January 2010

Before your HOA or condo board withholds payment in a dispute with a contractor, you should be fully aware that you risk having a mechanic's lien filed against your homeowners association. Here, we explain mechanic's liens and offer tips for resolving disputes with contractors in a way that avoids liens.

The Basics of Mechanic's Liens for HOAs

"A mechanic's lien is a statutory lien that allows certain types of vendors to have a lien against real property when they've performed construction-type services that benefited that real property," explains Matt Zifrony, who advises homeowners and condo associations at Tripp Scott, a Ft. Lauderdale law firm, and who's also the president of a 3,000-home association. "It's a pretty powerful tool contractors have if someone they've done work for refuses to make payments."

It's powerful because many lenders refuse to lend for properties with liens attached to them. They'll require the lien be paid before any new loan may close. So if a pool construction company slaps a lien against your association, and your board later wants to secure a loan to build a clubhouse, it's likely your association won't be able to secure financing until the pool lien is removed from the association's title.

Not every contractor can file a mechanic's lien. "The only people typically protected for lien purposes are those adding value to the property, maybe painting or roofing contractors or contractors adding some fixed asset," says Robert White, managing director of KW Property Management & Consulting in Miami, which oversees about 125 associations totaling 30,000-35,000 units. "If the work involves a service contact, such as landscaping, those providers are normally not allowed to place a lien unless that's provided for in their contract. So when boards are entering into contracts with vendors, they need to be educated on the contracts they enter into and lien problems from the beginning."

Another important point to remember is that mechanic's liens can be placed only against the entity that owns the property on which the work was completed. "You have to focus on where the work was performed," explains Zifrony. "If it was against the common elements, the mechanic's lien would be limited to the association, which would be less likely to affect sales of individual units. But potential buyers will still want to understand what a lien is for. Is the association in financial trouble? Could resolving that lien result in a special assessment? So even if a mechanic's lien might not directly affect the sale of individual units, it might indirectly affect them."

Typical Disputes That Lead to Liens

Mechanic's liens can come up at associations in many ways. One common scenario involves a contract for work and a later dispute over the quality or completeness of the job. The board may think it holds all the cards in the dispute because it can withhold final payment, but it may not realize the contractor also holds the mechanic's lien card.

Also, struggling contractors in today's economy may not be up front when bidding jobs, leading to disputes later. "These difficult times can lead to contractors trying to cut corners, underbidding, and trying to collect more than they're entitled to, and an association may not be able to pay," says Zifrony. "All of that may lead to a fight that results in the lien being recorded."

Contractors' failure to pay subcontractors on your job can also cause problems. "What I've seen frequently is an association, through its manager or board, thinks everything is fine and makes the final payment," explains Lisa A. Magill, a shareholder and association attorney at Becker & Poliakoff PA in Fort Lauderdale, Fla. "A month or two later, it receives letters from subcontractors on the job saying they were never paid on the account. Associations have liability not only to the contractors, but also to subcontractors and suppliers."

6 Steps to Protect Against Liens

You can take many steps to avoid mechanic's liens, and they often start before the contract is signed. Here are six steps to avoiding a mechanic's lien.

1) Use proper contracts. "It all goes back to the beginning," says Jeff Vinzani, an attorney at Nexsen Pruet LLC in Charleston, S.C., who represents associations. "Where I've seen issues, there seems to be a bad habit of a contractor giving a board a verbal or written quote, but the board doesn't sign a written contract. All the board has is a quote that doesn't spell out what to do if there's a default: What will the contractor do if he's not on time? How will payments be made? Can there be a holdback if the contractor doesn't do what he's supposed to do? Have a lawyer draft a real contract instead of what the contractor offers, which often isn't a real contract and doesn't have any depth to it."

Zifrony agrees. "Have any contract reviewed by attorneys, and make sure the contract is clear about the expectations for the contractor and how much the association is expected to pay," he suggests. "If you have the paperwork on your side and a contractor places a lien, there are statutes that can hold the contractor liable for improperly placing the lien."

2) Don't make any payments before you're positive the work has been done—and done properly. For big jobs, it might be smart to hire a third-party construction manager or engineer to oversee the job. "Before you make a payment," advises Magill, "check with not only your contractor, but also your construction manager or engineer who bears responsibility to make sure you're making all the proper payments."

3) Complain when a problem arises. Don't hold onto complaints until the end of the job. "If it's a six-month job, pay as you go, and keep the lines of communication open," says Zifrony. "That way, it's not six months later that you're complaining about something that happened in month one."

4) Pay attention to paperwork. Before you make a payment, says Magill, it's smart to have your association's lawyer check the public records to determine whether any subcontractors or suppliers have filed liens. Also read the paperwork you receive. "In Florida, a potential lienor must, as a prerequisite to perfecting a lien under the law, serve a notice to owner (NTO) on the property owner," says Magill. "One of the most important steps in administering a contract is cataloging the NTOs. You can't throw them in a file and ignore them. Get in touch with those contractors and ask if they've been paid or will be paid with the next payment, and get a waiver of claim from them."

5) Insist on lien waivers. That waiver of claim, called a lien waiver, is critical. "As you pay your contractor, you need a waiver of mechanic's liens," says Vinzani. "If you have a $50,000 job and have to make a $15,000 progress payment, get your contractor to sign a waiver that he's paid all his contractors to that point and that work done under and payment for that $15,000 is no longer in dispute. A lot of times the breakdown isn't between the association and the general contractor, but sometimes the general contractor doesn't always pay his subs on time, or you have a dispute between the contractor and some sub. The contractor tells you he'll reduce some expense by $1,500 and just doesn't pay the sub, and you don't know that."

Vinzani says most title insurance companies have standard lien waiver forms from the American Land Title Association (ALTA) that cover potential liens while work is in progress and when work is complete. If you don't use ALTA forms, says Vinzani, make sure you use a document that's in affidavit form in which the contractor is appearing before a notary, swearing that the facts he's giving are true, and acknowledging that he could be subject to perjury. Some states impose criminal penalties for committing perjury on affidavits.

6) Be careful before paying in full. Never pay in full before you get a lien waiver for the entire job. "Make sure you get the final waiver signed before you give the contractor the last payment," adds Vinzani. "If you don't get a lien waiver, the contractor can say, 'Well, we had this change order, or this one thing came up after the project started.' In addition, most states say that if you've paid the contractor in full and get a lien waiver stating that, no one is entitled to a mechanic's lien against the association."

Resolving Disputes with Liens

If you're bickering with a contractor over work and payments and want to avoid a lien, contact an attorney, who can attempt to mediate the dispute. "Normally if you're to the point of withholding payment, the first thing I'd do is get the board member who's overseeing the project and the vendor in the same room and try to hash it out," says White. "The vendor typically wants to complete the job properly, and the board typically wants to pay. Then if the issues can't be resolved, approach the association's attorney, who will reach out to the contractor's attorney and likely bring up arbitration or mediation."

If you can't resolve the dispute and it's affecting the sale of units, the association can "bond off" the lien. In that case, the association purchases a bond that will cover the amount of the lien until the dispute is resolved. "That doesn't eliminate the dispute, but it limits the ability for the lien to encumber the property," says Zifrony. "The lien no longer encumbers property, but it encumbers the bond instead."

But it's always better to avoid liens than to try to work around them later. "If you can avoid the lien," says White, "it helps the association on the back end, whether it's trying to obtain debt or sell units."