As the economy continues to slump many in the homebuilding industry, particularly subcontractors and suppliers, are increasingly concerned about getting paid. One of the most common strategies employed by subcontractors and suppliers to help insure they receive payment is to record “mechanic’s liens” against property which their labor or materials benefitted.
The hope is that the builder will be unable to sell their home if there is a lien. While this is a commonly perpetuated myth among subcontractors/suppliers, in the absence of a cooperative title insurance company or more complicated (and costly) legal action, a lien can be an impediment to closing on time. Further, a builder could end up paying twice if a lien is recorded against one of their homes. This article will address a number of ways homebuilders can guard against liens through their subcontracts.
Although many builders have longstanding relationships with their key subcontractors and suppliers, in this age of trivial disputes escalating into full scale warfare, they should still have good subcontracts and purchase orders. If they do not, the chances of prevailing in a “he said, she said” dispute are reduced dramatically.
One of the issues which should be addressed in any subcontract is mechanic’s liens. In Colorado, any party who may assert a mechanic’s lien (essentially anyone involved in the design or construction of the home) can prospectively waive their mechanic’s lien rights. Therefore, to prevent its first tier subcontractors and suppliers from recording a lien, a homebuilder can insert a provision in its subcontracts which indicates the subcontractor/supplier waives any rights they have under the mechanic’s lien act. Unfortunately, the subcontractor/supplier cannot waive the lien right of its own sub-subcontractors or suppliers. Thus, addition of appropriate subcontract language will not provide complete protection against all mechanic’s liens.
To guard against potential “unknown” liens the homebuilder should require its first tier subcontractors/suppliers to provide a list of all sub-subcontractors and suppliers they intend on using which are providing labor or materials with a value exceeding some threshold amount, typically $500 or $1,000. By this means the homebuilder knows who is involved with their projects and can verify they are getting paid by also requiring their subcontractors/suppliers provide lien waivers from them. Homebuilders should absolutely require such waivers from their own subcontractors/suppliers when each payment is made. The waivers can either be a separate document or a lien waiver stamp on the back of each check.
The subcontract should also allow the builder to issue joint checks in the event a subcontractor begins to experience financial difficulties. The subcontract should also provide for direct payment to sub-subcontractors/second tier suppliers under certain circumstances, i.e. the subcontractor disappears from the face of the earth.
Finally, the subcontract should provide that the builder may withhold payment on any and all projects in the event a sub-subcontractor/second tier supplier initiates a lien and a provision which obligates the subcontractor to indemnify the builder against any lien claims, including the payment of the builder’s attorney’s fees. While the indemnity may ultimately prove to be worthless, including it may provide some comfort to the builder.
Although having a strong subcontract (reviewed and updated periodically) will not guarantee a mechanic’s lien will not be recorded against your properties, it will allow you to be able to more effectively manage the risk of a lien showing up at an inopportune time.
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