Construction Law - Mechanic's Liens

The kitchen remodel is nearly finished but you thought that the contract called for under cabinet

lighting. The addition is almost done, but there are several items still left incomplete and the contractor is asking for a draw. The new house has its certificate of occupancy, but there is a punch list that is incomplete and money remains to be paid under the contract. The contractor has just handed you an invoice for several change orders which you may or may not have agreed to have done. A dispute over the scope of work or poorly performed work has developed and your relationship with your contractor, which was once so great, has soured. My landscaper installed $5,000 worth of sod without seeking my permission first. Neither side is willing to budge so work has stopped and one day the owner gets a notice in the mail. It is a notice and certificate of a mechanic’s lien filed on their property.

All of these issues are common problems facing both owners and contractors as parties approach the end of a construction project. The mechanic’s lien is a method by which a contractor, subcontractor or material supplier can protect the value of the work or materials they have supplied to the property. While it represents a security interest in the property, the lien is also notice of sorts. If properly drafted and filed it tells everyone in the world that the lien holder believes he has an interest in the property because of the material and/or labor he has supplied. Anyone trying to obtain an interest in the property subsequent to the filing of the lien (such as a mortgage or purchase) does so knowing that whatever interest they may have is subject to the lien. If followed to its end, a mechanic’s lien can result in a foreclosure action and judicial sale of the property to pay the amount sought. It can be a very powerful tool.

Title 29 Chapter 5 of the South Carolina Code sets forth the basis by which a contractor, subcontractor, material supplier or other persons improving real estate may file a lien on property for which they performed labor or provided materials. Some of what can and cannot included in a lien is covered in previous posts The Ethics of Mechanic's Liens Part 1 and The Ethics of Mechanic's Liens Pt. II. This discussion is to point out some of the effects of the lien on the owner and what needs to be done once it is filed.

Problems with the Bank

For most new construction projects and large renovations there is some sort of financing. A construction loan is usually a temporary loan. The bank pays draws for construction on a temporary basis and the borrower may pay interest during the construction period. However once construction is completed the construction loan is often converted to permanent financing. The presence of a lien on the property will halt any conversion to permanent financing because no bank is going to allow their mortgage to be subordinate to a lien. In most instances is also a breach of the construction loan contract. Unless addressed it can cost the owner interest costs, penalties, delayed closing causing the loss of a lock on an interest rate and in extreme cases cause the bank to default on the loan and initiate foreclosure proceedings. If there is no construction loan, but there is a security interest already in the property such as a mortgage, the lien will be subordinate to that existing mortgage. While this is not as big of a concern to the owner, it still may be a breach of that mortgage.

If there is a construction loan or other financing in place for the construction than the lien must be dealt with immediately. That can be done by negotiating the lien or bonding off the lien.

Problems with a Sale

Because the sale of the property requires clean and marketable title, any lien on the property must be removed prior to sale. As the owner of the property you will want to deal with any lien prior to putting the home on the market. This is when you will have some negotiating power to deal with the lien. Once there is a contract for sale the lien holder knows that you will have to deal with the lien before closing or the contract will fall through. At this point the lien holder will have much more leverage to demand more money.

If there is no financing, refinancing or sale of the property in the near future, then the owner will typically have more time to deal with the lien.

Foreclosure

Like a mortgage given to the bank to secure the money borrowed to purchase a home, a mechanic’s lien is enforced through foreclosure. However, unlike a mortgage, a mechanic’s lien is only a temporary measure. In South Carolina, the contractor must file a lawsuit to foreclose on the lien within six months after the contractor ceased to labor on or furnish labor or materials on the property. Failure to do so will invalidate the lien. This is not to say that the contractor no longer has the right to sue for his money, it just means that foreclosure and judicial sale of the property by way of the mechanic’s lien is no longer a remedy. The contractor may still sue for a breach of contract.

So What to Do When You are Served with the Lien?

First, check to see if the lien valid. Mechanic’s liens are creatures of statute. As such the requirements set forth in Title 29 Chapter 5 of the South Carolina Code must be followed strictly. Was the lien timely? Was it filed and served within ninety days after the contractor ceased to labor on or furnish labor or materials? Is the contractor licensed in South Carolina? Is there a proper statement of account? There are many important requirements for a valid lien and the failure of any one of them will invalidate the lien. As you get into these questions you may want to consult an attorney who is familiar with how these issues have been addressed by the South Carolina Courts.

Second, is the lien amount accurate in accordance with your agreement with the contractor? Does it appear that the lien includes things such as overhead and profit?

Third, there are legal defenses available to the owner. These defenses may include breach of contract, uncompleted work, and deficient work. Is the lien placed by a subcontractor and has the owner paid the general contractor? There are a multitude of defenses to the lien.

Attorney Fees and Costs

Unlike many lawsuits, the court must award attorney fees and costs to the prevailing party in a mechanic’s lien case. While this may seem like an appealing part of the statute, it can be a double edged sword. Determining the prevailing party under the statute can be complex and result in a mixed judgment. It is possible that the lien holder may win the foreclosure action, but the owner is determined to be the prevailing party and as such be entitled to his attorney fees and costs from the contractor and vice versa. There is a complex mechanism that includes a series of potential offers and counter-offers which determines who will be the prevailing party.

Mechanic’s lien disputes in South Carolina are not simple. It is easy to slip up on both sides of the dispute. It is important as an owner or a potential lien holder that you seek the advice of someone who is knowledgeable in the statutory requirements before you embark on that slippery slope.

For over 40 years, the Finkel Law Firm has represented individuals and businesses in construction and mechanic’s lien cases. If you require legal assistance involving construction or mechanic’s liens, please do not hesitate to contact the Finkel Law Firm.

Serving the people and businesses of South Carolina for over forty years.