I have discussed the picky nature of Virginia mechanic’s liens often over at my Construction Law Musings blog. Not only are the requirements and details strictly enforced, but the Virginia General Assembly seems to feel the need to tweak them in each of its sessions.

The latest change involves the use of a mechanic’s lien agent on residential projects. Beginning at the start of this month, July 1, 2010, a contractor can no longer depend on the failure of the owner to list a mechanic’s lien agent on the posted building permit. The new statute requires that a contractor go beyond merely reading the building permit and make a reasonable inquiry with the local building authority to determine the identity of the mechanic’s lien agent.

I truly appreciate the opportunity to reach a new audience with a guest post. As all of my readers know, I am a big fan of guest posts and having others guest post here at Musings.

Check out this blog and the Wolfe Law Group‘s great resource for construction professionals, the Construction Law Monitor.

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Musings thought that it would step away from its discussion of “green” construction to discuss a few interesting construction cases that came down recently in the Commonwealth of Virginia.

The first of these is another warning to contractors that arbitration provisions can be waived by conduct.  In Shoosmith Bros., Inc. v. Hopewell Nursing Home, the Hopewell Circuit Court of Virginia found that Kenbridge Construction Company’s waived its right to arbitration by its use of the Courts for a substantial period of time and its use of the discovery “machinery” of the Court.  In short, if you want to enforce an arbitration clause, do it early to avoid an argument that you have waived arbitration.

The second case is in relation to mechanic’s liens.  I find this one interesting because the Court actually refused to invalidate a lien for a minor inaccuracy in the description of the work performed.  In B.P. Realty LP v. Urban Eng’g Associates, Inc. et. al., the Fairfax, Virginia Circuit Court refused to invalidate a lien because the engineering firm and defendant in the case failed to include the word “surveying” in its description of the work.  The court held that this is an excusable inaccuracy.

This is significant because, as I have discussed on numerous occasions here at Musings, Virginia mechanic’s liens are extremely picky in their enforcement.  While I would not take this case to allow any inaccuracy that is more significant than that described here, it needs to be pointed out that you are not without arguments against claims that your lien is invalid due to a minor inaccuracy.

The third case I felt needed a mention is S. B. Ballard Construction Co. v. LGS Group, LLC, et. al.. In this case, the Court give a quick reminder that, in Virginia, it is very hard to make a contract claim into one for fraud, negligence or conspiracy.  The economic loss rule in Virginia prohibits any claim that could arise from the contract from being prosecuted as a tort claim instead of a contract claim.

In a fourth set of consolidated cases, the Norfolk Circuit Court held that the language found in Va. Code Sections 43-11 and 43-7 invalidated a subcontractor’s mechanic’s lien, despite non-payment to the general contractor, where an owner expressly conditioned payment to the general contractor upon its obtaining financing, diligently sought financing and was unable to obtain that financing.  The Norfolk Circuit Court also discussed estoppel and waiver and I commend reading this case to all who are interested in construction contracts and liens.

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Another exception is highlighted by a recent case in the Western District of Virginia Federal district court.  In Summit Community Bank v. Blue Ridge Shadows Hotel the Court considered the question of what supplies to a construction project are subject to a mechanic’s lien in Virginia.  In this case, the Western District bankruptcy court determined that furniture delivered to a hotel during construction was properly subject to a mechanic’s lien.  Unfortunately for the lienholder, the U. S. District Court disagreed.

The Court stated that furniture, including tables, lamps, chairs, etc. are not “improvements” within the meaning of the mechanic’s lien statute.  In short, the Court determined that the Virginia statute requires more of a connection between the materials and the structure than is present with personal property with the sole connection of  “presence” in the building.  The Court did not go so far as to require a physical connection, leaving open the question of where on the spectrum of personal property with only a “presence” connection and an irremovable fixture would allow materials delivered to a job site to be subject to a lien.

The takeaway?  First of all, not all work or materials are subject to lien.  This means that a contractor, subcontractor or supplier must be careful in what it includes in a lien, particularly in light of the picky nature of these liens and the ease with which the Virginia courts will invalidate them.  Second of all, just because a claim is not subject to lien does not mean that a contractor is completely without remedy.  A breach of contract action is always a possibility (of course this case is a bankruptcy case and a lien is always a better option in such circumstances).

