Mechanics' and Materialmen's Liens
MECHANICS’ AND MATERIALMEN’S LIENS
MECHANICS’ AND MATERIALMEN’S LIENS
III. Defending Lien Claims. 8
MECHANICS’ AND MATERIALMEN’S LIENS
David H. Johnson
Under OCGA Section 44-14-361, liens are created: (1) to give the furnisher of labor and/or materials a claim against property improved thereby, (2) to make that property liable for the labor and materials, and (3) to force the owner to ensure payment for all labor and materials prior to distribution of final payment. Henderson v. Mitchell Eng'g Co., 158 Ga. App. 306, 279 S.E.2d 750 (1981); Scott v. Williams, 111 Ga. App. 735, 143 S.E.2d 16 (1965). These liens attach to and provide the lien claimants with interests in the property improved, which may ultimately be foreclosed, eliminating inferior interests in the property arising after creation of the lien right.
Construction liens attach to the improved real estate as inchoate liens at the inception of the claimant’s involvement in the project, e.g., the first date that a subcontractor works on the job, the first day a supplier ships materials to the property, etc. Title Standard 15.2. However, to be enforceable, the liens must be perfected in strict accordance with the substantive and procedural requirements of the lien statutes.
The relative priorities of construction liens versus other types of liens are set out in OCGA Section 44-14-361.1(c) (see also, State Bar of Georgia Title Standard):
“The liens specified in Code Section 44-14-361 shall be inferior to liens for taxes, to the general and special liens of laborers, to the general lien of landlords of rent when a distress warrant is issued out and levied, to claims for purchase money due persons who have only given bonds for titles, and to other general liens when actual notice of the general lien of landlords and others has been communicated before the work was done or materials or services furnished; but the liens provided for in Code Section 44-14-361 shall be superior to all other liens not excepted by this subsection.”
While the statute makes clear that all Georgia tax liens are superior to liens under OCGA Section 44-14-361, the priority of federal tax liens is a separate question governed by federal law. A full discussion of lien priority in the context of federal tax liens can be found in Hinkel, Ga. Construction Mechanics= & Materialmen=s Liens (4th ed.), ' 9-10. Generally, with a limited exception for an owner-occupied residence, a recorded construction lien will have priority over a subsequently recorded federal tax lien.
Obviously, these liens are of great significance to any owner of property being improved by construction work. Fortunately for the owner, and for the owner=s attorney, construction lien procedures are complex and intricate, and they are always strictly construed against the lien claimant. Palmer v. Duncan Wholesale, Inc., 262 Ga. 28, 413 S.E.2d 437 (1992). Where there are numerous hurdles along the way to the ultimate perfection and foreclosure of a lien, there must also be numerous potential defenses to that lien. The complexity of the lien procedures creates a powerful weapon in the hands of an attorney willing to expend the effort necessary to master them.
Where a lien claim has been successfully challenged or, when all else fails, satisfied by payment, the lien should be cancelled of record in accordance with Title Standard 15.8, i.e., by recording a written cancellation on the original lien or in a separate document, or via a quit claim deed indicating its purpose to release the property from the lien. The present Title Standard 15.8 and the Comment thereto also refer to a third method of satisfying a lien of record, but that method has been deleted from the lien statutes in favor of automatic expiration of the lien where no notice of lien action is timely recorded. See Title Standard 15.5 and paragraph III.F.1., below.
II. Avoiding Lien Claims at the Outset.
In addition to defenses based upon the substantive and procedural roadblocks to perfection of a lien claim, there are also certain practical steps that a properly advised owner can take to limit its potential exposure to lien claims even before they are filed.
A. Avoiding Liens at the Contracting Stage.
The first and most obvious method of protecting against filing of lien claims is to ensure the quality and stability of the general contractor. Not only is a reputable general contractor himself more likely to pass progress and final payments through to subcontractors and suppliers, but also his subcontractors are more likely to do so, since they often work for this general contractor on a regular basis and rely upon his business.
