Defenses to a Claim of Lien
So you’ve decided to improve your real property. You’ve signed a contract with a contractor and now you’re not happy with his performance. You terminate his services and he records a claim of lien against your property. What can you do at this point?
You have two primary options when dealing with a recorded claim of lien and three non-primary options. They include, challenging the lien with an order to show cause, notice of contesting the lien, demanding an accounting, demanding a list of subcontractors, depositing a payment bond or do nothing.
The notice of contest of lien is a document that is recorded with the clerk of court. It serves as notice to the contractor that he or she has 60 days from the date of the stated service (usually written in by the clerk of court) to enforce the lien. The contractor, person or entity who recorded the claim of lien enforces it by filing suit to foreclose on your property.
The effect of the notice is to shorten the one year timeline the contractor (or subcontractor, sub-subcontractor, materialman) has to enforce the lien to 60 days. In essence, it brings everything involving your lien to a head. If no enforcement of the recorded lien is started within the 60 day period, the lien is no longer valid and is automatically cancelled. The gamble in filing a notice is that it may awaken the person who filed the claim of lien to do something as opposed to you taking the chance that the person or entity that recorded the lien will do nothing and the one year limitation to enforce the lien will cause it to expire by itself.
The other alternative to challenging a claim of lien is to file and serve a complaint against the contractor (or person or entity who recorded the claim of lien) to show cause why the lien should not be canceled, enforced or vacated. The person or entity that filed the claim of lien will have 20 days from the date of service of the complaint to respond or commence a lawsuit to enforce the lien. If no response or other action is taken by the person or entity that recorded the lien, the court will cancel the lien. The effect of this procedure is to shorten the time to enforce the lien from one year to 20 days. Once again the gamble here is that it may awaken the person who filed the claim.
Generally speaking, if you are within 5 months of a recorded claim of lien becoming one year old from the date it was recorded, it may not make economic sense to gamble on awakening the contractor, person or entity who filed such lien. However, every situation is different and you should analyze how the recorded claim of lien is affecting you and your future plans.
A few of the non-primary alternatives to offsetting a recorded claim of lien consist of demanding an accounting, a list of subcontractors and depositing a transfer payment bond with the clerk of court. These alternatives generally are used shortly after a claim of lien is recorded against the homeowner.
The homeowner can demand in writing and under oath that an accounting showing the nature of the labor or services performed; the nature of the labor or services to be performed (if any); the materials furnished; the materials to be furnished (if known); the amount paid on account to the date of the demand for the accounting; the amount due; and, the amount to become due (if known as of the date of the demand for the accounting) from the contractor, person or entity that recorded the lien against your property. If the contractor, persons or entity that recorded the claim of lien fails to provide the information to you (or provides false information) within 30 days, he or she may be deprived of his or her lien. If you elect to use this alternative, make every attempt to use the statutory form for such request because it will contain certain warning language that if not included may prevent you from depriving the person or entity from enforcing their lien.
You may also request an accounting at any time. A request for an accounting (as opposed to a demand for accounting under oath) is usually made whenever there is a request for a partial or full payment by any person or entity that is making improvements to your property. In addition, to the request for the accounting, you can also request a copy of the contract from the entity requesting payment. The purpose of this procedure is to review the agreement between the contractor and his subcontractors and supplier to see if the amounts being requested for payment are valid and what work or materials were agreed upon. Unlike the demand for an accounting under oath, if the person or entity who receives your request refuses or neglects to provide you with this information, your remedy is a lawsuit against that entity or person for damages that you sustained from not having received the information requested. This tool serves as good means of staying on top of the amounts currently due, those expected to be due in the future and what agreements were made with persons who will be working on your residence.
You also have a right to request a list of subcontractors and suppliers who have a contract with your contractor. The request must be in writing and delivered to your contractor by registered or certified mail. Your contractor must, within 10 days of receipt of the request, furnish to you (or your agent) a list of the subcontractors and suppliers who have a contract with the contractor as of the date your request is received by the contractor. If the contractor fails to furnish the list, the contractor will forfeit his right to assert a lien against your property to the extent you are prejudiced by the contractor’s failure to furnish the list or by leaving a subcontractor or supplier off the list. Although this is a tool to assist in offsetting a claim of lien, its effectiveness is questionable due to the requirement that you must show how you were affected by not knowing the names of the subcontractors and suppliers working on your residence.
Another alternative to offsetting a claim of lien is to file a transfer payment bond with the clerk of court. The purpose of depositing a bond with the clerk of court is to clear title to the real property that is subject to the claim of lien. The clerk of court has a specific formula that they use to determine the amount that is to be deposited by you. Generally, the formula used is the full amount of the lien plus interest for a three year period, plus the greater of $1,000.00 or 25% of the lien claim for costs and attorney fees. There may be other fees charged, so check with the clerk of court what the correct amount is needed for the deposit.
Once the fees are paid, the clerk then completes and records a certificate. The clerk of court will then send a copy of the certificate to the person or entity that filed the claim of lien by registered or certified mail. Once the certificate is recorded, the property is released from the lien claim. This method is usually used when a homeowner needs to clear title to the property in order sell it or have their financial institution that holds a construction mortgage on the property begin releasing funds to recommence making the improvements or to convert to a fixed mortgage.
You last option in dealing with a claim of lien recorded against your property is to do nothing and hope that the person or entity who filed the lien will simply forget about it and allow it to expire on its own after one year from it being recorded.
Although this article deals with how to offset a recorded claim of lien against your property, it is not intended to be all inclusive. There are other means of dealing with a claim of lien which are outside the scope of this article. If you are unsure of what is the best tactic to take, consult a legal representative for a strategy that is best suited for your situation.