Protecting Your Right to Get Paid

Originally published
Originally published: 1/1/2009

My brother-in-law, who owns an auto parts business, considers his customers who do not pay to be thieves. While this may seem a bit harsh, his point is that no business person should ever feel timid about aggressively pursuing payment for goods delivered or services rendered. I think he is right, and if you agree with him, you need to understand the law of mechanic’s liens.

Although something akin to mechanic’s liens existed under Roman law, the concept disappeared for the most part until the state of Maryland enacted a statute in 1791. The Maryland law was intended to give contractors a preference in order to encourage them to assist in the building of Washington, D.C. Today, mechanic’s lien statutes exist in all 50 states, but the rules vary dramatically from state to state. Thus, it is important to know the law as it exists in the states in which you work.

A mechanic’s lien is an encumbrance on a real estate deed, similar to a mortgage deed. Its purpose is to place any potential buyers or lenders on notice that a contractor has not yet been paid and has preferential rights to payment. The rationale for the mechanic’s lien is that the contractor has not merely provided materials or services to a property, but has actually increased the value of the property and; therefore, is entitled to be reimbursed if the property is sold. Most lenders will not lend money to a landowner if a mechanic’s lien is on the property. First, the existence of the lien brings into question the credit worthiness of the borrower. Second, the lien holder has a priority over the bank if the lender defaults on payment of the loan. Similarly, it is difficult to sell a property if the lien is in place.

Each state has its own forms and its own procedures for filing liens. While the details vary from state to state, most state statutes have similar characteristics. First, there are generally very strict time limitations for filing a mechanic’s lien. Thus, it is important for you to be familiar with these time limitations. In some states, there is actually a danger in filing a mechanic’s lien after the time for filing has expired, as some states impose penalties for intentionally filing a false lien.  Additionally, a mechanic’s lien does not last forever. Most states require you to take additional action to enforce payment within a reasonable period of time after the lien is filed. Thus, you may have to file an action for foreclosure or a lawsuit for collection in order to preserve the value of the lien.

While the mechanic’s lien can assist you in collecting from a non-paying customer, the process can be time consuming, and it does represent an additional expense of doing business.  Whenever possible, you should try to collect a down payment on your projects. Additionally, it is appropriate to be paid in installments on large jobs. Finally, include in your contract provisions for a quick resolution of disputes, so that your customer has no reason to indefinitely delay payment.

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