and stating the amount actually owed and/or reasonable value of the work performed at the time of filing. This document must be filed within 120 days of the claimant's last day of work on the property; and

5. Starts or joins a lawsuit to foreclose upon its mechanic's lien within one year from the last date of work on the property. Note that this one-year period runs from your last date of work, not from the date the lien was filed.

II. HOW CAN MECHANIC'S LIENS AFFECT PROPERTY OWNERS?

A. New Construction: If the general contractor/developer does not pay all of the subcontractors working on the project, liens claimed by these unpaid contributors could complicate the closing. Real estate cannot be conveyed unless all valid lien claims are paid or otherwise settled or provided for at closing.

B. Existing Homes and Buildings: Remodeling jobs, additions, etc. can involve a different path to collection through a mechanic's lien. This is because there might not be a closing in the near future that would require the lien to be paid. If you work on an existing house or building and do not receive payment, the owner might ignore the lien until it expires in one year. If this is the case, the unpaid contractor will likely need to foreclose to try to force payment. Of course, the lien still carries great weight, because the owner cannot refinance or sell the property while the lien is alive without first paying your lien. Still, you should consult an attorney about your options if a closing is not in sight, because there are many factors to consider before foreclosing.

C. Condominium and Townhouse Associations: If the board of directors retains a contractor to repair or improve structures or elements within the association, there is a potential risk to all owners:

1. Common Elements/Areas: If a contractor repairs or improves common elements/areas within the association, liens could be filed against those properties if the general contractor or subcontractors working on the project are not paid. In a condominium this could have additional consequences, i.e. if the common roof is repaired in an apartment-style condominium development, unpaid contractors could claim liens and attempt to foreclose upon the entire building.

2. Individual Units: In any type of community association (condominium, townhouse, cooperative, single-family home), pursuant to the association's typical maintenance responsibilities the board of directors routinely hires contractors to work on the individual units. As an example of the potential impact of our state lien laws, if a siding contractor or subcontractors (or even the siding supplier if they deliver materials to the property) are not paid and they follow the rules, they could claim liens against every unit. Mass foreclosure against all units are not likely to be well-received by the unit owners, and the association and the board of directors certainly do not wish to deal with irate owners demanding that liens be removed from their properties. Further, even though an owner's dues are generally intended to pay for such services as painting and roofing, etc., if a mechanic's lien exists at the time an owner desires to sell, the owner may be faced with paying the lien claimant directly to allow the closing to occur. To put it mildly, this does not usually make for good relations between the affected owner and the association, no matter who is at fault in the situation.

III. WHAT IS A LIEN WAIVER?

A. A lien waiver is a written affirmation from a contractor that provided labor, skill or materials to improve the property. The waiver specifically states that the entity has either been paid, or alternatively agrees that it has no right to claim a lien against the property. The general contractor should provide the owner with lien waivers for all subcontractors working on the project.

B. The owner may withhold enough money from the general contractor to pay the claims and satisfy the liens of any subcontractors or other entities that the general contractor has failed to pay.

1. The owner may pay and discharge all such liens and deduct these costs from the contract price.

2. No owner is required to pay the general contractor until the expiration of 120 days from the completion of the improvement, except to the extent that the contractor furnishes the owner with lien waivers signed by all entities that furnished labor, skill or materials to the property and who gave "pre-lien notice" (see part I.C.3 above). Note that the foregoing time period refers to the last possible date any claimant could file a mechanic's lien against the property, i.e. 120 days from the last date of work on the premises (see part I.C.4 above).

C. A lien waiver given without adequate consideration is generally not enforceable. Unless the lien claimant actually receives payment or some other equivalent compensation in connection with the lien waiver, the owner may not rely upon the waiver and a lien could possibly still be filed within 120 days of the claimant's last day of work.

IV. MORTGAGE FORECLOSURES

A. What does a mortgage foreclosure do to my lien? The short answer is that a mortgage foreclosure will generally wipe out your lien unless you take certain steps to protect it.

