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Protect Your Property From Mechanic's Liens

| November 15, 2016
By: Evan Sauer | e: evan@rdlawyers.com | p: 877-809-4567 x3

With the current rate of construction, there is no surprise that the number of mechanic’s liens filed has skyrocketed. Since we have experienced an uptick in our real estate clients requesting assistance, I thought it would be a good time for a refresher.

The first question I always ask is whether the property owner and lien claimant followed the requirements of the Illinois Mechanic’s Lien Act (“Act”). 770 ILCS 60/0.01, et. seq. Unfortunately, the response is often “what are the requirements?”

Protections Prior to Mechanic’s Lien Recorded.

Property owners should be proactive from the start. Even before the construction process begins, owners should ensure that their documentation is in order and complies with the Act to protect against future mechanic’s liens. The Act affords great protection for owners when the Act is strictly adhered to. Even minor deviations from the Act by general contractors or subcontractors may declare a lien unenforceable.

Prior to making any payment to the general contractor, the property owner should have the following: (1) a written construction contract with the general contractor (discussion of terms is beyond the scope of this article); (2) a contractor’s sworn statement; (3) lien waivers; and (4) an owner’s sworn statement.

1. Contractor’s Sworn Statement.

Before making any payment to the general contractor, the owner should make sure that it has received and adequately reviewed a properly executed contractor’s sworn statement. A contractor’s sworn statement is a statement in writing, under oath or verified by affidavit, of the names and addresses of all parties furnishing labor, services, and material and of the amounts due or to become due to each. 770 ILCS 60/5.

The general rule is that a property owner cannot be made to pay an amount greater than it originally agreed to pay the general contractor unless the owner violates a subcontractor's rights and interests by making payment without complying with the Act's requirements. 770 ILCS 60/21(d). The contractor’s sworn statements should be in line with what monies the owner agreed to pay.

The most significant risk posed to owners is having to pay twice for the work of subcontractors. Take this example: a general contractor submits an invoice to the property owner for work allegedly performed. The owner fails to obtain a contractor’s sworn statement from the general contractor listing all subcontractors and work performed. The general contractor fails to pay a subcontractor for work performed and the subcontractor later records a lien against the property. The owner may be required to pay the subcontractor even though it already paid the general contractor for work it believed was performed by the subcontractor.

Unfortunately, this scenario comes up way too often. In order to avoid this harsh result, an owner should request from the general contractor a contractor’s sworn statement prior to making payment. Sections 5, 22, and 32 of the Act provide:

It shall be the duty of the contractor to give the owner, and the duty of the owner to require of the contractor, before the owner or his agent, architect, or superintendent shall pay or cause to be paid to the contractor or to his order any moneys or other consideration due or to become due to the contractor, or make or cause to be made to the contractor any advancement of any moneys or any other consideration, a statement in writing, under oath or verified by affidavit, of the names and addresses of all parties furnishing labor, services, material, fixtures, apparatus or machinery, forms or form work and of the amounts due or to become due to each.770 ILCS 60/5.

No payments to the contractor or to his order of any money or other considerations due or to become due to the contractor shall be regarded as rightfully made, as against the sub-contractor, laborer, or party furnishing labor, services, material, fixtures, apparatus or machinery, forms or form work if made by the owner without exercising and enforcing the rights and powers conferred upon him in Sections 5, 21 and 22 of this Act. 770 ILCS 60/32.

When the contractor shall sub-let his contract or a specific portion thereof to a sub-contractor, the party furnishing labor, services, material, fixtures, apparatus or machinery, forms or form work for such sub-contractor shall have a lien therefor; and may enforce his lien in the same manner as is herein provided for the enforcement of liens by sub-contractors. Any sub-contractor shall, as often as requested in writing by the owner, or contractor, or the agent of either, make out and give to such owner, contractor or agent, a statement of the persons furnishing labor, services, material, fixtures, apparatus or machinery, forms or form work, giving their names and how much, if anything, is due or to become due to each of them, and which statement shall be made under oath if required. If any sub-contractor shall fail to furnish such statement within 5 days after such demand, he shall forfeit to such owner or contractor the sum of $50 for every offense, which may be recovered in a civil action and shall have no right of action against either owner or contractor until he shall furnish such statement, and the lien of such sub-contractor shall be subject to the liens of all other creditors. 770 ILCS 60/22.

Taking these provisions of the Act together, if the owner requires a sworn statement from the general contractor and withholds sufficient funds to pay the amounts shown as remaining due the subcontractors, the owner will be protected from any liens for amounts in excess or the amounts shown on the sworn statements and lien waivers.

However, there are exceptions: (1) if the owner receives a notice of lien from a subcontractor (within the required time-period, as discussed below) prior to making payment to the general contractor, the owner cannot rely on the contractor’s sworn statement to protect itself; or (2) if the owner has reason to believe that the contractor’s sworn statement is false, the owner may be required to pay any subcontractor liens even if already paid to the general contractor.

