Basics of Liens
Liens can be tricky tools to use. If you aren’t careful, you could end up with additional problems, instead of solving your existing issues. Before you can even discuss the nuances involved with filing a lien, of which there are many, you have to understand what a lien is, what it is not, and the purpose behind it.
To begin with, a lien is not a check you get if the insured does not pay for the work you performed. It does not mean that you are going to get paid. The purpose of a lien is to imprison the property. All this means is that the owner is unable to transfer an interest in the property without first satisfying the lien or setting aside sufficient funds to satisfy the lien upon disposition of the property. If you have a lien and the owner sells the property without first satisfying your lien, then the owner or buyer may be liable to you for the amount of your lien.
In Wisconsin, there are two main types of liens: statutory and equitable. A statutory lien is based upon legislative enactment, like a mechanics lien. Statutory liens grant you specific rights that are defined by statute. An equitable lien is a judicially-created implied lien . All equitable liens operate outside the contract and depend upon principles of fairness rather than the existence of a contract between the owner and your company. The most common equitable lien arises from someone being unjustly enriched at another’s expense. As soon as the unjust enrichment is identified, the aggrieved party establishes the lien by filing an action with the Court. There is no right to trial by jury in an equity case. Equitable liens can only be dissolved or enforced by a judge.
Statutory liens are governed by specific statutes and procedures. This contrasts with equitable liens, which have no specific statutes, rules or regulations governing the process. Most equity liens in Wisconsin must be pursued in Circuit Court. However, Wisconsin also has remedies to handle bad faith debtors who corruptly refuse to pay their debts outside of the normal statutorily authorized lien process.
Usually, when you have a custom agreement between yourself and the owner, you can simply rely on the language of the agreement concerning any liens. However, there is nothing wrong with including a lien in a purchase order, especially when you have a pre-printed form.
The Importance of a Contract to File a Lien
A contract is a critical aspect of a lien claim. It is extremely common that a contract will exist between the owner and general contractor (GC) or sub-contractor or supplier. If so, the contractor’s or subcontractor’s lien will be filed based on the contract terms. Additionally, the contractor or subcontractor will also have a breach of contract claim since the lien claim will mirror the contract.
If there are no contracts, however, a lien can still be placed on the property. For example, the statutory requirements to place a lien on the property can be satisfied if a contractor is owed a balance for work on the property. Other situations can come up regarding mechanics liens as well, but generally, these types of filings are dependent on the existence of contracts.
When Filing Without a Contract is Allowed
In certain instances, it may be possible to file a lien even when there is no actual contract in writing. These instances are rather narrow, but if they do apply, then a contractor may have a right to file a lien irrespective of whether a contract exists.
A verbal agreement between the Contractor and an Owner may suffice as the contract for purposes of filing a lien. Of course, proving the existence of the contract can be quite difficult, especially where the options court does not allow for testimony.
The existence of other contracts may also be enough to permit a lien. For example, a lien for work and materials may relate back to a written or oral rental agreement, or even a lease. In some cases, this even applies when the lease or rental agreement is not actually applicable to the property where the work and materials were supplied.
Another situation that may justify the filing of a lien without an actual contract exists when there is an implied contract between the owner and the contractor. An implied contract may be present where the owner orders, but does not pay for work or materials to be supplied. If so, the contractor’s right to file a lien could potentially extend to the value for the cost of the work and materials supplied, even if they were supplied for the benefit of another person.
Legal Consequences and Complications
A common question that comes up is whether or not legal issues can arise if the project owner is not the party with whom you have a contract and you file a lien. An example of this is when there is a revocation of a notice of commencement and the project owner hired a contractor who had a contract with a sub-subcontractor.
The general rule of thumb is that you cannot lien property unless a contractual relationship exists by which you contract to provide work, labor or materials to the property for which you are claiming a lien. If you do not have a contract with an owner, and you lien an owner’s property, there are many potential defenses to the lien and potential counterclaims for legal fees. Those can include, a counterclaim for slander of title on the property, if the lien is improperly recorded. The one area that is murky would be the situation referenced above where the prime contractor with whom you have a contract has the contract with the owner and gets paid directly from the owner, and does not pay your company.
