Relating to Real Estate

While common in the construction world, the anxiety and stress of mechanics’ lien filings never get easier with time. By its nature, mechanics’ lien litigation is expensive, often rushed, and fraught with a number of procedural complications that a party litigating a normal contract claim would not face. In Maryland, assuming the claimant has provided a timely notice of mechanics’ lien filing (a requirement for subcontractors and vendors) and otherwise filed its lawsuit within the statutory period (for example, a subcontractor must provide the Notice of Intention to Claim a Lien within 120 days of completion after last providing labor or services, and all mechanics’ lien plaintiffs must file their lawsuits within 180 days of the same date), it is common for a state court to schedule a show cause hearing on claimant’s mechanics’ lien claims within 45 to 60 days of filing. Although it is somewhat uncommon for a court to establish a final lien at the conclusion of the show cause hearing, even an interlocutory lien can cause headache and pain for an owner of a large construction project.

Most worrisome to an owner is the potential breach of loan covenants that might be caused by the establishment of a mechanics’ lien. Construction loans often contain negative covenants that prohibit the borrower from allowing mechanics’ liens to be placed on the project during construction. Breach of these covenants can trigger default remedies and place the owner at the mercy of its lender even though the owner has done nothing wrong in terms of payment on the project.

While all issues relating to the defense and successful resolution of a mechanics’ lien matter are beyond the purview of this article, here are five steps every owner should take immediately if served with a Notice of Intention to Claim a Mechanics’ Lien (NOI) or a mechanics’ lien lawsuit.

1. Check Construction Loan Covenants and Follow Notice Requirements

Mechanics’ lien litigation can begin by mailing an NOI to the owner of the project (by subcontractors or vendors), or by the filing of a Petition to Establish a Mechanics’ Lien (by the general contractor). Some lenders will insist that they control the flow of money on the construction project, while others leave it to the project owners to do so. In either event, the lender is unlikely to be aware if a subcontractor or vendor has not been paid. Upon receipt of a mechanics’ lien filing or NOI, an owner should immediately consult its construction loan agreement and follow the procedures for placing the lender on notice of the situation. The mere filing of a petition or mailing of an NOI is not tantamount to establishment of the lien, but a failure to timely notify the lender of such a development could, in and of itself, be a breach of the loan agreement and may cause difficulties with the lender down the road when attempting to resolve the situation.

2. Have a Plan in Place to Defend

While prompt notice to the lender is critical, it is also important to outline your game plan for investigating and defending against the establishment of the lien and communicating that plan to the lender as soon as is practical. All plaintiffs in mechanics’ lien law actions must meet a strict set of statutory requirements in order to prevail on their claims, which include rigid procedural deadlines and substantive proof requirements. Mechanics’ lien litigation moves faster at the interlocutory stage than other civil litigation, so the owner must evaluate all factual and legal defenses as quickly as possible. Some of these defenses may be easier to establish than others. Consider the complexity of the “15%” value defense. In Maryland, a project for improvement of an existing property cannot be liened unless the improvements comprise at least 15% of the value of the property which is being improved. The valuation of a large, industrial property and the related improvements can be a complex exercise, requiring expert witness testimony and sufficient time to develop expert opinions. Lost time at the front end of a mechanics’ lien issue can be costly in developing this defense.

3. Review General Contractor Payment Bond

Although the mechanics’ lien process may provide some attractive leverage to a subcontractor who is looking for payment for labor and materials provided, a prudent owner will have required its general contractor to procure a payment bond against which claims by unpaid subcontractors can be made. Resolution of claims against a payment bond can be even more streamlined than the mechanics’ lien process and will result in payment to the claimant, rather than just perfected lien rights. An owner should check to ensure that such a bond exists and determine whether and how a claimant could make a claim against such a bond, potentially bypassing expensive lien litigation.

4. Be Prepared to ‘Bond Off’ Lien Claims

An owner may “bond off” a mechanics’ lien claim even in advance of the show cause hearing on the petition for the establishment of the lien. While an owner has the right to contest the amount of the bond necessary to protect against the establishment of a lien, it may be prudent for an owner to bond off the potential lien in the amount sought by a plaintiff even as the owner contests the merits of the lien petition. Such a move will allow an owner to file a motion to dismiss any lien that is later established at the show cause hearing, thus reducing a risk of loan covenant defaults and other potential consequences of a lien on the property.

5. Seek an Early Meeting with All Affected Parties

Litigation is an expensive and distracting process for businesses, and an owner should always seek to find an early resolution of any mechanics’ lien dispute. While formal mediation has become commonplace in Maryland state and federal courts, these mediations are typically scheduled well after interlocutory proceedings on the lien claim. At a minimum, an early meeting between the owner, the general contractor and the subcontractor can yield clarity on the parties’ respective legal and factual positions, which can sometimes get obscured in the litigation “fog of war.”

There are, of course, some mechanics’ lien issues that require a court resolution. Our law firm was recently involved in a multimillion-dollar matter, which raised the novel issue of whether solar panels and related solar equipment constituted “property” that could be subject to a lien under Maryland law. With the help of experienced counsel, however, the vast majority of lien claims can and should be resolved short of trial.

For more information, contact George F. Ritchie.

George F. Ritchie
410-576-4131 • gritchie@gfrlaw.com