- Florida Construction Law Essentials #1 What is a Construction Lien? How Does it Work? How Does it REALLY Work?
- February 18, 2011 | Author: Scott W. Machnik
- Law Firm: Marlowe McNabb P.A. - Tampa Office
Welcome to the first in a series of articles which will touch upon the basics of various aspects of construction law in Florida. The series will largely be aimed at informing contractors of legal requirements, helpful tips, and pitfalls to avoid. However, the series will also be educational to consumers, and from time to time I will include tips aimed directly at consumers.
What is a Construction Lien?
If you provide labor, services, or materials for the improvement of real property, you might be able to obtain a legal interest in the real property equal to the value of the work performed. To do so, you must follow strict guidelines set forth by Florida Statutes Chapter 713, including recording a Claim of Lien in the public records of the county where the property is located.
How Does it Work?
With the Claim of Lien, you can attempt to force the Owner of the property to pay for your work, even if you never had a direct contract with the Owner. While the Claim of Lien is in effect, the Owner will find it nearly impossible to sell the property or draw on its equity.
If that is not incentive enough for the Owner to pay you, you may file suit to foreclose the lien, and eventually force the property to be sold at public auction in order to pay for your work. If there is not enough money from the sale to pay for your work, you will receive a “deficiency judgment” against the Owner.
In effect, the Claim of Lien acts as a kind of mortgage on the property, but instead of making a monthly payment to the bank, the Owner must pay you for your work or risk losing their property.
How Does it REALLY Work?
If the Owner wants to keep the property and has enough money to pay for your work, then chances are good that you will be paid. If not, foreclosure of the property is an option.
However, when—like now—the economy is suffering, the power of your Claim of Lien suffers, as well. The ultimate usefulness of a Claim of Lien is generally based on two factors: 1) the equity in the property; and 2) the wealth of the Owner.
When a property goes to public auction, it is subject to your lien and any other lien on the property—including mortgages. You automatically make a “bid” on the property equal to the value of your work, and if no one else makes a higher bid, then you win the auction. If someone else makes a higher bid, they will win the auction, and out of their purchase price you will be paid for your work.
The problem usually comes up when there is a mortgage on the property—which there often is. That mortgage stays attached to the property even after the auction, and if the new purchaser wants to keep and use the property, they will have to make mortgage payments in addition to the purchase price at auction. Since most mortgaged properties are “upside down” (more is owed on the property than the property is worth), there is no equity in the properties and the new purchaser—far from getting a good deal—will lose money. As a result, it is often difficult to obtain payment on a construction lien at auction.
If you are not fully paid by proceeds of the public sale (a likely occurrence), then you will have a deficiency judgment against the Owner just as if the Owner owed you directly for the work. In this case, your judgment is only as valuable as the assets of the Owner. Since the origin of many problems on construction projects which lead to non-payment is the Owner’s lack of funds, and since many Owners with money pay lienors before their property is sold at auction, chances are great that if the property was sold, the Owner is broke and you will be able to collect little, if any, money to pay for your work.
This doesn’t mean that construction liens are worthless. It just means that liens do not “automatically” work as intended as they did several years ago when the economy was in better shape. Instead, a lesser number of liens are useful as leverage against the Owner in order to procure payment for construction work. As such, it is important to protect yourself as best as possible from “bad” projects.
However, it is just as important to be able to make good judgment calls about when to record a lien and how far to take the lien foreclosure process. A good construction attorney will be able to advise you regarding your construction liens, and could help your chances of receiving payment or prevent your chances of wasting money on a worthless and lengthy lien foreclosure.