What Happens at Closing?
Claim of Lien After Closing
So you’ve decided to improve your property by building a new home. You’ve signed a contract with a builder and it is now ready to be occupied. You and your builder sit down at what is reverently known as a closing. The builder hands you a stack of documents to sign along with a packet containing warranties of the equipment installed. You reach into your pocket and hand over your hard earned money as the last and final payment to your builder. Your builder hands you a set of shinny new keys, thanks you for your business and out the door you go. Within 4 weeks of being in your new home, you receive from your mail carrier a certified letter from ABC Cement, Inc., containing a claim of lien. To your dismay you suddenly learn that you may have to pay again for the cement driveway that you thought was covered in the final payment handed to your builder. You re-read your contract to see that the driveway was included as part of the price and learn that it is. So why are you getting this claim of lien from ABC Cement, Inc., with threats of foreclosing on your new property? You frantically call your builder who assures you that he or she will take care of it. However, you quickly learn that “taking care of it” will never happen when your builder no longer takes or returns your calls. What can you do at this point?
This very situation came up the other day in a conversation wherein the asking party was dismayed to learn that your options are limited once the closing has been completed. It was pointed out that the key to having a successful closing is in the knowledge of knowing which subcontractors, sub-subcontractors and suppliers have and have not been paid prior to closing. So how do you find this out?
The first step to assuring yourself that all persons who have entered your property and improved it were paid is to locate each Notice to Owner that you received during the building process and match them with the lien releases delivered to you or your builder from each subcontractor, sub-subcontractor and supplier. Under normal circumstances your builder should have performed this task for you. More importantly, your lender (if you are using one) will likely demand the lien releases from every Notice to Owner received prior to delivery of the final draw. However, sometimes delivery of the Notice to Owner does not coincide with the time of your closing.
An example when the delivery of a Notice to Owner may not coincide with your closing occurs when a subcontractor, sub-subcontractor or supplier is asked to perform services or deliver supplies a few days before closing. Under normal conditions, the subcontractor, sub-subcontractor or supplier has 45 days to serve you with a Notice to Owner from the start of work on your property. Therefore, if they began working on your property 3 days prior to your closing, they still have another 42 days to serve you with a Notice to Owner. Under this situation, you may never be sure that your builder paid all of the subcontractors, sub-subcontractors or suppliers prior to closing because you would not be aware of what person or entity had worked on your property, submitted an invoice for such work to the builder and was not paid before you closed.
More importantly, even your title insurance will not be in a position to assist you because they insure the title to your property up to the point of closing that no encumbrances exist on the property (other than those that are established and are taken as exceptions to insuring the property such as taxes or easements or prior mortgages or judgments).
The solution lies in the delivery of a Final Contractors Affidavit from your builder. As the buyer you must insist on obtaining a Contractors Final Affidavit prior to disbursing the final draw or payment. Your builder has a duty to provide this document to you. In addition, your builder is to include all persons or entity’s who have not been paid in this document. However, this is not foolproof because the statute that requires the builder to inform you of those persons or entity’s not paid is less than clear concerning whether the builder has an obligation to inform you of those persons and firms who recently worked on your property but have not provided a Notice to Owner. The statute in question states that the builder will only have to provide the names of the persons or entity’s that were not paid and furnished a Notice to Owner to you and the builder. That same statute goes on to state that persons or entity’s whose time to serve a Notice to Owner has not expired shall be paid from the final draw or payment. If the builder has been diligent about keeping track of the persons hired and not paid, he or she should be including them on the Contractors Final Affidavit supplied to you. However, be aware that you should not rely on the contractors affidavit to inform you of those persons or entities who served a Notice to Owner on you and are not listed as unpaid. You should make certain that each person or entity serving you with a Notice to Owner has been paid prior to making the final payment.
The solution to providing you with some security as to knowing who can file a Claim of Lien against your property when the work performed is 3 days before closing seems to turn on the diligence of the person or entity that worked on your property. The subcontractor, sub-subcontractor or supplier has a duty (by statute) to provide a Notice to Owner to you before you receive your Contractors Final Affidavit and make the final payment to the builder. If the person or entity fails to serve the Notice to Owner on you before you receive the Final Contractors Affidavit and make the final payment, no claim of lien can be enforced against your property by the subcontractor, sub-subcontractor or supplier.
Therefore, it is extremely important that you obtain a Final Contractors Affidavit from your builder before the final payment is handed over to the builder. It is suggested that you obtain the Final Contractor’s Affidavit 5 days before closing. This will give any subcontractor, sub-subcontractor or supplier time to mail a Notice to Owner to you before you make your final payment. Upon receipt of the Final Contractors Affidavit you should review it for persons or entity’s that have not been paid and compare that list to any Notice to Owners received against the release of liens you also received. If there are any persons or entity’s that you cannot determine were paid, you should immediately contact the subcontractor, sub-subcontractor or supplier and ask if full payment was received. If payment was not received, you owe it to yourself to contact your builder for an explanation and make arrangements to have the subcontractor, sub-subcontractor or supplier paid before you close. The alternative is for you to deduct the amount due for any known unpaid person or entity from the builder’s final payment.
In essence, before you make your final payment to your builder, you need to make certain that everyone who served you with a Notice to Owner has been paid. Your last chance at avoiding a lien on your property is the Final Contractor’s Affidavit. Insist on its delivery before making your final payment and deduct from the final payment the amounts due those persons or entity’s listed on the Affidavit. Follow this general rule and your experience in having a home built will be less stressful.