Thoughts on construction law from Christopher G. Hill, Virginia construction lawyer, LEED AP, mediator, and member of the Virginia Legal Elite in Construction Law
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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For this week’s Guest Post Friday here at Construction Law Musings, we welcome a great friend. Scott Wolfe Jr. (@scottwolfejr)is a construction attorney in Louisiana, Washington and Oregon, and is the founding member of the construction practice Wolfe Law Group. He authors the Construction Law Monitor. He is also the founder of the mechanic lien and preliminary notice filing service, Zlien, and the author of its Construction Lien Blog.
Residential construction disputes come in all shapes and sizes, but very typically have one thing in common: they can get very nasty.
This is understandable, especially in today’s economy. The homeowner is spending hard-earned money on something very personal to them, their home. They want it done right. The contractor is working on really tight margins, and with a diligent client.
These disputes can become frustrating legal battles that costs thousands of dollars. And since it’s such a hot topic politically (there is lots of pressure for legislatures to protect against construction fraud), many states have layers of consumer protection laws that are consequential to both the residential contractor and the homeowner.
This post does not discuss any one state in particular, but gives a bullet-point style summary of some things to keep in mind when starting a construction project. And that’s right, I said starting. The only way to adequately prepare for and avoid residential construction disputes is to take steps before any work begins, and in many cases, before signing the construction contract.
For Homeowner: Tips to Prepare and Avoid Residential Construction Disputes
Tip 1: Hire a Licensed Contractor. This one is very important. If you don’t have a licensed contractor doing your work, you’re taking a very big risk. Unlicensed contractors don’t have much to lose if they run from your job, construction fraud usually occurs with unlicensed contractors, and unlicensed contractors are usually without bonds, insurance, workers comp, and a lot of other things that can ultimately create liabilities for you.
So, tip one is to hire a licensed contractor. You can make sure the contractor is licensed by checking with the state’s agency for contractor licensing. Here are the agencies for a few states (in Virginia and where I practice). Typically, you can search for their license status right online. Washington, Oregon, Louisiana, Virginia.
Tip 2: Request a Written Contract. Get your agreement with the contractor in writing. If it’s not in writing, you can easily find yourself in a disagreement about the agreement.
Tip 4: Condition Payments on Receiving Lien Waivers. Protect yourself against paying twice for the construction work, and from getting liens placed against your home. For each payment you make to the contractor, require lien waivers from the contractor and its subcontractors and suppliers.
For Contractors: Tips to Prepare and Avoid Residential Construction Disputes
Tip 1: Require a Written Contract. Get your agreement with the homeowner in writing. If it’s not in writing, you can easily find yourself in a disagreement about the agreement. Plus, many states require contracts be in writing. Breaking these state’s laws can result in penalties, fines, or the nullity of your agreement (depending where you are).
Tip 2: Understand Your Obligations. Unfortunately for residential contractors, there are a maze of requirements when performing work on a residential project. It doesn’t matter whether your just installing a new HVAC system or remodeling the kitchen, or if you’re building a residence from scratch – consumer protection statutes are abound in residential construction, and it’s your job to know them and know them well.
If you fail to furnish the notice, you may run afoul of consumer protection laws which subject you to penalties, damages, and the loss of lien rights.
Tip 3: Take Lots of Photos and Be Organized. From the start of the job, through the progress of work, and at completion – take lots of photos, make notes, keep a work log, and do other things to organize your work and document what you’ve done. You may need it…even before you think you need it.
We have discussed mechanic’s liens and their advantages relating to bankruptcy on several occasions here at Musings. As I warmed up from a cold weekend of camping with my son’s Boy Scout troop, I remembered a recent case out of the Fairfax County, Virginia Circuit Court that provides an explanation of yet another wrinkle in the mechanic’s lien/bankruptcy interaction.
In Heritage Contracting LLC v. Vasquez, the Court considered the effects of a filing of bankruptcy by one of two joint tenants upon the lien enforcement rights of a material supplier to the property owned by those joint tenants. In Vasquez, Chopp & Company recorded its lien against the property 5 months prior to one of two joint tenants with the right of survivorship filing bankruptcy. Once the stay was lifted 9 months after the lien was recorded (and well outside of the 6-month statute of limitations for filing suit to enforce the lien), Chopp attempted to enforce its lien. While this, in and of itself, is relatively straightforward, Chopp did not file within the 30 days post-bankruptcy required by the bankruptcy code.
Despite this failure to meet the bankruptcy code deadline, Chopp argued that, because one of the two joint tenants did not file for bankruptcy, it was still allowed to enforce its lien. The Court disagreed. After an analysis of the various cases relating to severance of joint tenancies and the Fourth Circuit‘s “unusual circumstances” test (found in A. H. Robins v. Piccinin, 788 F.2d 994 (4th Cir. 1986)), the Court concluded that Chopp had blown its opportunity to enforce its lien when it failed to file the enforcement action within the 30 days.
In short, the cautionary tale of this case is that, despite mechanic’s liens surviving bankruptcy, several statutes (state and federal) are at play in every bankruptcy. Contractors and subcontractors that file these liens need to be aware of these interactions themselves or consult with an experienced construction attorney who is. Failing to do so could send your Virginia mechanic’s lien to the “dismissed” pile in a hurry.
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Well, this past Monday I had the opportunity to take part in the hearing on the bill before the Virginia Senate committee that was considering whether to recommend the amended bill to the entire Senate for a vote.
And, in one of my favorite areas of law, mechanic’s liens, the Court in Peed Plumbing Inc. v. Freedland clarified the mechanic’s lien rules on who has to be served with and enforcement action and when.
Musings highly recommends these links and cases for some quick information on how courts and others will look at certain contractor claims and defenses.
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