One of the best ways to ensure that the contractor’s sworn statement is accurate is to retain a title company for the construction escrow and to review the documents thoroughly. Below is a checklist that can be used when reviewing the contractor’s sworn statement:

General Contractors and Subcontractors:
1. Is the general contractor listed correctly? Are the subcontractors listed correctly? Yes No
2. Have any parties been added or deleted since the last statement? Yes No
3. If a party has been deleted, is there a proper final lien waiver? Yes No
Contract Amount:
1. Is the contract amount correct? Yes No
2. Has the contract amount increased or decreased? Yes No
3. If so, do lien waivers reflect the change? Yes No
4. If so, do written change orders reflect the change? Yes No
Increases/Decreases:
1. Do the amounts total all increases and decreases in the contract amount? Yes No
2. Are there written and executed change orders for each increase and decrease? Yes No
Amount Previously Paid:
1. Do the amounts total prior payments to each contractor/subcontractor? Yes No
2. Are there lien waivers reflecting the previously paid amounts? Yes No
3. Does the previously paid column total the amount previously paid to all contractors/subcontractors? Yes No
Amount of This Payment:
1. Are there lien waivers reflecting the amounts of these payments? Yes No
2. Does the amount of this payment column total the amount to be paid to all contractors/subcontractors on this draw? Yes No
Retainage:
1. If there is a retainage, does the retainage column equal the total retainage? Yes No
2. If the contract amount changed, has the retainage been recalculated correctly? Yes No
Balance:
1. Does the balance column for each contractor/subcontractor equal the contract amount, plus or minus extras/credits, less amount previously paid, less amount of thus payment? Yes No
2. Does the balance column total the balance to complete? Yes No
Completion of Sworn Statement:
1. Does the sworn statement list the correct general contractor as affiant? Yes No
2. Does the sworn statement list the correct owner? Yes No
3. Does the sworn statement list the correct property? Yes No
4. Does the sworn statement list the correct draw? Yes No
5. Is the sworn statement signed and dated by an authorized representative of the general contractor? Yes No
6. Is the sworn statement notarized correctly? Yes No
2. Lien Waivers.
 

In addition to the general contractor’s sworn statements, the owner should require partial and final lien waivers from all subcontractors, material suppliers, and the general contractor, if applicable. Lien waivers are not required under the Act, but are normally required as part of the contractual process.  Although lien waivers do not provide absolute protection for the owner, they can be used as evidence if the owner properly relied upon them.  The owner should adequately review each waiver to ensure that it is properly completed. Here is a checklist for review:

Generally:
1. Is there a partial or final lien waiver from all contractors, subcontractors, and material suppliers listed in the owner’s sworn statement and general contractor’s sworn statement? Yes No
Completion:
1. Is the owner listed properly? Yes No
2. Is the general contractor listed properly? Yes No
3. Is the property address correct? Yes No
4. Is the type of work performed listed properly? If no material supplier listed , is there a statement that “all materials taken from fully paid stock delivered to the job site by our truck”? Yes No
5. Does the contract amount match the contract amount on the contractor sworn statement? Yes No
6. Does the previously paid amount match the previously paid amount on the contractor sworn statement? Yes No
7. Does the amount of this payment match the amount of this payment on the contractor sworn statement? Yes No
8. Does the balance match the balance on the contractor sworn statement? Yes No
9. Does the lien state the proper waiver language, for example: “waiving the right to lien on the premises and improvements thereon and on the monies or other consideration due or that may be due from the owner”? Yes No
10. Is the lien waver dated? Yes No
11. Is the lien waiver signed by an authorized representative? Yes No
12. Is the lien waiver properly notarized? Yes No
13. Is the lien waiver unconditional? Yes No
3. Owner’s Sworn Statement.

Although an owner’s sworn statement is not mentioned in the Act and it is not a requirement for the owner, it is highly advisable for the owner to prepare and execute a sworn statement for each draw. If the owner uses a title company for a construction escrow, the title company will also require an owner’s sworn statement for each draw.

An owner’s sworn statement is a statement by the owner affirming and representing that it made certain payments to the listed general contractors, architects, surveyors, engineers, and other parties. It is evidence that the owner made certain payments to the various parties for certain amounts.

The owner’s sworn statement should be properly completed by the owner and notarized. The owner should ensure that each general contractor listed on the statement has provided a general contractor sworn statement to the owner. The owner should ensure that the totals of the contract amount, amount previously paid, and amount of this payment columns on the general contractor’s statement match with the owner’s statement.

Protections After Lien Recorded.