1. Redemption: Generally the mortgage or construction finance company will have a first lien on the property. This means that if it forecloses on the property to collect its unpaid balance on its loan, any junior liens (including mechanic's liens) will be extinguished unless those lien holders "redeem," which involves paying off the mortgage.

a. Notice of Intention to Redeem: Redeeming involves first filing a document against the property after the mortgage foreclosure sale. This document is call a Notice of Intention to Redeem. This document must be filed within the "redemption period," which is the waiting period after a foreclosure sale. If the foreclosure was involuntary, meaning the property owner is not cooperating with the foreclosure, the redemption period is typically 6 months. In a voluntary foreclosure, where the owner agrees to let the mortgage company foreclose, the waiting period is typically only 2 months.

b. Paying off the first mortgage: If you have a valid lien and filed a Notice of Intention to Redeem during the redemption period, you will have the right to buy the property, i.e. to pay off the liens ahead of you and take over the property. The purpose of doing so would be to then sell the property to get your money back, and also to pay off your own lien. This can be expensive and complicated, and you should always seek legal advice in this situation to determine your options and whether or not redemption is advisable in the given situation.

2. Deciding not to redeem: If you do not redeem, you risk losing your lien. The mortgage company will typically not be required to pay off your lien when it takes over the property. However, under some limited circumstances you might still be paid without redeeming, such as:

a. Sale of property: If the property is sold before the redemption period expires, a valid lien will need to be paid at closing.

b. Work pre-dates the mortgage filing: If any of the contractors that worked on the job started work to visibly improve the property before the mortgage was filed with the county, all of the valid liens will potentially be senior in priority to the first mortgage. If this is the case, the foreclosing mortgage company will take over the property subject to the valid liens, and will need to pay them at closing if the property sells while your lien is still alive.

c. Larger lien holders buy you out: Sometimes another lien holder with a large claim will offer to pay off smaller liens at a discount. This may be a good option if you do not have the financial ability to buy the property and pay off the mortgage, or if your lien amount is relatively small and you just want to obtain some money and move on.

V. COMMON QUESTIONS AND FAST ANSWERS

A. Pre-Lien Notice

1. Q: What if I did not give pre-lien notice? Can I still claim a lien?

A: First, I recommend that my clients always provide pre-lien notice, no matter what kind of job it is. By doing so, there will never be a question of whether failing to pre-lien the job will wipe out your lien rights.

2. Q: If I did not give pre-lien notice, if I file a lien anyway can the property owner sue me for slander of title?

A: Slander of title is a common threat from property owners trying to force the removal of a lien. While you cannot really ever prevent someone from suing you, to be successful the owner would need to prove that your lien was filed with "malicious intent." This is very hard to prove, and there are no reported cases in this state where a contractor who contributed to the improvement of the property has been held liable for damages in a slander of title action. However, refusing to release a lien that is clearly invalid would give rise to a slander of title claim.

3. Q: What if it is commercial property over 5,000 square feet but my work was only on a small portion of the property?

A: You should still provide pre-lien notice. If you do not, you will risk losing your lien rights.

4. Q: I am a general contractor, and my written contract contains pre-lien notice. If I enter into a contract with a tenant of a property, have I complied with the pre-lien notice requirement?

A: No. Minnesota Statutes section 514.011 requires that the owner be given a copy of the contract or other pre-lien notice. The owner must receive the pre-lien notice if you want to later claim a lien against the owner's interest in the property.

5. Q: What if the general contractor owns the property when I start working on it? Do I still need to give pre-lien notice?

A: Technically, the statute does not require a pre-lien notice "where the contractor is managed or controlled by substantially the same persons who manage or control the owner of the improved real estate." Minn. Stat. § 514.01, subd. 4a. However, I always recommend that my clients also find out for whom the house is being built, and serve those people with a pre-lien notice to be safe. A purchase agreement can be considered an ownership interest in the property, and known purchasers should also be served with a pre-lien notice.