In that situation, most courts will allow the claim to proceed forward. We have had some success on such claims and with appeals on behalf of the subcontractor who wants to get paid. If lien attorneys know you were hired by a contractor for work performed and didn’t get paid, they probably will not take the risk of rejecting the case on the basis of the potential liability if the lien is invalid. Having said that, just because they are willing to take the case does not mean that they will be able to have a court find that the lien was valid against the owner. If you’re dealing with a trade association, a large project, or one of many projects with the same prime contractor, I would strongly suggest getting an attorney involved prior to filing the lien.
There are many other potential defenses that a project owner can raise against the subcontractor who didn’t get paid. For example, that the contractor had a duty to provide notices to the property owner and failed to do so. Although this is a factual determination that should be assessed on a case-by-case basis, it is not a good idea to file a lien unless you receive a contractual commitment from the owner. That way, you are not faced with having to litigate the issue of the contract where you are also required to pay the general contractor’s legal fees if your lien is found to be invalid.
Similar to that issue, generally speaking, a subcontractor must pay the general contractor’s attorneys’ fees if the subcontractor’s lien is found to be invalid. However, if the subcontractor has a contract directly with the owner or the general contractor’s work is not performed under a written contract, this potential liability is avoided. In sum, it is a good idea to have a direct contractual relationship with the property owner to avoid this potential problem.
Substitute Documents for Liens
In the absence of a formal contract, an owner or general contractor may produce nearly any form of documentation that demonstrates its right to payment, possession of possession of a lien waiver, or agreement for a lien waiver. This evidence may include, but is not limited to, a receipt or account statement by the supplier showing account activity, checks for invoice payments, internal accounting records, purchase orders, change orders, delivery tickets , invoices, promissory notes, money judgment, court pleadings, or deposition transcript. For example, in Macklowe v M.S. Eternity Inc. (2007 NY Slip Op 52245(U)) a flooring subcontractor was granted a mechanic’s lien where it produced sales slips and billing statements, and the owner did not offer an invoice in opposition. In four separate cases explored below, NYC courts have granted mechanic’s liens to claimants that relied on non-contract documentation.
Documentation to Have Before You File a Lien
The steps to take before filing a lien if a contract did not exist required a compulsory pre-lien process where your client must send a Notice to Owner (NTO) as well as a Pre-Lien Notice to Supplier, Subcontractor, or Sub-subcontractor with the Florida Department of State for every bill. The same notice is to be sent to all the other parties involved in the project as to the previous NTO for every other bill. Then, after all this and when you are getting closer to filing the lien, you will send a final Notice to Owner (Final)
It is clear that an agreement between the Claimant and Owner appearing on the property records is insufficient to show privity of contract to file a lien. An agreement between two parties which is related to the property at issue is not enough. There must be something recorded which ties the agreement to that particular parcel of property in order to have standing to file a lien. A simple order for a product or typographical error in the description of real property is not sufficient to be sufficient to be considered "of record." The statute requires a specific mention of the property in question (a legal description) to provide a clear and definite identification of the lot to provide notice to a subsequent purchaser.
Consulting with an Attorney
Considering the complexities and potential signal of bad faith that comes with filing a lien without a contract behind it, it is safest to seek legal advice before pursuing a lien under these circumstances. Most times, it may be possible to pursue recovery through mediation rather than the filing of a lien and just as often, a negotiated settlement will make filing a lien unnecessary and preserve your relationships. If a lien does become necessary , it is wise to file one based on its own merits and not as a bargaining chip to force payment. A lien that has no contractual basis will be difficult to legally maintain and opens the possibility of its discharge being ordered, which could have the unintended consequence of seriously harming the claimant and causing even more problems.