Second, the construction contract can provide a variety of protections against lien claims. The contract can require the general contractor to post payment and performance bonds, thereby guaranteeing that all suppliers of labor and materials to the project must be paid by the surety or the general contractor. The contract can also expressly provide that the general contractor must take responsibility for any lien claimed. See, e. g., Paragraph 14.5.2 of AIA Document A107 - 1997, Abbreviated Standard Form of Agreement Between Owner and Contractor, which states:
“Final payment shall not become due until the Contractor has delivered to the Owner a complete release of all liens arising out of this Contract or receipts in full covering all labor, materials and equipment for which a lien could be filed, or a bond satisfactory to the Owner to indemnify the Owner against such lien. If such lien remains unsatisfied after all payments are made, the Contractor shall refund to the Owner all money that Owner may be compelled to pay in discharging such lien, including all costs and reasonable attorney’s fees.”
The variety of contractual provisions employable by the owner to render the general contractor responsible to remove liens is limited only by the owner’s lawyer’s imagination. In addition, these provisions may be made applicable to the subcontractors by virtue of flow-down provisions in the subcontracts, the inclusion of which may itself be mandated in the general contract, adopting as obligations of the subs the obligations of the general under its contract with the owner.
It should also be noted that OCGA Section 44-14-366(e)(1) expressly authorizes subordination of lien rights, even where given prior to acquisition of the interest to which the claimant subordinates and even though the claimant has not been paid. Such subordination to future interests of lenders can be specified contractually for general contractors and, through flow-down provisions, of subcontractors as well.
B. Avoiding Liens at the Start of the Project.
Under Section 44-14-361.5, where the owner or contractor has properly recorded, posted, and provided a Notice of Commencement, the failure of the lien claimant to give its Notice to Contractor to both the owner and the contractor within thirty days of first furnishing services or materials or of the filing of the Notice of Commencement, whichever is later, absolutely prohibits enforcement of the lien. Note that this applies only to lien claimants not in direct privity with the general contractor, i.e., second tier and lower tier subs/suppliers. Note also that, under recent case law, errors in the preparation of a Notice of Commencement and/or in the timing of its recording or posting, may not invalidate the Notice of Commencement, depending on how substantial the errors are. See the discussion in Fidelity and Deposit Co. of Maryland v. Lafarge Bldg. Materials, Inc., 312 Ga.App. 821, 720 S.E.2d 288 (2011). Note also that, even where a notice to contractor is provided, an error in the content of that notice to contractor many preclude it from functioning to preserve the claimant’s lien rights. Consolidated Pipe & Supply Company, Inc. v. Genoa Construction Services, Inc. , 302 Ga. App. 255, 690 S.E.2d 894 (2010).
Obviously, the Notice of Commencement is a powerful tool for eliminating possible lien claims, and it should be utilized on virtually every project. The owner’s representative might want to incorporate in the general contract a clause requiring the general to comply with the Notice of Commencement provisions of Section 44-14-361.5. However, it would behoove the owner to follow up to ensure prompt compliance with this clause, since it is too late to gain the protection of the Notice of Commencement after a lien is filed. The recording of a Notice of Commencement does not create or constitute any encumbrance upon or defect in the title to the real estate. OCGA Section 44-14-361.5(d); State Bar of Georgia Title Standard 15.4.
C. Avoiding Liens During Construction.
One primary means by which an owner can minimize exposure to lien claims is by requiring the general contractor to provide, in connection with each progress and final payment, lien waivers from each subcontractor and major material supplier on the job. A waiver and release of lien executed in one of the forms specified in Section 44-14-366 is binding upon the lien claimant and a defense to the lien, subject to payment in full of the amount stated in the waiver and release. OCGA Section 44-14-366(f)(1). “Payment in full” for these purposes can consist of actual payment, a separate written acknowledgment of payment by the claimant, or the passage of sixty days from execution of the waiver without the recording of an affidavit of nonpayment.
