Power of Attorney - April 2009

How To Avoid Having A Mechanic’s Lien Filed Against Your Property

by Bruce N. Willoughby

    One of the most unsettling things that can happen to a property owner is to have a mechanic’s lien filed against his/her property when the owner has paid the contractor in full or when his/her tenant does not pay his contractor.

    The lien is a cloud on the property’s title and can even block the sale of the property until paid. A property owner may have paid the contractor in full and still have a mechanic’s lien filed if the contractor failed to pay one of its suppliers, subcontractors or laborers.

    Protecting your property against a mechanic’s lien is essential. The first protection is to have a written contract with the general contractor with defined payment terms, including documentation required from the general contractor before any payment is made by the property owner. Remember that a general contractor, who has a contract with the property owner, may also have a cause of action for breach of contract and sue the property owner directly, in addition to recording a lien. Subcontractors as well as suppliers and laborers usually do not have a direct contract with the property owner, and their only remedy is to record a lien against the property. There are several actions a property owner can take that will protect the property from liens.

Lien and Labor Waivers

    One way to protect the property from liens is to obtain lien waivers from the general contractor, every material supplier and every subcontractor who works on a project and labor waivers from any person who supplies labor to the project. As a property owner, it is important you require the contractor or the tenant, if the tenant’s contractor is building the improvements, to provide lien waivers and labor waivers

    The property owner should require lien and labor waivers to be submitted with the contractor’s invoices. No payment of any invoice should be made without properly signed lien and labor waivers provided.  Proper lien waivers can protect the property owner from liens filed by the contractor’s subcontractors, suppliers and laborers who might record a lien if not paid by the contractor.

    In Nevada, the lien waiver forms must conform to strict statutory requirements. The accepted form of lien waivers are found in Nevada Revised Statutes §108.2457(5).

Joint Checks

    In addition to the lien and labor waivers, property owners can insist that joint checks be made payable to the contractor and the contractor’s suppliers or subcontractors. The use of joint checks is no substitute for obtaining lien and labor waivers.

Construction Control Account

    A number of companies in Nevada provide the opportunity to open a construction control account. Funds for a construction project are deposited into a construction control account, and the contractor submits invoices and lien waivers to the construction control company. The construction control company usually performs an inspection and then pays the contractor, based on whether the invoice amount corresponds with the work completed and whether all the lien and labor waivers have been provided.

Notice of Non-Responsibility

    Property owners whose tenants are having improvements done to the property should file a Notice of Non-Responsibility with the County Recorder affirming the property owner will not be responsible for the construction, alteration or repair to the property. Nevada Revised Statute §108.234 provides all the steps that must be taken to have the Notice of Non-Responsibility effective. Caution, there is a very short window of time to file this notice.

Landlord’s Protection From Tenant Improvement Liens

    Before commencing improvements, a tenant must record a notice of posted security and either:  (a) establish a construction disbursement account in an amount equal to the prime contract; or (b) record a surety bond in 1.5 times the amount of the prime contract.  Failure to comply with these provisions permits the prime contractor to stop work.  See the Nevada Revised Statute §108.2304 for additional information.

Retainage

    The property owner should consider a provision in the construction contract retaining a percentage of each payment to the contractor until the project is completed. When the property owner has received all necessary lien waivers and the work has been satisfactorily performed, the retained amount can then be paid to the contractor. These legal securities can all be pursued on your own or with an attorney. However, it only takes one small mistake in the paperwork to make a document null and void. To ensure your property is safe from having a mechanic’s lien filed against it, consult an attorney and have all paperwork completed before any work is done.

Bruce N. Willoughby
Bruce N. Willoughby is a shareholder of Kolesar & Leatham, CHTD