Magazine article Business Credit

Participating Owners: Enforcing a Mechanic's Lien for Materials against a Non-Contracting Party

Magazine article Business Credit

Participating Owners: Enforcing a Mechanic's Lien for Materials against a Non-Contracting Party

Article excerpt

In the past several years, the construction industry has enjoyed an unprecedented level of success. A significant portion of this success is attributable to the extension of credit from "materialmen," or suppliers of material goods. The industry depends on credit because construction contracts seldom provide advance payment to contractors; instead, contractors rely on scheduled or quarterly payments. Accordingly, a contractor usually does not have the capital to finance improvements without an extension of credit.

As with any credit extension, there is the risk of nonpayment. The mechanic's lien has become the primary mechanism to minimize risk. Mechanic's lien statutes may provide materialmen security for the underlying debt by securing an interest in the land and the structure subject to improvement. However, a mechanic's lien may be unenforceable against a property owner if the materials are supplied on contract with a leaseholder making improvements to a leasehold estate. If the leaseholder defaults on payment, or files for bankruptcy protection, then the material supplier may be without a remedy, while the property owner receives a benefit without bearing a burden.

Mechanic's Liens and Material Goods

Mechanic's liens are creatures of state law, or in some instances, a constitutional remedy. Although each state has its own statute and requirements to enforce mechanic's liens, these statutes share common attributes. Mechanic's lien statutes only protect certain classes of professionals or tradesmen that contract with the owner or leaseholder.

In a majority of states, mechanic's liens are enforced through foreclosure proceedings. A claim on a mechanic's lien is an action in property to recover materials furnished, not a personal action in contract for repair or improvement (i.e., breach of contract or restitution). The material supplier should appreciate the difference between contracting with a property owner directly, or alternatively, with a leaseholder.

It is important to consult the specific state law to determine the treatment of materials. State law dictates whether materials qualify for a mechanics lien. Generally, materials qualify for a mechanic's lien if incorporated into an improvement with knowledge of their intended use on a specific site. Alternatively, some states expressly designate certain materials for qualification. The determination of whether non-inoorporated materials qualify (ep, rental equipment utilities, mamtenance, etc.) varies state to state.

Improvements to Leasehold Estates

Payment issues may arise when materials are supplied to a project involving improvements to a leasehold estate. Generally, the leaseholder, not the property owner, contracts to construct the improvements. However, the law of fixtures contends that a building becomes part of the land after it is constructed, and accordingly, ownership of the fixtures vests in the property owner. If the materials are furnished to a leaseholder for improvements, then the property owner is not liable for payment. Accordingly, if the leaseholder defaults on payment, or files for bankruptcy protection, then a mechan- ic's lien may have little or no effect.

Non-Contracting Owners May Not Be Liable for Improvements

Generally, non-contracting owners are not liable for improvements. The states use two approaches to balance the unfairness of subjecting a non-contracting owner to a mechanic's lien and the possibility of unjust enrichment. …

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