The owner may also employ a joint check system, whereby payments against the contract price are made via jointly payable checks to the contractor and its sub or supplier. Since this system would require that the subcontractors’ invoices be reviewed by the owner, it ensures that the subcontractors are in fact paid in full, and are therefore without lien rights. Obviously, if the lien claimant has in fact been paid in full for its labor and/or materials, then the claimant has no valid lien, since there is no “amount” claimed due. Of course, it would also be sensible to obtain written lien waivers as described above at the time of payment of the joint checks.
D. Avoiding Liens at Completion of Project.
Upon completion, the owner can ensure the proper execution of a contractor’s affidavit. A contractor’s or owner’s affidavit which is in compliance with all conditions of Section 44-14-361.2(a)(2)(A) and (B) will dissolve all potential lien rights on the project. Balest v. Simmons, 201 Ga. App. 605, 411 S.E.2d 576 (1991); see also, State Bar of Georgia Title Standard 15.9. One prerequisite to the effectiveness of the contractor’s affidavit is that, if it is irregular in some way, then there must be no proof that the owner was aware of the irregularity or proof of fraud and/or collusion. Walk Softly, Inc. v. Hyzer, 188 Ga. App. 230, 372 S.E.2d 500 (1988). Although this issue has usually arisen in the context of an irregularity in notarization of the affidavit, it appears that it could also be raised by a lien claimant with proof that the owner was aware that amounts remained due for materials and labor on the project and therefore that the affidavit was false.
An owner may also post a bond, or by contract require his general contractor to post a bond, to discharge a lien claim. OCGA Section 44-14-364 provides for the posting of a cash, surety, or property bond which, when approved by the clerk of the superior court in the county where the land is located and recorded in the property records, discharges the lien from the property. The claimant retains his right to pursue recovery under the bond, but the real estate itself is no longer encumbered and is discharged from the lien. An owner’s posting of a lien discharge bond is a mixed blessing, since the bond eliminates the lien on the property but also creates personal liability of the owner for the amount owed to the claimant. A better option for the owner is to force the general contractor to post the discharge bond, either on the basis of a term in the general contract requiring the contractor to do so, or by threat of a breach of contract claim.
From the standpoint of the real estate attorney examining title, a recorded bond may be relied upon only if it satisfies the statutory mandates and if it bears the approval of the clerk of the superior court in the county where it is recorded. State Bar of Georgia Title Standard 15.6; OCGA Section 44-14-364.
III. Defending Lien Claims.
Should the owner fail or be unable to protect itself by one of the means described above and find itself the subject of a lien claim, all is not lost. There remain numerous avenues to defeat the lien claim which warrant exploration. Although these avenues are usually considered as litigation defenses to lien claims, several can often be used, if the requisite proof is unequivocal, to induce a lien claimant to abandon its claim voluntarily. Therefore, an owner’s attorney must be aware of these defenses as possible means of nipping the problem in the bud prior to litigation. Either a written cancellation or a quitclaim deed from the lien claimant or its attorney, duly recorded, is required to satisfy the lien of record, in the event that one of these defenses results in an agreement to abandon the lien claim. State Bar of Georgia Title Standard 15.8.
In addition, where an apparently viable defense to a lien is present, the owner has the option, under OCGA Section 44-14-368, to force the matter to a head. This statute allows the owner (or the contractor) to shorten the time within which a lien claimant may commence a lien perfection action. This is accomplished by recording a Notice of Contest of Lien, in the form set out in the statute, along with proof of service of this notice on the lien claimant, which must be accomplished by certified or registered mail or statutory overnight delivery. The lien is then extinguished ninety days after the Notice of Contest of Lien is recorded, unless a notice of filing of a lien action is recorded within that ninety day period, with no recorded cancellation or release required.
Alternatively, an owner may simply sit and wait. Perfection and foreclosure of a lien, again, is accomplished only through compliance with a number of procedural and substantive requirements. Included in these are the requirements to file a lien perfection action within one year of the date of recording of the lien and to record a notice of the filing of that action in the property records where the lien is filed. OCGA Section 44-14-361.1(a)(3). Upon the failure to do either in a timely manner, the claimant’s lien becomes unenforceable as a matter of law. OCGA Section 44-14-367. Therefore, from a title standpoint, a claim of lien can be disregarded if no notice of a lien action is recorded within 395 days of the date the claim of lien was recorded.
