by Kyle D. McGann
As a contractor, supplier, or design professional, you should be able to rejoice and feel a sense of pride in the work you’ve done at the end of a project. But what happens when your invoices are left unpaid? That pride can quickly turn into frustration, especially for those larger bills left hanging out there. Luckily, most states, including South Carolina, offer contractors, suppliers, and design professionals the ability to place a lien, most notably a mechanic’s lien, on the property where labor and materials were supplied for improvements to the property.
Generally speaking, a lien is a security interest against a certain piece of property. If debts go unpaid, the lienholder has certain proprietary rights to collect against the property rather than relying on an owner’s bank account, which might resemble something eerily similar to the bank account of a graduate student who has been eating instant ramen for the past week. One of the most common liens is a mortgage, where a lender provides a loan to purchase or improve property and the owner uses the property as collateral to secure payment of the loan.
In the construction world, contractors, suppliers, and design professionals can record a “mechanic’s lien” against the property they are improving if their bills go ignored. As an added bonus, you may recover any attorney’s fees incurred as the result of recording and foreclosing on the lien (our next blog will detail foreclosing on liens). Nearly identical in theory to a mortgage, an owner is implicitly putting the property being improved as collateral for the labor and materials you provide.
For general contractors, the net collateral amount may be diminished and put you in a monetary bind if you don’t check all the necessary boxes at the very beginning of a construction project. A general contractor can furnish an optional Notice of Project Commencement (“Commencement Notice”). As the name implies, the general contractor files the Commencement Notice within 15 days of beginning the project with the Register of Deeds office in the county where the project is located. The Commencement Notice must include the name of the general contractor, address of the project, name of the owner, and an exact description of the project.
The Commencement Notice lets everyone know that the general contractor is running this show. This is especially important because a general contractor’s subcontractors tend to hire their own subcontractors (sub-subcontractors) or suppliers (“Second Tier Subs”) to perform parts or all of the scope of work. But, sometimes, subcontractors “forget to pay” their Second Tier Subs, despite the general contractor already paying its subcontractors. If the general contractor properly files the Commencement Notice and a Second Tier Sub files its own lien on the project, the lien amount is limited to the amount the general contractor owes the first-tier subcontractor for the project. By limiting the claims of Second Tier Subs, the general contractor will be in a better position to collect more on its lien and not have to split as much of the payout with the Second Tier Subs.
But, don’t you worry, Second Tier Subs—there is also a way to protect your interests and get the attention of the general contractor and project owner. The Notice of Furnishing Labor or Materials (“Notice of Furnishing”) can only be filed by remote claimants (i.e. Second Tier Subs). The Notice of Furnishing also must be filed with the Register of Deeds and should include the same type of information required in the Commencement Notice. But, unlike the Commencement Notice, the Notice of Furnishing must be served on the general contractor by certified mail, return receipt requested, to provide proper notice to the general contractor. Once general contractors receive it, they are on notice that there is another mouth to feed.
It is critical to take the proper steps in filing and “perfecting” mechanic’s liens. The owner’s property can only be levied as collateral for a limited amount of time. Those laws protecting your right to payment can quickly vanish within a blink of an eye . . . well, 90 of them, that is.
For instance, in South Carolina, if you do not record and perfect your mechanic’s lien within 90 days of the last day that labor or materials were furnished on the project, then you lose your right to lien the property as your primary source of collateral. See S.C. Code Ann. § 29-5-90. Further, the clock doesn’t stop ticking if a different party performs work on the project. It is dependent on the party intending to record a lien. Also, warranty work and repair work typically do not restart the clock. In North Carolina, you have 120 days from the last date of furnishing to file your lien.
Perfecting a mechanic’s lien requires some time, so it is best not to wait until the last minute to begin this process. In order to perfect your mechanic’s lien, you will need to do the following:
1. Record a “Notice and Certificate of Mechanic’s Lien” with the Register of Deeds office in the county where the property is located;
2. Record a “Statement of Account,” where you swear under oath to the amount owed for the labor or materials;
3. Enclose a legal description of the property subject to the lien within the recordings (usually found in the property deed);
4. Provide a verification that all of the aforementioned materials are true and accurate; and
5. Serve all of these documents on the owner of the property.
If you fail to check any of these boxes within the required time frames under state law, then those lien rights and the ability to recover attorney’s fees can no longer be “liened” on. Should you have fears of an owner, general contractor, or even subcontractor withholding money owed to you regarding a project, we strongly recommend you consult with a seasoned construction lawyer immediately to make sure your business is set up properly and that you can invoke the protections of a mechanic’s lien should you ever need them. If we can help, please don’t hesitate to contact us here at Kenison, Dudley & Crawford, LLC.