t a x & LEGISLATION
Lien Laws & Out-of-State Projects:
A Little Research Goes a Long Way
Your company, like many others in construction, is likely experiencing the effects of the prolonged economic downturn
and wondering if there’s an end in sight. Some states are starting to show small upticks in economic activity, but perhaps
not yours. This might lead your company to consider looking
for work in other states.
As your company ventures into other territories, you apply your
existing lien law knowledge to out-of-state projects. However,
as an out-of-state job approaches completion, something goes
horribly wrong. Perhaps there is a change order dispute with
a subcontractor who liens the project, which causes the owner
to withhold payment from you.
Naturally, you attempt to lien the project too. But, the out-of-state lien law is very different than what you thought, resulting
in an inadvertent failure to perfect your company’s lien rights.
Even worse, your subcontractor perfected its rights and was
paid by the owner to satisfy its lien, so now you must defend
the inevitable claim from the owner for sums paid to the lienor.
What went wrong? Your unfamiliarity with the out-of-state
lien law gave your subcontractor an unfair advantage when it
perfected its lien for sums to which you believe it was not
entitled. And, your company’s ability to resolve the payment
dispute was compromised by the loss of benefits otherwise
provided by that particular state’s lien law.
Unfortunately, this scenario happens all too often. As contractors expand their business into other states, they seldom consider the differences in lien laws from state to state.
Although lien laws differ significantly, most generally address
the same topics. With a little research, you can learn about the
most pressing provisions and perfect your company’s rights.
Protected Class of Lienors
Identify who is entitled to lien rights. There is general uniformity
throughout most states, with only a few variations. Most lien laws
afford rights to contractors, subcontractors, subsubs, and material suppliers. Some also provide rights to individual laborers.
It’s important to discover how far lien rights extend down the
hierarchy of contracts. For example, most lien laws protect
design professionals, but some do not. Some states give lien
rights to certified appraisers, but most do not. And, in some
states, the protected class of lienors differs depending on
whether the project is residential or commercial.
So, determine the class of potential lienors before a project
begins. This will help identify the entities from which you must
obtain appropriate releases as the project progresses.
You should also review the validity of the standard contracts
your company sends to its clients, subcontractors, and suppliers in light of local lien law requirements.
Most state statutes permit verbal and written contracts, but
some states limit the enforceability of verbal contracts. For example, many states require a written contract if a project cannot be performed in less than one year or involves the sale of
goods exceeding $500. If you come from a state where all verbal contracts are enforceable, you may be surprised if a verbal
contract is prohibited in another state.
Under “pay-if-paid” clauses, a contractor is not required to pay
subcontractors unless the contractor received money from the
owner. Some states freely enforce these clauses, some prohibit them as against public policy, and still others enforce them
under limited circumstances. So, you must determine the enforceability of your company’s standard contracts before using
them in unfamiliar states.
Required Warnings or Disclosures
Be aware of unusual procedures or warning requirements that
differ significantly from your home state’s. There are some that
could jeopardize your company’s lien rights before work on a
project even starts.
For example, on most residential projects in Florida, a contract between an owner and a contractor must contain a warning provision in no less than 12-point, capitalized, boldface
type on the front page of the contract or a separate page that