A. Payment of Amounts Equaling Contract Price.
Where an owner has paid the full contract price to its contractor, this payment can be a defense to a lien claim by a second tier or lower subcontractor or materialman, but only if the owner shows also that the sums paid to the contractor were properly applied to payment of materialmen and subcontractors on the project, prior to the filing of the lien, or that a proper contractor’s affidavit has been obtained. D & N Elec., Inc. v. Underground Festival, Inc., 202 Ga. App. 435, 414 S.E.2d 891 (1991); Browning v. Gaster Lumber Co., 267 Ga. 72, 475 S.E.2d 576 (1996). Where the contractor has abandoned the job, the owner’s costs to complete the project are subtracted from the contract price, along with those amounts that the owner can show were properly applied by the contractor, in order to determine the limit to which subcontractors, suppliers, etc., may claim liens. Maverick Materials, Inc. v. Kaufmann, 227 Ga. App. 102, 488 S.E.2d 690 (1997).
B. Failure of Claimant to Comply with Contract.
Substantial compliance by the claimant with its contract is a statutory prerequisite to enforcement of a lien. Section 44-14-361.1(a)(1). Because of the potential subjectivity involved in determining whether such compliance was attained, an owner should explore this defense carefully. In addition, where the claimant’s contract is not in a chain of privity with the owner, the claimant will not have a valid lien, regardless of substantial compliance with the contract. Dan J. Sheehan Co. v. Fairlawn on Jones Homeowners’ Association, Inc., 312 Ga. App. 787, 720 S.E.2d 259 (2011).
C. Improperly Filed Claim of Lien.
Because of the strict construction given the lien laws, the procedures for filing the claim of lien must be adhered to by the claimant, and any violation of those procedures may provide a defense to the owner.
1. Untimely Filed Claim of Lien.
The lien claim must be filed within ninety days after the last date of furnishing of labor, services, or materials by the lien claimant. A late-filed claim of lien or one filed prior to the last date of the claimant’s participation in the project is fatal to the lien. Tri-City Constr. Co., Inc. v. Sandy Plains Partnership, 206 Ga. App. 506, 426 S.E.2d 57 (1992). The ninety day period is calculated in the traditional manner, i.e., the first day is not counted, and if the period ends on a weekend or holiday, then it is extended to the next following business day. OCGA Sections 44-14-369 and 1-3-1(d)(3).
In addition, where materials are delivered or services provided to one project but under separate contracts, separate liens must be timely filed for each contract. Cherokee Culvert Co., Inc. v. Gurin, 153 Ga. App. 296, 265 S.E.2d 106 (1980). Whether minor “call back” work can provide the starting date for the three month filing period, thereby extending the period, is apparently a question of fact. Cumberland Bridge Assoc., Ltd. v. Builders Steel Supply, Inc., 169 Ga. App. 945, 315 S.E.2d 484 (1984); Womack Industries v. B & A Equipment Co., 199 Ga. App. 660, 405 S.E.2d 880 (1990); Schwan's Sales Enterprises, Inc. v. Martin Mechanical Contr. Inc., 202 Ga. App. 510, 414 S.E.2d 727 (1992).
2. Erroneous or Incomplete Claim of Lien.
A lien which fails to comply with the provisions of Section 44-16-361.1 is ineffective. Fowler v. Roxboro Homes, Inc., 98 Ga. App. 829, 107 S.E.2d 285 (1959). Virtually any failure correctly and precisely to state the name of the claimant, the name of the owner, and a correct description of the property may be fatal to the lien. Lathem Plumbing & Heating Co. v. Ledbetter Trucks, 96 Ga. App. 219, 99 S.E.2d 545 (1957); Fowler v. Roxboro Homes, Inc., 98 Ga. App. 829, 107 S.E.2d 285 (1959); King v. Rutledge, 208 Ga. 172, 65 S.E.2d 801 (1951). See Title Standard 15.4, providing that a lien filed against someone not the record title holder may be disregarded. More recent case law, however, has injected at least some degree of subjectivity into the question of compliance with these requirements. 3400 Partners, LLC v. Chavez, 309 Ga. App. 475, 711 S.E.2d 19 (2011). At the same time, it appears that the failure to properly include a correct statement regarding expiration of the lien and a notice of an owner’s right to contest it, required under Sections 44-14-361.1(a)(2) and 44-14-367, will be fatal to the lien claim. Handy Andy of Eastman, Inc. v. Evans, 310 Ga. App. 170, 712 S.E.2d 589 (2011).
