MECHANIC’S LIEN PLACED ON YOUR PROJECT CANNOT BE IGNORED
You are an owner, developer or contractor and an unjustified mechanic’s lien is recorded against your project. After your temper cools and you realize that you cannot ignore the problem, you will inevitably ask yourself: What can I do?
The first issue to consider is whether to pay the lien. This requires a realistic evaluation of the strengths and weaknesses of the lien. The person asserting the lien will receive attorneys’ fees if he is successful in litigation. A person that successfully defends a lien, however, may or may not be entitled to attorneys’ fees. This depends on the other claims brought in the lawsuit. In instances where a party does not have a right to attorneys’ fees if he prevails, it is not going to be a fair fight – the owner may spend more defending the lien (if it is not large) than he will spend buying his way out of the problem by paying the claimant.
If payment is not acceptable or practical, three choices may be available:
A. Leave the lien in place;
B. Persuade a title insurance company to protect the parties; or
C. File a petition with the court to substitute a bond for the property subject to the lien.
If no sale or financing of the property will occur for six (6) months, simply waiting may be the best solution. The lien will expire unless a lawsuit is filed within six months from the date the lien was recorded. Shortly after the expiration of six months, title will be insurable if no action to foreclose the lien has been filed by the lien claimant. A large percentage of all liens are discharged in this manner.
A second solution, which may be the best if financing or a sale is pending, is to persuade a title insurance company to provide acceptable title insurance notwithstanding the recording of the lien. Typically, the title company will want a cash deposit in an amount of at least 1.5 times the lien amount. The excess covers court costs and attorneys’ fees, which are included in the lien if the title company has to ultimately pay it to protect the title to the property. If the lien is relatively small (perhaps less than $10,000.00-$20,000.00), the title company may want substantially more to cover a potential attorneys’ fees award.
If you are going to attempt to obtain title insurance, be certain the insurance will be acceptable to your prospective buyer or lender. There are two ways the insurance can be handled.
The first is through a policy that does not show the lien as an exception and, therefore, the policy insures against loss due to foreclosure of the lien. This is the preferable approach and normally will be acceptable to most buyers and lenders. The title company may want to disclose to the buyer and lender that there is a lien and they are insuring it.
The second approach is to include the lien as an exception to coverage, but then include an affirmative statement that the title company insures the buyer or lender against loss due to foreclosure of the lien. This frequently will not be acceptable to a variety of lenders, including lenders who intend to sell the loan.
About ten years ago, the Idaho Legislature added a third potential solution by allowing an owner (or other person with an interest in the property) to provide a surety bond in 1.5 times the amount of the lien. The effect is to completely discharge the lien on the property, and the lien claimant’s rights are transferred to payment under the bond. There are some disadvantages to this procedure, including:
A. The cost of obtaining the bond;
B. The bond and petition must be filed in district court and they must be approved by the court at a hearing. This requires a lawyer and the proceeding will take somewhere between 5 and 40 days;
C. It is cheaper for the claimant to proceed against the bond than it is to foreclose the lien and recovery may be more certain;
D. The claimant may have the right to demand a trial within 30) days; and/or
E. The claimant may not be required to proceed with an action within six months from the lien recording.
In any particular situation, any one of the foregoing alternatives may be the way to proceed. Simply waiting six months is the simplest and may be the best solution. From an owner’s standpoint, if the general contractor is required to take care of the lien, obtaining a bond is most advantageous because it fully and completely removes the lien from the property. Effectively dealing with a title insurance company is a good compromise and in our experience, it is far more common than a proceeding to file a bond.