WHAT IS A LIEN? (misspelling: ' lein ')

A lien (property or tax related) is a legal encumbrance against the value of a property, that is put in place for non-payment of monies owed for property related improvement materials and/or services (or back-taxes owed against the property). The lien is not against the owner of the property. This makes a property with a lien against it very difficult sell because any liens against a property are automatically paid before a new mortgage can be applied, and no bank or mortgage company would allow this, and very few purchasers buy with cash only. This can be a good investment for investors with cash able to take advantage of distress sales.

LIEN WAIVER

A signed Lien Waiver is given by a supplier of materials or services to the owner of a house or other structure to formally acknowledge that there is no right to file a mechanic's lien (see below). One or more lien waivers may be critical to the owner to complete a sale of the property or to secure financing.

WHY A LIEN?

In the course of constructing a new building or improving an existing one, the building contractor or owner will likely contract with a number of different companies and individuals. These suppliers provide materials or construction services (or both) in the course of the construction. These might include plumbers, electricians, carpenters, lumber yards, paint sellers and countless others. Each of these suppliers, if not paid, probably has the right under local law to create a lien on the property to secure payment. These liens are called "mechanic's liens."

Each state has laws dictating how mechanic's liens must be created. In most states, some notice must be given to the property owner within a certain time period. In some states, the time for the lienholder to file starts to run when the work begins. In others, the time begins to run when the labor is complete or the materials delivered. The lienholder must also file the lien in the appropriate county office. When properly created, a mechanic's lien secures the payment of the debt owed to the supplier, just like a mortgage protects a bank. If you are a property owner, you likely cannot sell or finance the property until the lien is paid or otherwise released.

Often, a sale or financing is scheduled to close shortly after the construction has been completed. The buyer or lender may be concerned that a supplier will file a lien after the closing, too late to pay the lien out of the sale or financing proceeds or make other arrangements. To avoid this problem, the buyer or lender may request the owner to secure lien waivers from all of the suppliers involved. This effectively prevents the supplier from creating a new lien after the closing.

WRITTEN WAIVERS ONLY

Many states require that a lien waiver be in writing to be enforceable. Even if there is no statute, it is important to get a written lien waiver. Otherwise, there may be no evidence of the waiver and the lien could later be successfully created. To be effective, the waiver must clearly and unequivocally state that the supplier voluntarily and knowingly waives the right to assert a mechanic's lien. The lien waiver itself is not normally filed. Rather, the original is saved to gain the release of a lien if one is later filed.

WARNING TO OWNERS

One problem facing the property owner is the issue of subcontractors and suppliers that have dealt only with the general contractor. Many property owners pay their contractor in full, only to be confronted later by a subcontractor who has not been paid. Unfortunately, the subcontractor can file a mechanic's lien, thereby forcing the owner to pay the same bill twice (once to the contractor, and again directly to the subcontractor).

To prevent this from happening, the owner can require the contractor to get lien waivers from all subcontractors before the final payment is made. It may be necessary to work with the contractor to make sure he or she has the cash to make the payments to the subcontractors. You can do this by making installment payments to the contractor that are conditioned on the delivery of one or more lien waivers. Make sure that your contractor agrees to this kind of payment arrangement in advance.

ADDITIONAL INFORMATION

This Lien Waiver form is appropriate only if the mechanic's lien has not yet been filed. If a mechanic's lien has been filed, you will need another document in recordable form showing the lien has been satisfied. Check with a local attorney to get the right form. After it is signed, make sure it is properly filed.

If you can't get the lien released, you may at least be able to negotiate a "subordination". With a subordination, the mechanic's lien holder signs a document agreeing that the lien will be subordinate to a mortgage or other interest. This can be helpful in arranging for financing. It probably will not help you if you are trying to sell the property because the lien remains in place until you can work something out to get it released.

ARTISAN'S LIENS

Some states provide for creation of a lien when work is done on personal property, just like a mechanic's lien on real estate. This kind of lien is called an "artisan's lien." An artisan is essentially a "skilled craftsman", though state law may provide for a different definition. For example, if you have repair work done on your lawn mower and do not pay the repair bill, state law may permit the repairman (the "artisan") to place a lien on the mower.

Many artisans are not aware of these laws, and take other steps to collect their bills. However, if you are buying an expensive piece of personal property, you may want to see if a lien has been filed. Check with the local and state offices that accept UCC financing statements and other similar filings. Check for any liens filed under the name or names of the owner/seller.