D. Failure to Mail a Copy of the Lien Claim.
Under Section 44-14-361.1, a copy of the lien must be served by registered or certified mail or statutory overnight delivery, on the owner or, if the owner’s address can’t be found, then on the contractor as the owner’s agent, within two business days after the lien claim is filed. Failure to comply with this service requirement will bar enforcement of the lien against the owner’s property. Note that faxing a copy of the lien is insufficient. Phillips, Inc. v. Historic Properties of America, LLC, 260 Ga. App. 886, 581 S.E.2d 389 (2003). However, note also that some uncertainty has been injected into what would seem to be an unambiguous statutory requirement to send a “true and accurate copy of the claim of lien” to the owner/contractor. The recent case of Madison Retail Suwanee, LLC v. Orion Enterprises Sales and Service, Inc., 309 Ga. App. 712, 711 S. E.2d 71 (2011), upheld the mailing of a copy of the lien which contained a slightly different owner’s name than did the lien as filed.
E. Untimely Filed Suit to Perfect Lien.
The requirement that the suit to perfect a lien be filed within one year after the claim of lien was recorded is not a procedural limitation period but a condition precedent to creation of the lien. Stonepecker, Inc. v. Shepherd Constr. Co., Inc., 188 Ga. App. 513, 373 S.E.2d 295 (1988). Failure to file within the required period is a complete defense to the lien claim. However, where the suit is timely filed but incorrectly names the owner, an amendment correcting the name may relate back to the date of filing and the suit will be timely. Coe & Payne v. Foster & Kleiser, 258 Ga. 161, 366 S.E.2d 292 (1988). As noted above, often the best means of eliminating a materialman’s lien is simply to wait until the time for filing suit to perfect the lien has expired.
F. Improperly Recorded Notice of Lien Action.
The notice of filing of the suit to perfect the lien must be filed as a prerequisite to enforceability of the lien. Statham Mach. & Equip. Co. v. Howard Constr. Co. 160 Ga. App. 466, 287 S.E.2d 249 (1981).
1. Untimely Recording of Notice of Lien Action.
Under the statute, the notice must be filed within thirty days of filing of the suit. OCGA Section 44-14-361.1(a)(3) and (4). Late filing of the notice will defeat the lien claim. Title Standard 15.5 provides that where no notice of lien action is recorded within 395 days of the date of recording of the lien, the lien may be disregarded and is void. See also, e. g., Metromont Materials Corp. v. Cargill, Inc., 221 Ga. App. 853, 473 S.E.2d 498 (1996), holding that, once the notice deadline has been missed, the lien is lost forever, and even dismissal of the suit, refiling, and recording the notice within the statutory period in connection with the second action cannot revive the lien. See also, Krut v. Whitecap Housing Group, LLC, 268 Ga. App. 436, 602 S.E.2d 201 (2004), applying the notice requirement to a counterclaim to enforce a lien.
2. Erroneous or Incomplete Notice of Lien Action.
Similarly, any failure to comply with the statutory instructions for the form and content of the notice is a defense to the lien claim. See, e.g., Allied Electrical Contractors, Inc. v. Kern & Co., Inc., 184 Ga. App. 747, 362 S.E.2d 452 (1988). A lien claimant gets only one chance to get the notice right and, upon the recording of a defective notice, the lien is extinguished and cannot be revived. Weber Air Conditioning, Inc. V. Triple-R Pooler, Inc., 245 Ga. App. 590, 538 S.E.2d 499 (2000); Carey v. Maynard, 269 Ga. App. 110, 603 S.E.2d 515 (2004). Note, however, that the failure to make the notice under oath is an amendable defect under OCGA Section 44-14-361.1.