6. Q: What if the property owner has already paid the general contractor?

A: In some cases, a property owner might only be liable for sums due and owing a lien claimant if they received pre-lien notice prior to paying the general contractor. Alternatively, in other cases the owner might only be liable for sums not yet disbursed at the time the owner receives the pre-lien notice. For these reasons, you should always serve pre-lien notice right away in order to protect your lien rights.

B. Mechanic's Liens

1. Q: How much may I include in my lien amount?

A: If you have a contract with the owner for an agreed upon price, you may file a lien for that amount. In all other cases the lien may be for the "reasonable value" of the work done, materials provided, etc. However, if it is a job requiring pre-lien notice, there are additional rules. For example, you must subtract any payments made by the owner to the contractor before you served your pre-lien notice. This is why it is so important to serve your pre-lien as soon as possible – see Q & A No. 6 in the "Pre-Lien Notice" section above.

Be careful about trying to include too much in your lien. If it is later proven that you intentionally inflated your lien or knew you were actually owed less than your lien amount, you risk losing your lien rights entirely. Further, additional costs such as interest Further, additional costs such as interest, attorneys' fees and filing fees, etc. may not be included in the lien amount.

2. Q: What if I do additional work on the project after I file my lien? If I file a new lien, should it be for the total or just for the extra amounts?

A. Provided you are still entitled to file a new or amended lien statement, you would file a lien for the entire amount you are owed.

3. Q: What if the work was done for a tenant?

A: The lien attaches to the property, not the people involved. However, in most cases you need to serve pre-lien notice on the actual owner of the property to protect your lien rights. Efforts should always be made to ensure the property owner has actual knowledge of your work. If you do not, you face being able to claim a lien only against the tenant's interest in the property, which might not be worth anything.

4. Q: Can I file a lien for work done under an oral contract?

A: Yes.

5. Q: What if the work is only partially completed?

A: As stated above, you can file a lien for the reasonable value of your work and materials so far. However, if you are later deemed to have breached the contract, the property owner might be able to offset the amount you are owed as damages.

6. Q: What if I give a lien waiver conditioned on a check clearing?

A: You should clearly and conspicuously mark the lien waiver as "conditional." If you do not, someone else (i.e. a title company) might rely on the waiver and close the sale without verifying your check has cleared.

7. Q: What if the general contractor will not pay me until I give him a lien waiver?

A: A conditional lien waiver should be sufficient to protect your lien rights if the check bounces or the general does not properly disburse the funds at closing. However, once a lien has been satisfied it cannot be "unsatisfied." If you provide an original satisfaction and later do not receive payment, you are left only with personal claims against the party that hired you.

8. Q: Can subcontractors go directly to the property owner for payment?

A: Yes. The property owner can pay the subs directly and deduct those payments from the total amount owed to the general.

9. Q: What if it is too late to file my lien?

A: You must file a mechanic's lien statement within 120 days from your last date of work on or materials supplied to the property. If you file your lien after that deadline, it will not be enforceable. If this is the case, you will be limited to suing the party that hired you for the unpaid money.

10. Q: What if the property owner disputes the quality of my work?

A: Try to go back and fix any legitimate problems. If you later sue to collect your money or foreclose a lien, the owner can many times offset your claims by alleging breach of contract and citing the problems with your work. Further, a judge is far less likely to award you attorneys fees and costs if you breached the contract or do not have completely "clean hands." Recent cases suggest that an owner may not refuse to allow you to cure the alleged defects (primarily punch list items) and at the same time refuse to pay you the contract balance if the job has been "substantially completed."

11. Q: What if the property owner disputes the quality of my work, but will not let me back on the property to fix it?

A: Make it clear that you are ready, willing and able to come back to review and/or fix any potential problems. Put it in writing through a letter to the owner, general contractor, etc. Keep a copy of the letter in for your records in case you need it later to show a court that you offered to repair any alleged problems. Recent cases suggest that an owner may not refuse to allow you to cure the alleged defects (primarily punch list items) and at the same time refuse to pay you the contract balance if the job has been "substantially completed."

