Commercial Properties
George was the owner of the 30,000 square foot Mercury Office Building. When he bought the building, he established that there was extra land for him to build an expansion of 5000 sq.feet. His key tenant, Mercury Running Shoes, was growing and if he did not expand the building, they were not going to renew their lease.
He hired Meyer and Meyer architects to prepare the drawings, and Todd Smith Construction to build the expansion. The president of Mercury was very excited about the expansion and agreed to the drawings as well as the increased rent. He also naturally agreed to have his company's name on the building!
Construction was moving right along, when suddenly George received a lien notice in the mail from the carpet supplier. George was stunned. He immediately called his attorney. His attorney confirmed that for commercial projects, materials suppliers must give a written notice of right to lien if the job is handled through a contractor. If the owner orders the good directly from the supplier, then no written notice (lien notice) must be given.
George asked his attorney, "What exactly is a lien?" His attorney replied, "In its simplest form, a lien is a legal document filed with the county clerk which, if properly filed and recorded, gives the lien holder an interest in the of property. In the worst case a lien holder can force the sale of the property in order to get paid for their bills."
Residential Properties
Katrina owned a 4-plex1. She decided to put a new roof on the property. Her bid proposals included an "Information Notice to Owner"2 that she needed to review before she signed the contract (or within 5 days after she agrees orally to a contract).
Katrina received a notice of right to lien from the roofing supply company. She did not receive a notice from the roofer. The roofer completed the work so she paid his company. But, the roofer did not pay the materials provider, and 60 days after the roof was completed, she received "Intent to Lien" notice from the supplier. She was horrified. She called her attorney for help.
He pointed out that Katrina should have read the "Notice of Right to Lien" more thoroughly. He noted that she could have written out her check to both the roofer and the supplier to avoid this incident, or she could have asked the roofer to supply her with a Lien release notice. The lien release from the supplier and the contractor could have been delivered to her upon receipt of the check in payment of services.
Oregon lien laws specify that, "Liens must be filed by the contractor or subcontractors, no later than 75 days after completion of construction work or cessation of work." Within 20 days after a claim of lien has been filed, the lien claimant must mail to the owner and any mortgagee or others with a recorded interest in the property, a notice that the lien claim has been filed.
Is there a lesson to be learned here?
It is prudent to read all contracts with vendors before you sign them. It is critical to make sure that before you pay bills (contractor draws), the contractor executes lien release documents. Withhold 10 percent at the end of the job until you are sure all of the work has been completed and paid for.
Obtain a list of subcontractors that are going to be involved in the project and ensure that their bills are getting paid.
Check out the contractors you are going to hire. Use a construction attorney to help you sort out the process on a major job.
What qualifies as a major job? All jobs are major if you don't know what you are doing. In new home construction you have the construction lender helping you keep track of the project. They prepare draws, lien releases and regular inspections of the job site to ensure completion prior to the release of partial payments. You can also have a contractor and their subs execute partial lien releases as they get done with parts of the job.
Regular inspections are a part of the process. If you don't understand construction, then hire someone that does. Don't be penny wise and pound foolish.
Just yesterday at my daughter's birthday party, one of my friends came to me and said that a contractor they had hired had not finished a job. The contractor requested the final 10 percent, but the work was not yet done. Siding, insulation, sheetrock, mudding still required completion and painting. The contractor was whining that he was out of money and needed the last few thousand to finish purchase materials for subcontractors to complete the job.
So where does that leave my friend? If he pays the final 10 percent, he's out in the cold. He chose the lowest price and was about to get stiffed -- plus had no lien releases from the subcontractors. The 10 percent acts as his hammer, or insurance, to get the job done. Once the contractor is paid in full, my friend has no recourse but litigation to get the work completed.
Don't let that happen to you. Write each check out to both contractor and subcontractor or get lien satisfaction/release documents from them each. It is imperative that you understand this process, otherwise you can be liable to pay out much more than you budgeted for.
1 According to the Oregon Construction Lien Pamphlet, published by the Associated General Contractors, "A residential structure is one which the owner does or will occupy as a residence and the structure is not more then four units capable of being used for a residence.
2 Pursuant to Oregon state statute, the State Construction Contractor's Board has adapted a form entitled "Information Notice to Owner" that is used by all contractors. (If a contractor does not provide the Information Notice, the contractor may not claim a lien, may be fined for up to $15,000, or may have his registration as a contractor revoked.)