A lien will not attach unless there is proof of a contractual relationship, either directly or through a chain of contracts, between the owner and the lien claimant. Benning Constr. Co. v. Dykes Paving & Construction Co., Inc., 263 Ga. 16, 426 S.E.2d 564 (1993). See also, Bowers v. Howell, 203 Ga. App. 636, 417 S.E.2d 392 (1992), where the illegality of a portion of a contract, due to the contractor’s lack of plumbing and electrical contracting licenses, rendered that portion of the contract void and unenforceable, thereby defeating the lien in part. Presumably, violation of Georgia’s general contractor licensing statute, OCGA Section 43-41-1, et seq., would present a similar defense to a lien by an unlicensed general contractor.
H. Failure to Maintain Separate Accounts.
Where a materialman supplies to a single contractor on several projects, it is the obligation of the materialman to maintain separate accounts of the materials supplied to each of the jobs. Furthermore, the materialman must also inquire as to which of these accounts should be credited when payment is received from the contractor. Should the materialman fail to do so, then his lien claim may be lost. Rickman Brothers Lumber & Supply Co., Inc. v. Martin, 144 Ga. App. 39, 240 S.E.2d 308 (1977). Therefore, if the owner’s attorney can show from the materialman’s own statements and invoices that he has not segregated the accounts of the general contractor and properly credited the payments thereto, then the materialman may be forced to abandon its lien claim.
I. Claimant without Statutory Lien Right.
OCGA Section 44-14-361 creates liens in favor of a broad variety of entities involved in the improvement of real estate, including engineers, architects, surveyors, foresters, contractors, subcontractors, materials suppliers, mechanics, and equipment suppliers. See State Bar of Georgia Title Standard 15.2. This breadth of availability of liens arises from the theory behind the lien statutes, i.e., that the work, material, or equipment for which the lien is security has increased the value of the realty by becoming incorporated therein. Skandia Draperies Mfg. Co. v. Augusta Innkeepers, Ltd., 157 Ga. App. 279, 277 S.E.2d 282 (1981). There is a presumption that materials delivered to the liened property were incorporated therein, but this presumption is subject to attack by the property owner, and where evidence is shown to refute the presumption, the claimant does not have a valid, enforceable lien. Sanford v. Hodges Builders Supply, Inc., 166 Ga.App. 86, 303 S.E.2d 280 (1983).
However, the spectrum of potential lien claimants is not without limits. While a supplier of materials to a contractor or subcontractor is entitled to a lien, a supplier to a supplier of materials is not. Porter Coatings v. Stein Steel & Supply Co., 157 Ga. App. 260, 277 S.E.2d 272 (1981).
J. Owner’s Property Interest not Subject to Lien.
Where a tenant contracts for improvements of leased premises, the interest of the tenant with an estate for years is subject to liens. James G. Wilson Mfg. Co. v. Chamberlin-Johnson-DuBose Co., 140 Ga. 593, 79 S.E. 465 (1913). (See Comment to Standard 15.1, advising that a title search in the name of the tenant be performed where the examination is for a leasehold interest.) However, the interest of the landlord may be subject to liens only under certain circumstances. Under OCGA Section 44-14-361(b) liens may attach only where the labor, services, or materials giving rise to the lien were “. . . furnished at the instance of the owner, contractor, or some person acting for the owner or contractor.” Therefore, a landlord’s interest is lienable only where the landlord and tenant have agreed that the tenant shall make improvements, and then only to the amount of the allowance given by the landlord for the construction of the agreed improvements. F. S. Associates, Ltd. v. McMichael’s Construction Co., Inc., 197 Ga. App. 705, 399 S.E.2d 479 (1990); D & N Electric, Inc. v. Underground Festival, Inc., 202 Ga. App. 435, 414 S.E.2d 891 (1992). An attorney representing a landlord can likely defend against a lien claim, in whole or in part, on this basis.
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