12. Q: Can I file a lien for custom-made items that were not actually incorporated into the property?

A: In most cases, yes.

13: Q: Can subcontractors sue the general for payment?

A: Yes, even if the property owner did not pay the general.

C. Mechanic's Lien Foreclosures

1. Q: Should I foreclose?

A: You should consult an attorney experienced in this area to discuss the specifics of your situation. There are many factors to consider before commencing a lien foreclosure, and there may be a number of different strategies you could use under your circumstances.

2. Q: If I foreclose, will I recover my claim plus interest and attorneys' fees?

A: This is another question for an attorney that works extensively in the mechanic's lien and construction law area. It is impossible to predict exactly how a case will turn out, but there are many factors that make it more likely that you will recover all of your money in a lien foreclosure action. Three primary factors are: 1) is your lien valid? 2) did you do the work properly? and 3) is there equity in the property?

3. Q: Can I join with other subcontractors and split the foreclosure attorneys' fees and costs?

A: Generally speaking, yes. Litigation can be expensive and time consuming, and joining forces with other subs can help reduce your share of the costs. Further, courts are sometimes more willing to give the subs all of their legal fees and costs if they obtained joint representation to reduce the overall costs.

However, sometimes conflicts of interest might prevent the same attorney from representing two or more subs in the same case. If the parties consent to the joint representation in writing after being informed of the potential for a conflict, the joint representation may usually proceed. Still, the ultimate goal of all the subs involved is to obtain payment, and it might be harder to negotiate a settlement for yourself if you and your attorney also need to worry about the interests (and problems) of other subs. Joint representation should be discussed with the attorney and the other interested subs to determine whether or not it is feasible in your case. I generally advise against it.

4. Q: If another lien claimant starts a foreclosure, do I need to participate?

A: If you are named in a foreclosure action, you need to join in the action if you want to protect your lien. Under the law, after one lien claimant files and serves a foreclosure action, "no other action may be commenced for the enforcement of any lien arising from the improvement described." Minn. Stat. § 514.12, subd. 2. All lien holders named in the case must intervene in the case by filing an answer.

Note: The answer must be filed while your lien is still alive, i.e. within one year from the last date of work listed in your mechanic's lien statement. The Summons you will receive in a foreclosure action will state that you have 20 days to file your answer. However, if your lien actually expires in five days, you need to file your answer before the lien expires. Aside from limited circumstances when the property owner files for bankruptcy, nothing can extend your lien rights past the statutory one-year period.

5. Q: May a mechanic's lien be renewed?

A: No. If a lien foreclosure action is not commenced within one year from the last date of work or materials supplied as stated in the lien, the lien expires and may not be renewed or otherwise enforced.

VI. CONCLUSION: There are many rules to follow in perfecting and pursuing your lien rights. The topics and questions discussed above will hopefully help you in sorting through the process. However, if you take anything at all from this outline and my articles and seminars, it should the following rules:

RULE #1: Always pre-lien every job, no matter what. Period.

RULE #2: Do not rely on past jobs as justification for future ones. Circumstances outside of your control can change any situation, and a general contractor or customer that has always paid you in the past might not continue to do so in the future. Again, pre-lien every job. Not pre-liening a job because you have never had a problem in the past is like refusing to save money because you have always seemed to have enough to get by.

RULE #3: Follow the law, not your heart. The law provides protections if you follow the steps. Business is business.

RULE #4: Develop a system. Systematizing your pre-liens and liens through an attorney or a lien service is recommended. It is much more efficient and effective if you can move forward and pursue your lien rights instead of back tracking to attempt to fix mistakes or salvage a situation where some or all of the necessary steps were missed. Using an attorney or a lien service helps ensure that appropriate steps are followed and that your lien rights are protected on every job.

This outline is intended to provide some basic information about the Minnesota mechanic's lien statutes, and is not to be taken as specific legal advice. Facts and circumstances vary, and specific situations and issues should be presented to an attorney experienced in this area.