As always, I encourage you to consult a Virginia construction attorney to discuss your options prior to moving forward with a mechanic’s lien or any other claim related action.

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Musings has discussed mechanic’s liens on numerous occasions.

As we discussed in earlier posts, the general rule is that a mechanic’s lien jumps to the head of the line of liens when filed. This is true in most instances. In the typical case, a contractor puts up a building and, when the owner refuses payment, it files a mechanic’s lien that takes priority over all other liens on that property, including the construction loan deed of trust (or mortgage, depending on your state’s property laws).

However, in Virginia, an exception exists. The Virginia Code provides that in a case where there is a loan on the land with a deed of trust, and then a construction loan with its own security in the land, the first lien holder can enforce its lien up to the value of the original and unimproved land on which it placed its lien. The mechanic’s lien holder takes priority on any value added to the property based on any improvements (i. e. the building itself) over any other liens.

When the construction loan is secured by the same deed of trust as the purchase loan, the mechanic’s lien takes precedence. Of course, these are the general rules. Your particular situation must be examined carefully by an attorney or other professional experienced in mechanic’s liens to determine the priority of your lien.

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As we settled yet another construction case on the courthouse steps today, I began to think about what I should post to begin 2009. Of course, given the construction industry slowdown that is predicted, and the trend at construction projects around the Commonwealth of Virginia that looks to me as if payments will be harder to come by from Owners less willing, for financial reasons, to work with contractors, mechanic’s liens will be more useful, and necessary, now than ever.

Virginia mechanic’s liens are unusually strong because your memorandum of lien takes priority over all prior liens on the property that you have improved (including from the bank that is financing the project) except in very limited circumstances. What this means is that, should you properly file and sue to enforce your lien, you get to foreclose and have first crack at any money. By contrast, a judgment lien takes priority only over liens filed after the lien is recorded.

As I stated in my primer on Virginia mechanic’s lien law in an earlier post, filing a mechanic’s lien in Virginia is a picky business. You need to be sure that you meet your time limits, include the correct information in your memorandum, and assure that you do not lien for a penny more than that to which you are entitled.

Failing to do any of these things can, and will, cause you to lose your lien, killing any advantage that you could have gained by filing the lien and leaving you with run of the mill contract rights (I will be writing on basic do’s and dont’s for construction contracts in a later post). While a breach of contract suit is a viable option, a mechanic’s lien gives you leverage that a mere lawsuit will not.

Scott Wolfe at the Construction Lien Blog has posted several short items on Virginia Lien Law that are worth checking out. However, while these posts are accurate and give the basics of lien law in Virginia, please hire an attorney (whether its me or another experienced construction lawyer) to help you file a lien and enforce it in Virginia because of the pitfalls that can occur from the slightest mistake.

Please also check out my links and updated blog roll for other construction resources.

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If you have spent significant time in the construction business, you have encountered instances where (i) your construction contract has been breached, (ii) you have not been paid, and (iii) you need to file a mechanic’s lien. Some basic business practices, however, will help ensure that your lien rights are maximized and your claim preserved. Consider these points:

The best way to avoid contractual pitfalls is to consult with an attorney knowledgeable in the construction field to assist you in drafting a contract that fits your particular area of the industry and protects your rights. Once your contracts are properly drafted, the enforcement of your lien rights becomes an uncomplicated task.

The Virginia mechanic’s lien statute allows a contractor to file a lien only for unpaid amounts accrued within 150 days of either the date of the lien or the last day of work performed on the project, whichever is earlier. The simplest and most effective way to avoid losing valuable receivables is to apply receipts to the oldest invoice first, thus pushing the receivables closer to the end of the project.

Notify any mechanic’s lien agent listed on the building permit and send collection letters at 30, 60 and 90 days from the time you are owed the money. The mechanic’s lien statute requires that you file any memorandum of lien within 90 days of the last day of the last month in which you performed work or provided materials.Having a 30-60-90 day system will act as a set of reminders to keep you from missing this important deadline.

Mechanic’s liens can be expensive to enforce. Regardless of the amount of the lien, enforcement involves a circuit court lawsuit against all parties who have an interest in the property on which your construction was performed.

Remember also that a lien is not the sole remedy– a simple breach of contract suit, alone or in concert with the filing of a mechanic’s lien memorandum, may be enough to force payment. The process need not be scary so long as you enter into well drafted contracts, use proper office business procedures, and consult with an attorney experienced in the filing and enforcement of mechanic’s liens to determine the best course of action.

