BiggerPockets

How To Remove An Invalid Mechanic's Lien

Every real estate investor who undertakes a renovation will eventually encounter a disgruntled contractor. This is the nature of the business. Of course, the dispute is always over how much money is due the contractor.

Every state provides contractors with mechanic's lien rights. While the intention is that mechanic's liens will protect valid interests of contractors, unscrupulous contractors often take advantage of the system and file invalid liens. This is because the lien filing process in many states is too simple and not properly supervised. As a result, this places a lot of power in the contractor's hands - whether the lien is valid or not.

It's important that real estate investors understand their options when dealing with a lien they feel is invalid. The lien could be invalid due to any of the following reasons:


1) The real estate investor does not owe the contractor any money

This could be due to any number of factors including; 1) the contractor walked off the project or was fired and left work incomplete, 2) the contractor held up the project and the owner incurred cost overruns, or 3) the contractor provided substandard work.

This is why a carefully drafted contractors agreement is important since it addresses how these situations will be handled.


2) The contractor did not serve a pre-lien notice to the owner.

A contractor is required to provide an owner with a "pre-lien" notice that puts the owner on notice that the contractor has the right to file a lien for unpaid work. Most contractors rarely serve pre-lien notices to owners.


3) The contractor did not serve a properly written pre-lien notice.

All states determine what elements a pre-lien notice must contain, how it should be written (fonts, capital letters, spacing, etc.), and how the owner shall be served the notice (dates, timing, etc.)


If you feel the contractor has filed an invalid lien, you have several options. While most mechanic's liens are discovered at inconvenient times like right before a closing, you have several ways to handle the situation.

Your options include any of the following:

1) Negotiate with the contractor.

First, speak with the contractor and try to reach an agreement. Perhaps they hastily filed the lien after they were fired, knowingly filing an invalid lien despite the fact that they were paid in full for the work they actually completed (even though this may have fallen short of what they would have been paid had they completed the entire job). You should clearly convey to the contractor that you have options other than dealing with them and that they can be held liable for filing an invalid lien. A rational discussion with the contractor may result in a fair resolution.


2) Make an agreement with the closing company to close around the lien.

A title company can close around the lien if the owner agrees to indemnify the title company. The subsequent owner's and lender's tite policies will simply contain an exception for the lien. The owner may be required by the title company to escrow the lien amount, plus an added reserve amount. This is usually somewhere around 120-150% of the lien.

This method is useful because it allows you to sell or refinance the property without the contractor putting your deal in jeopardy. You now have the ability to fight the lien without upsetting relationships with your buyers or your lender. It also places less control in the contractor's hands.


3) Make a cash deposit in District Court.

You may be able to remove the lien by depositing the lien amount in District Court. The court will then determine whether the lien is valid and if the contractor is entitled to receive any money. However, this option does carry its own risks since a liberal judge may be biased toward the contractor. Furthermore, they may be too busy to fully evaluate the matter and simply award some money to the contractor just to get the matter off their case load.


4) Ignore it and let the lien expire

If you are not in any rush to sell or refinance the property, you could simply let the lien expire. In many states, there is a statutory period in which the lien will simply expire if the contractor fails to take action on the lien.


A contractor who files an invalid lien faces potential damages, including attorney fees, if a sale of a property gets delayed or cancelled due to the invalid lien. The contractor could also face disciplinary action from their regulatory agency. The bottom line is that you have options. If you use the options mentioned above, you can effectively handle almost any invalid lien situation.

Comments

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  Justin Pierce — about 1 year ago

  Good article. Most people get scared to death when the find out there is a problem with their title. They need to know they have options and they need to do their homework.