August 29, 2018
Author: Joseph B. Jaap
Organization: BARRON PECK BENNIE& SCHLEMMER CO., LPA
WHAT IS A MECHANIC’S LIEN?
1. Basic Characteristics
(a) Security - a secured interest in real property, if properly obtained.
A mechanic’s lien merely is security for the payment of money claimed to be owed; it is not money. It might or might not result in payment to the mechanic’s lien holder. It is comparable to a mortgage on real estate which is security for the repayment of the loan made by a lender. When borrowing money, the borrower signs a promissory note or loan agreement which is a contract to repay a certain sum of money. The lender secures this contractual debt by the mortgage which the borrower grants to the lender, which gives the lender a secured interest to use the real estate to pay off the loan if borrower defaults. A mortgage is not money; it merely gives the lender a secured interest in the real estate, which usually enjoys a first priority over other potential creditors.
(b) Claim for payment – created by state law to secure a payment owed on a contract claim for payment.
Once a mechanic’s lien has been recorded, if the lien claimant is not paid voluntarily, then the lien claimant must file a lawsuit to force payment from the owner, just as a lender must file a lawsuit seeking payment and foreclosure if the borrower defaults on its note and mortgage.
The lawsuit seeking to collect on a mechanic’s lien must first establish that there is valid construction contract by which the lien claimant is owed money, it then must determine the proper amount of money owed on the contract after considering all setoffs and counter-claims the property owner might have against the lien claimant for defective work, delays, or other charges incurred in default of the contract, and finally, the lien claimant then must establish that it properly followed all of the required statutory procedures for a valid mechanic’s lien within the prescribed time deadlines for lien filings.
(c) Statutory creation – must follow statutory procedures.
Since the right to the security of a mechanic’s lien is created by state law, the lien claimant must follow the statutory procedures to obtain valid mechanic’s lien rights. If the lien claimant does not follow the required procedures, then the mechanic’s lien could be deemed invalid. Each state’s mechanic’s lien laws are different. A lien claimant must follow the laws of the state in which the project is located. The Mechanics’ Lien laws for Ohio can be found at Ohio Revised Code Chapter 1311, Sections 1311.01 through 1311.32. Even if a lien claimant’s mechanic’s lien is determined by a court to be invalid, the claimant still has a contractual claim for repayment of the money against the party with whom the claimant contracted. However, that claim is not secured, and unless there is payment bond on the project, the contracting party might be insolvent or have insufficient assets to pay the contract claim.
(d) Leverage for payment – might or might not result in payment.
Recording a mechanic’s lien can provide the lien claimant with leverage to obtain partial or in some cases full payment. However, if payment is not made, then a lien claimant must consider whether it would be cost effective to file a lawsuit to collect, since a lawsuit can be expensive and time consuming to pursue to completion.
(e) Negotiating tool – gives an owner a reason to negotiate.
Without a secured claim against the real estate on which the property is located, the lien claimant’s recourse typically is limited to the party with whom the lien claimant contracted, with no opportunity to make a claim against the project owner, except in some circumstances such a unjust enrichment. With a valid mechanic’s lien, the lien claimant acquires a claim against the owner’s ownership interest in the property and can bring the owner into the negotiation.
However, owners typically require general contractors to remove liens through bonding, and even if the owner negotiates, owners often take the costs that a lien claimant will incur to litigate into account and then offer the lien claimant less than the full amount to obtain a release of the mechanic’s lien.
(f) Valid for 6 years – mechanic’s lien expires after six years and becomes void.
If no lawsuit is filed by a lien claimant to enforce its mechanic’s lien, the mechanic’s lien automatically will expire and become void six years after the date on which it was recorded, but if a lawsuit is filed before the lien expires, the lien will remain in effect until final resolution of the lawsuit.
2. Mechanic’s Lien Attachment – PRIVATE Project
(a) Mechanic’s Lien attaches to the real estate.
For a privately-owned project, a mechanic’s lien attaches to the real estate on which the project is located, so that if payment is not made, the lien claimant can start a foreclosure action seeking to have the real estate sold at a sheriff’s sale. Specifically, the lien attaches to the ownership interest (or part ownership interest or lease interest) of the party who contracted for the improvement to the real estate.
(b) Interest Sold at Foreclosure Sale.
If a sole owner of the real estate contracted for the project, and the mechanic’s lien is foreclosed, then the owner’s entire interest is sold. If a part owner contracted for the project, then only the part interest of that part owner is sold. If a tenant contracted for the project, the mechanic’s lien only attaches to the tenant’s leasehold interest, and only the remainder of the tenant’s lease is sold at the sheriff’s sale, which might be of little or no value.
(c) Distribution of Proceeds upon Foreclosure Sale by Priority.
