Stites & Harbison, PLLC

In these difficult economic times, lien rights are even more important to contractors as security for payment on construction projects.  Generally, a construction lien is a statutory claim against the owner’s property that secures payment for work performed to improve the property.  However, the devil is in the details, and every state’s lien laws are different.  In fact, some of the differences are surprising and even dangerous.  For example, did you know:

In North Carolina, subcontractors have a lien on funds held by the project owner, in addition to the general contractor’s lien against the real property.

In Tennessee, while there is no lien on funds, the owner is required to establish a separate escrow account to hold retainage for the benefit of contractors.

In Florida, filing an overstated claim of lien can not only forfeit your lien rights, but also render you liable for the owner’s attorney’s fees. 

In Georgia, a lien waiver becomes effective after 60 days, even if you have not been paid. 

In Kentucky, a contractor that improves real property under circumstances where a mechanic’s lien may be filed must use each owner payment to pay bills for labor and materials on that project or risk criminal penalty. 

In North Carolina, the general contractor has lien rights against the owner’s real property.  (N.C. Gen. Stat. § 44A-8).  A subcontractor, however, has two liens.  The first is a lien against the improved real property by way of subrogation to the general contractor’s lien.  The second is a lien on funds owed to the general contractor.  (N.C. Gen. Stat. § 44A-18).  A lower tier subcontractor or supplier has a lien on funds owed to the subcontractor above it.  When the owner receives a proper notice of claim of lien on funds from a subcontractor, it is required to retain any funds subject to the lien or risk personal liability to the lien claimant.  In other words, it stops the flow of money and gets everyone’s attention.

Tennessee does not have a “lien on funds”, but it does require an owner to deposit all retainage in a designated escrow account for the benefit of contractors performing work on the project.  (Tenn. Code Ann. § 66-34-104).  At the time of the deposit of retained funds, they become the sole and separate property of the contractor to whom they are owed.  Another interesting twist under Tennessee law is a limitation on lien rights against residential property.  Lien rights have been eliminated on residential property for subcontractors, suppliers and other persons that do not contract directly with the property owner.  (Tenn. Code Ann. § 66-11-145). 

Unlike some states, Florida penalizes a lien claimant for filing an overstated claim of lien.  If a contractor files a lien that is willfully exaggerated, such as including a claim for work not performed or amounts not due, it is considered a fraudulent lien and the claimant forfeits his lien rights against the property.  (Fla. Stat. § 713.31).  The lien claimant also faces liability for the owner’s legal fees and costs.  In addition, filing a fraudulent lien is a felony subject to criminal punishment.  A good faith dispute over the amount owed does not make a claim of lien fraudulent or willfully exaggerated.  However, given the downside risk, it pays to be careful in Florida.

Georgia has a statutory form of lien waiver for use on construction projects.  Interim waivers are given in exchange for progress payments, and a final waiver is provided in exchange for final payment.  (O.C.G.A. § 44-14-366).  Until recently, the statute provided that an interim or final waiver became effective to waive lien rights after 30 days, whether payment had been made or not.  This came as an unpleasant surprise to many contractors.  The statute and waiver form were recently changed, so that the presumption of payment occurs after 60 days and is spelled out on the lien waiver form.  It is still possible to inadvertently lose your lien rights, but not quite as likely. 

Kentucky includes in its lien laws a type of “trust fund” statute, which requires that a contractor must pay in full all material and labor from the proceeds of any payment received from the owner.  (KRS § 376.070).  If the payment from the owner is insufficient to pay for all labor and material, payments must be made on a pro-rata basis, unless otherwise agreed.  Failure to comply exposes the contractor to criminal penalties.  (KRS § 376.990).  It is a serious restriction on the use of project funds.

Generally, the lien laws enacted by different states have a common purpose of providing some security for payment on construction projects.  However, they vary from state to state and contain plenty of  traps for the unwary.

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R. Daniel Douglass is a Member located in the Atlanta office where he has significant experience handling complex construction disputes involving multiple parties and expert consultants.  He can be reached at ddouglass@stites.com.