Even if the owner complied with all of the above and obtained all contractor’s sworn statements and lien waivers, unfortunately general contractors and subcontractors are still able to record liens. A mechanic’s lien recorded against the owner’s property, results in many negative consequences for the owner, including: (1) the lien becomes a cloud on the owner's title; (2) the Act requires the owner to hold back sufficient funds to pay the lien. 770 ILCS 60/27; (3) a construction lender will likely refuse to further fund the loan unless the owner puts up adequate security (150% of the lien amount); and (d) if the owner is an investor looking to sell or flip the property quickly, the lien may delay or prevent the owner from selling.

What then is an owner to do? What defenses is the owner entitled to?

1. Defenses to Mechanic’s liens.

In order for a general contractor or subcontractor (each a “contractor”) to assert a valid mechanic’s lien claim, the contractor must: (1) have a contract with the owner or authorized agent (general contractor); (2) perform lienable work; (3) complete the work or have a valid excuse for non-performance; (4) provide contractor sworn statements, unless waived by the owner (general contractor); (5) timely record a proper claim for lien or timely file suit instead; and (6) timely file a lawsuit to foreclose the lien.

A. Prerequisites for Valid and Enforceable Lien.

Sections 1 (general contractor requirements) and 21 (subcontractor requirements) set forth the prerequisites for a valid and enforceable mechanic’s lien:

  1. the lien claimant must be a general contractor or subcontractor;
  2. the lien claimant (general contractor) must have a valid contract with the owner or authorized agent for the project;
  3. the lien claimant must have provided lienable services or materials for the project;
  4. the lien claimant must have completed performance of the work seeking to be paid for or must have a valid excuse for non-performance;
  5. the lien claimant (subcontractor) must have notified (personally or by certified mail) the owner within 60 days from the start of work that it is supplying labor or materials for the project. 770 ILCS 60/5;
  6. if requested by the owner, the lien claimant must have provided contractor sworn statements (as explained more fully-above);
  7. If the project is residential and over $1,000, the contract must have delivered to the owner the required brochure pursuant to the Home Repair and Remodeling Act. 815 ILCS 513/20.
B. Timing and Contents of Lien Claim.

Sections 7 (general contractor requirements) and 24 (subcontractor requirements) set forth the requirements for the contents and timing of a mechanic’s lien claim.

In order to have a valid lien with priority over third parties, such as lenders, a contractor must record a claim for lien with the recorder or file suit to foreclose on the lien within four months following completion of the work. 770 ILCS 60/7. The lien claimant must also serve the owner with the lien claim within ten days of recording if the claimant is a general contractor and ninety days following completion if the claimant is a subcontractor. 770 ILCS 60/7; 770 ILCS 60/24. If the contractor just records the claim for lien, it must file suit to foreclose on the lien within two years after completion of the work. 770 ILCS 60/7.

The lien claim must be in the form of a recordable verified affidavit, listing the following:

  1. owner’s or owner’s agent name;
  2. contract description;
  3. balance due;
  4. sufficiently correct description of the property;
  5. contract date;
  6. completion date of contractor’s work; and
  7. claim for a lien on the property.
2. Sections 34 and 35 of the Act.

If the contractor has not filed suit to enforce its lien claim and the owner believes the lien is frivolous and unwarranted, how does the owner remove the lien?

First, the owner should serve the contractor with a notice pursuant to 770 ILCS 60/34 demanding that the contractor file suit to enforce its claim within thirty days. I know it sounds odd; why would you want someone to file a lawsuit against you? If the lien is frivolous, often times the contractor will not file a suit to enforce it and failure to file suit within the thirty-day time period will result in a forfeiture of the lien claim. Also, the Act allows for harsh penalties if contractors file unwarranted suits, including payment of the owner’s attorney’s fees and costs. 770 ILCS 60/17.

Although the lien will be void if a suit is not filed within the thirty-day demand period, it will still show up in a search with the recorder of deeds, unless the contractor voluntarily releases it, which is unlikely to happen. How then do you force the contractor to release the lien? The next step for the owner is to serve the contractor with a release demand. Pursuant to 770 ILCS 60/35, if the contractor fails to record the necessary release of lien with the record of deeds within ten days following the demand date, the contractor will be liable to the owner for attorney’s fees, costs, and $2,500.

What happens if the contractor fails to release the lien within the ten-day period? If the contractor does not release the lien, the next step for the owner is to file a declaratory action with the appropriate court requesting a declaratory judgment that the mechanic’s lien claim is void and should be released, and damages in the amount of $2,500 together with attorney’s fees and costs.

Although there are many things on a construction project that an owner cannot control, it can avoid being compelled to pay more for the project than it agreed to pay. The best way to avoid any surprises and issues with the contractor is for the owner to make sure its paperwork is in order before getting started and throughout the construction process, use a title company for the construction escrow, and of course retain a good attorney.

Evan Sauer is a Chicago real estate attorney at Reda & Des Jardins, LLC, a forward-thinking, technologically savvy law firm providing top-notch legal services to clients ranging from startups to large companies in a variety of industries. R&D's practice includes business, real estate, litigation and estate planning.

 

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