These are just the basics.  Remember that your case is unique and the facts can and will change the general considerations.

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However, not all is lost.  As the latest issue of ENR points out, with the right strategies, the contractors and subcontractors that remain standing can thrive in this new landscape.  As Hugh Rice, of Denver, CO points out in the ENR article:

Once survival is no longer an issue, thinking about how to take advantage of future growth markets is critical.

Despite my occasional Eeyore like tendencies, I fully ascribe to this more positive thinking for my clients and friends in the construction industry in Virginia, and elsewhere.  Now that the contractors that survive have taken a lump or two, they are looking at their business practices more carefully.  I have noticed that more construction firms are re-examining  their business practices and talking to me earlier in the contracting process.   When money was flowing, contractual provisions such as “pay if paid” clauses did not seem so critical.    Even the basics like incorporation become more critical when money gets tight and bankruptcies are more common place.  This is a good thing.   This sort of pro-active thinking can only help contractors to grow, even in this down market.

Aside from the basic business and contractual processes, contractors need to have internal procedures to assure that they preserve their mechanic’s lien rights.  Because of the economic climate and the fact that mechanic’s liens survive bankruptcy,  Virginia contractors need to make sure that they keep track of the picky deadlines and requirements for Virginia mechanic’s liens.  A simple set of demand letters at 30 and 60 days from invoicing can both lead to payment and keep a contractor aware of impending deadlines on this front.

On a more business growth note, I think that sustainability and selling the economics of sustainability will be a growth area for contractors.  Virginia contractors must speak the language of sustainability to not just survive, but to thrive.  Thinking “outside the box” and building closer relationships will also be key.

In short, while the landscape looks bleak, smart contractors and subcontractors can find opportunities in this quickly changing world of construction.

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Each of the last two years, I have attended the Virginia State Bar Construction Law and Public Contracts Section Seminar.  This year it was held at the Boar’s Head Inn in Charlottesville, VA.

While there, I have the pleasure of talking with friends (among them Tim Hughes aka @vaconstruction and main force behind the Virginia Real Estate Land Use and Construction Law Blog) and others.  This networking opportunity is a great way to meet other construction attorneys, discuss cases, and make new friends.  Such opportunities make a great “real world” addition to Web 2.0 efforts.

Of course, the topics are great also.  This year, they ranged from green building, to mechanic’s liens, bankruptcy and recent developments in construction law.  I was happy to see that many of the cases that my friend Tom Wolfe of LeClairRyan cited have been discussed in various places on this blog.

Tom listed cases on waiver of arbitration clauses, recovery of delay damages on public projects, the economic loss rule, and the validity of mechanics liens that have been discussed here at Musings.

While it is gratifying to find out that someone else finds these developments in construction law important, I enjoy the opportunity to hear from other lawyers with slightly different specialties.  Learning is a good thing and I look forward to next year’s seminar.

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For this weeks Guest Post Friday here at Musings, we have our first three time guest poster.  Scott Wolfe, Jr. (@scottwolfejr on Twitter) is a construction lawyer practicing in Washington, Oregon and Louisiana.   He is the founding member of the bi-coastal construction law boutique practice, Wolfe Law Group.  He is also the founder of Express Lien, a nationwide lien service that offers a free web-based preliminary notice and lien management software.  Check out his great blogs on various areas of construction law.

Nearly everyone in the construction industry has heard the term “lien” thrown around on a project.   Depending on the type of project being constructed, however, the lien-like remedies available to you may differ significantly.

This post discusses the types of lien or claim remedies available to contractors, suppliers and laborers on the three classes of construction projects:  private, state and federal.   This post discusses the concepts broadly, and does not focus on the law of any particular state.   Remember that laws differ from state-to-state, and it’s important to consult the laws applicable to your project.

The Lien – Private Works

When you think of the term “lien,” you are likely thinking of the remedy available to unpaid parties on a private construction project.

In most states, when a party provides labor and/or materials to an improvement, and the party is not paid, the law allows that party to file a lien on the property itself and claim a privilege thereon (similar to a mortgage privilege held by a bank on mortgaged property).

