Construction: Improperly Filed Mechanic’s Liens Could Cause Financing Slowdown
The option to file a mechanic’s lien is intended as a protective device against non-payment for work completed. If someone at work on a construction project is not paid, they can file a lien against the property. Recently, however, attorneys and the government have taken notice—and action—because many liens filed are invalid, incorrect or even illegal.
Improperly filed mechanic’s liens have the potential to limit financing, as lenders are weary of unpaid obligations.
The Lawyers’ Issue
“An improper lien to a property could be devastating to a property owner or developer,” said Paul Shapses, partner in Herrick, Feinstein, LLP’s New York office. “A lender may hold back proceeds or delay closing.” This potential problem would only increase with the size of the project, according to Mr. Shapses.
Since a title is public record, an improperly filed lien for property owners up-to-date on payments may still be associated with the project’s address.
The way commercial mechanic’s liens are filed has become a source of concern in North Carolina, where the State Bar recently
took action against national, online lien filing service, Lienguard.
Customers of Lienguard pay a flat fee and provide information through its website, and the firm prepares the lien.
In June, however, Lienguard was found guilty of “unauthorized practice of law,” for preparing such documents. While Lienguard contended it was performing clerical work, the court found their business to be providing legal advice, something they were not qualified to do. A permanent injunction was issued in The North Carolina State Bar v. Janis Lundquist [President of Lienguard] and Lienguard.
Third-party providers of claims of liens may be popular with national suppliers since they are seen as a “one-stop shop,” according to Matthew Bouchard, partner in Lewis and Roberts, PLLC’s Raleigh office. Unfortunately, they may not take the care that an attorney would in filing a lien—which can remain a black mark on a property’s title while an owner jumps through various legal and administrative hoops.
To rectify improperly filed liens, property owners or developers have to look to their financing sources. “Lenders have to be flexible to circumstances, but still adhere to underwriting standards,” according to Mr. Shapses. “If there is $100,000 in question, a lender may have a title company hold the amount in escrow as the borrower is trying to resolve.”