Home Improvement: How to Avoid Paying Twice

From Nolo.com

All Kate and Peter wanted to do was remodel their ancient kitchen and build on a family room. They saved and borrowed, got their permits and hired a contractor. The construction was over after just three dusty months, but the legal headaches were just beginning.

It turned out that the contractor hadn't paid the lumberyard thousands of dollars for the lumber, doors and windows used in the new family room. The lumberyard recorded a lien on Kate and Peter's house and threatened to file a lawsuit to force the sale of the house. Kate and Peter had already paid the contractor and had no money left over to pay again.

Suddenly they were faced with the possibility of losing the house they'd worked so hard to improve. Kate and Peter were blindsided by what's known as a mechanics' lien. A mechanics' lien has nothing to do with mechanics in the usual sense. It's a claim against property being improved, and it can be filed by anyone who provides materials or does work on the project and doesn't get paid. The property itself becomes responsible for the debt, and the people who are owed money can force its sale at auction if something isn't worked out.

But It's Not Fair

Most homeowners, like Kate and Peter, are shocked when they find out that they might still end up owing laborers, carpenters, electricians, materials suppliers or equipment lessors, even if they pay the contractor in full. But that's the law. The whole point of the mechanics' lien procedure is to make the improved property the ultimate guarantor of payment for all contributors to the project. It dramatically turns the economic tables by shifting the burden of proof on the question of payment from workers and suppliers to the property owners themselves.

Basically, state law is more concerned about those who provide labor or materials to an improvement project without getting paid than it is about the possibility of the owner having to pay twice for the same work. After all, the owner can turn around and sue the contractor (or subcontractor or supplier) to recover the funds. But that's another story.

How It Works

Here, generally, is how a mechanics' lien works. First, a contributor (a supplier or subcontractor) who does not contract directly with the homeowner must provide the homeowner with fair notice that describes the goods or services that are being contributed. The notice must typically be delivered within 20-30 days of when the goods and services were first contributed.

If there is a payment problem after work is begun or material supplied, the contributor records a document called a "claim of mechanics' lien" at the county recorder's office for the county where the real estate is located. The contributor then has a period of time -- typically between 60 days and 6 months -- in which he or she can either work out the payment problem or file an action against the owner to enforce the lien, which may ultimately lead to the property being sold at auction. If the enforcement action isn't filed by the statutory deadline, the lien becomes invalid.

As it turns out, mechanics' lien enforcement lawsuits are seldom filed within the mandatory period, which should mean that the lien has no further effect. Even so, many title insurance companies will refuse to clear title when the property is sold unless the lien is affirmatively removed, either by a release from the lien claimant or by court order. Fortunately, in most states, the procedure necessary to get a court order is simple and straightforward when it is clear that the mechanics' lien claimant blew the enforcement action filing deadline.

Heading Off Problems

There are some steps that an owner can take -- both before and during an improvement project -- to protect against this type of horror show. The main idea is to make sure that everyone is paid. One approach is to not rely on the general contractor to pay off the subcontractors and materials suppliers. Instead, the owner can write a number of checks, each check being jointly made out to the general contractor and to a particular subcontractor or to a subcontractor and a materials provider. The idea here is that the check may be cashed only if the ultimate beneficiary endorses it, which will help assure payment and eliminate the risk of a mechanics' lien. This is a common procedure, especially near or at the very end of a project.

Direct payments may not be a good idea. Sometimes a contractor who runs short of cash at the end will ask the owner to pay the last accounts directly (getting receipts, of course) and deduct them from the contractor's final check. You might be all right paying subcontractors and suppliers directly, but not the contractor's own employees: You don't want to look like an employer yourself, and you don't want to interfere with the contractor's special responsibilities, such as withholding income taxes and paying insurance and Social Security.

Another approach is to ask the contractor to get lien waivers from everyone who the contractor is responsible for paying. In California and many other states, a contractor must provide a waiver for all work for which the contractor has been paid, before accepting any further payment from the owner for additional work. In some states, neither the contractor nor the subcontractor may "waive" his or her mechanics' lien rights until payment is actually made, but in other states a waiver is permitted.

It helps to be organized. You should collect all papers on your project in one file, including any written notices of goods or services provided by contributing suppliers or subcontractors. Before you write the contractor that one final check after the project is finished and passes official inspection, it's only prudent to check in with anyone who sent you one of those notices. You might also want to check in with the last workers and subcontractors, even if they haven't sent you any notices yet (especially if they still have time to do so). Then you'll know which waivers to look for at your last meeting with the contractor.

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