JAMES AND MORRIS CAREY | On the House To avoid chaos, know mechanics' lien law, details

"Pay me or I'll slap a lien on your property!" are 10 words you don't want to hear.
They're often words of an angry, frustrated contractor to a defensive homeowner over a dispute about workmanship, money or both in remodeling or repair projects.
Yet these dreaded words don't always come from a contractor. They can be uttered by a company or person who can demonstrate that labor and-or material to improve or repair your home were supplied, and they have not received payment per the terms of the contract.
About the law
The mechanics' lien law ensures that those who work on your home get paid for their services. If not, they have legal recourse that ties up your home and property until they are paid or the lien is resolved.
Any homeowner who employs outside labor and material for the improvement or repair of his home is vulnerable to this law. Because this law is based on state statutes and civil codes, you should consult a local attorney for specifics in your area.
Your understanding of this law could prevent you from paying twice for any phase of your project, and safeguard you from losing your house to a disgruntled creditor in a nasty foreclosure sale because a material bill or service bill was not paid.
Though general contractors are most widely associated with the threat of a lien, the list of prospective lien claimants can include any material suppliers, such as those furnishing concrete, lumber, roofing; subcontractors such as electricians and plumbers; and even laborers that your contractor employs to clean up your job.
Even if you pay your contractor as agreed, you can still be hit with a mechanics' lien if your contractor fails to pay a material supplier, subcontractor or an individual who furnished labor for your project. The same holds true if a subcontractor doesn't pay his material supplier. For example, you hire Acme Construction Co. to build an addition onto your home. Acme hires ABC Roofing to roof the addition. ABC buys the roofing material from XYZ Roofing Supply. You pay Acme, Acme pays ABC, but if ABC doesn't pay XYZ, you could end up paying for the roofing material twice.
Though there are means to prevent a mechanics' lien, your best protection has more to do with your contractor's ability, business experience and integrity -- and your ability to get along with him -- than any other aspect. Your focus should be on finding a good contractor.
Protecting yourself
Since a mechanics' lien can happen even with the best of contractors, consider the following options for protection.
UMake a list: It helps to know who is working your job so that you can ensure that they get paid. Subcontractors and material suppliers are required by law to supply the property owner with a preliminary 20-day notice -- within 20 days from the time that they become involved with a project. Since many fail to do so, insist that your contractor supply you with a list of subs and suppliers.
U Pay as you go: One of the biggest mistakes is to pay huge sums of money in advance of work being performed. A system that offers the consumer better protection -- more leverage and time to hear from a sub or supplier who didn't get paid -- is to make progress payments as a percentage of completion of the work.
U Lien releases are a must: There are two types -- conditional and unconditional (or full releases). You should not make a payment to your general contractor unless you receive a conditional lien release in exchange. The conditional release will become unconditional when the check clears the bank. You can insist on an unconditional release with each payment if you are willing to provide the contractor with a certified check or a cashier's check. Before making final payment, require your general contractor to furnish unconditional lien releases from all subs and material suppliers.
U Issue joint checks: You can issue joint checks to the general contractor and a subcontractor or material supplier. This option is not particularly popular with either the homeowner or contractor because of the need for additional management on both sides. It also can be disadvantageous to the owner and contractor in that it diminishes the contractor's monetary control over subs and suppliers. An alternative is to issue joint checks for services that put you at the greatest financial risk -- big-dollar items such as lumber, kitchen cabinets, roofing or windows. Keep in mind that joint checks are not issued in lieu of obtaining lien releases.
U Third-party management: Many banks, escrow companies, construction management firms and consulting architects are set up to provide detailed project accounting and pay construction draws as an agent for the owner. This option generally is reserved for larger-than-average projects and comes with a hefty fee. Be prepared to drop an additional 5 percent to 10 percent of the total contract value for this service.
U Payment and performance bond: You can require your contractor to supply you with a payment and performance bond that provides that the bonding company will either complete the project or pay damages up to the amount of the bond. In short, it's an insurance policy that you pay for as part of the contract; it usually tacks on about 1 percent to 5 percent of the contract sum. One caveat: Not all contractors are bondable because of longevity in business or financial position. Or, the amount for which the contractor can be bonded is only a fraction of the value of the job. Don't confuse a payment and performance bond with a surety bond, which is required of most contractors -- with an average value of $5,000 to $10,000.
U Mechanics' lien release bond: After a mechanics' lien is recorded, a property owner, general contractor or subcontractor may record a mechanics' lien release bond, which frees the property of the mechanics' lien. Once such a bond is recorded, the real property described in the bond is released from the mechanics' lien and, of more importance, any action to foreclose on the lien is released as well. The bond acts as a substitute for your home as the object to which the mechanics' lien attaches.
In other words, once you have a mechanics' lien release bond, the person chasing you for the money must chase the bonding company.
The mechanics' lien law is complex. Honing design plans and picking appliances, cabinets and flooring are fun and necessary parts of planning a home-improvement project.
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