This is the key difference between a private lien and a public claim.    Unlike most public claims, a private lien actually gives the unpaid party a privilege upon the property.  Most states then allow the lien claimant to bring a proceeding against the property owner to foreclose on the lien (and thus, the property).

To acquire this powerful privilege, many states require contractors to send pre-lien notices.   The notice may be due before work begins or immediately thereafter, and other notices may be due immediately before filing the lien itself.

The first step to knowing the notice requirements in your state, however, is knowing the type of lien you’ll file on a project.   It’s something you’ll want to understand from the start of your work.

Claims on State Projects

Most states do not allow “liens” to be taken against property owned by the state.   Accordingly, the traditional “lien” that can be filed on a private work cannot be filed on a public work.

However, this does not leave unpaid contractors, suppliers and laborers without a remedy.

Normally, a state project will require the general contractor to post a bond in an amount sufficient to pay for the claims of all subcontractors, laborers and suppliers.    In the event you’re unpaid on a state project, most states allow the unpaid party to file a claim against that bond.

Usually, this process is referred to as filing a claim, as opposed to filing a lien.

Three key things to keep in mind when working on a state project:

(1) Like a private lien, state projects may also require you to send pre-claim notices, so familiarize yourself with those requirements;

(2) Like a private lien, you will only have so long to assert your claim against the bond, so do it timely; and

(3) It’s important to know the name of the surety and the public entity in charge of the work, as you’ll be required to notify these parties of your claim.   Have this information from the start of construction, or request it from the general (you’re entitled to know).

Claims on Federal Projects

Like property owned by the state, property owned by the federal government cannot be liened.  Unpaid contractors, suppliers and laborers must bring a claim against the general contractor’s bond, through what is referred to as a “Miller Act Claim.”

To make a claim under the Miller Act, first tier subs and suppliers must bring suit against the bond within 1 year from last furnishing labor and/or materials, and must deliver notice to the owner and/or surety.   Second tier subs and suppliers to first tier subs must deliver a Miller Act Notice to the prime contractor within 90 days from last furnishing labor and/or materials to the project, and a suit must be brought within 1 year of last furnishing labor and/or materials.

Again, as it is true with state projects, it’s important to know the name of the surety and the public entity in charge of the work.   If it’s not provided to you, you can request it.

Conclusion

Regardless of what class of project you’re working on, a lien-like remedy is probably available to you in the event of non-payment.   However, it’s critical to understand the different remedies available at the onset of construction, for each remedy carries different pre-lien or pre-claim requirements.

As always, both Scott and I encourage your comments below.  I also encourage you to subscribe to keep up with this and other Guest Post Fridays at Construction Law Musings.

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Mechanic’s liens are a powerful tool when used correctly. However, as I have discussed on numerous occasions here and elsewhere, these tools must be wielded correctly if they are to be effective.

Another case in point occurred recently in the Hanover, VA Circuit Court. In Dallan Construction Co. v. Super Structures General Contractors Inc. (Harris, J.) No. CL08-473, Jan. 30, 2009, the Court considered the question of what can be included in a mechanics lien.

Super Structures filed a mechanic’s lien for the value of work performed and materials that it ordered in preparation for doing work for Dallan Construction. Dallan canceled the project before Super Structures began work or delivered any materials to the site.

The Court determined that Super Structures’ lien was invalid because Super Structures had not provided labor or materials to the site. In short, unless you have labor or materials incorporated into or delivered to a job site you cannot properly file a mechanic’s lien in Virginia.

While this case is a Circuit Court (trial court) case, I think that it is fundamentally correct. A mechanic’s lien is a remedy that is meant to allow a construction professional to recover for the labor provided to improve a piece of property. Unless your materials and labor actively improve the real estate at the project site (for example, providing silt fencing allowing the project to commence), you should not be able to lien that project.

A lien is not a substitute for a breach of contract suit. A contract generally contains remedies that are unavailable by pursuing a mechanic’s lien and vice versa. Many times the two actions are simultaneous (and, for reasons that I will leave for a later date, many times must be enforced simultaneously if you wish to pursue both). Because a lien remedy and a contract remedy are separate, you can pursue your contract remedy even if you cannot pursue a lien.

My suggestions? Talk to an experienced construction attorney early in the construction process so that you can evaluate your options. Also, if you do in fact have lien rights, file earlier rather than later in today’s economic climate.

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