The proceeds from the sheriff’s sale of the owner’s or tenant’s interest will be distributed to mortgage holders and lien holders in the order of their priorities. Often, a bank has a mortgage which has the first priority, and after the bank’s mortgage loan is repaid, there might not be any additional proceeds from the sale to pay other lien claimants who have lower priority, such as mechanic’s lien holders. Therefore, a mechanic’s lien is only as good as the equity of the person who contracts for the project, and if that person has little equity in the real estate where the project is located, then the mechanic’s lien holder has little security. The mechanic’s lien might be completely valid, but it only attaches to the equity of the person who contracts for the project.
3. Mechanic’s Lien Attachment – PUBLIC Project
(a) Types of Public Projects.
A mechanic’s lien on a public project operates differently from a mechanic’s lien on a private project. A public project is defined as a project that is contracted by a public authority and that is financed with public funds. A public project usually is constructed on publicly-owned land, and includes city, county, and township buildings, fire stations, public schools, public hospitals, roads, bridges, sewers, public parks, professional sports stadiums, etc.
(b) Attachment of Mechanic’s Lien on Public Project.
A mechanic’s lien can not attach to real estate that is owned by the public, and the public real estate cannot be sold at a sheriff’s sale to satisfy a mechanic’s lien. Instead, the lien attaches to the fund of public money that has been authorized and set aside for the project.
(c) Collection against Mechanic’s Lien on Public Project.
When a lien claimant collects against a mechanic’s lien on a public project, the collection comes from the fund of money that has been authorized by the public project owner for the project. If all of the authorized money is disbursed by the public project owner to the contractor before a lien claimant properly files its mechanic’s lien, then the lien attaches to nothing, and the lien claimant has no security unless there is a bond on the project. The public project owner is not obligated to authorize more money to pay the lien claimant, even if the lien claimant correctly complies with all the statutory rules to establish a valid lien.
4. Mechanic’s Lien Law Objectives
(a) Primary Objectives –information to project owner and lien claimants.
Ohio mechanic’s lien law provides a simple procedure for a project owner to furnish all the important information about a project to potential contractors, subcontractors, and suppliers so that they have sufficient information about the project to decide whether to become involved.
It also provides a simple procedure for potential lien claimants to notify the project owner of their participation on the project so that the project owner can ensure that these lower tiers are properly and timely paid.
(b) Secondary Objective – establish priority of liens and simplify filing deadlines. The mechanic’s lien law provides an objective method of determining the priority of mechanic’s liens, expands the items for which liens can be obtained, and clarifies technical issues to make it easier for contractors, subcontractors, and suppliers to record valid mechanics’ liens.
(c) Benefits of following statutory procedures for mechanic’s liens:
1) Provides objective information to everyone regarding a project and determines the priority of mechanic’s liens;
2) Simplifies the deadlines for recording a mechanic’s lien affidavit; and
3) Eliminates “hidden,” “secret,” or “surprise” mechanic’s liens recorded against the owner by subcontractors and suppliers after the owner makes final payment to the contractor.
(d) Notice of Commencement, Notice of Furnishing, Mechanic’s Lien Affidavit.
The mechanic’s lien law provides a system of notification in which the owner records a Notice of Commencement providing information about the project to potential subcontractors and suppliers. A subcontractor or supplier serves a Notice of Furnishing upon the owner and general (original) contractor to notify those parties that the subcontractor or supplier will be on the project, so that the general contractor and owner are advised of lower tier remote subcontractors and suppliers and can ensure that proper payments are being made to them for work and materials.. A lien claimant must record a Mechanic’s Lien Affidavit in the county recorder’s office within the proper time period and serve a copy of it on the owner by certified mail or other authorized method within 30 days to properly place the mechanic’s lien on record.
B. WHO IS ENTITLED TO A MECHANIC’S LIEN?
1. Contractors, Subcontractors, Construction Managers, and Laborers
The mechanics’ lien law defines the term “original contractor” and “principal contractor” to refer to what is commonly known as a general or prime contractor. The term “original contractor” includes anyone who contracts directly with an owner, part owner, or tenant for work to be done or improvements to be made on a privately-owned project. The term “principal contractor” includes anyone who contracts with a public authority for work to be done on a public improvement with public financing. One project might have multiple original or principal contractors, e.g. a mechanical prime contractor, an electrical prime contractor, etc. Each of them has their own separate mechanic’s lien rights for their own portion of the project.
Subcontractors include anyone who contracts with an original or prime contractor, or with any other subcontractor to perform work on a project. The term does not include anyone who merely delivers or supplies materials to a project. However, if someone who supplies materials also performs installation services on the project site, then that party is a subcontractor.
(c) Construction Managers
Construction Managers are those who contract directly with an owner, part owner, or lessee on a private project and who have substantial discretion and authority to manage or direct an improvement.
Laborers include any mechanic, workman, artisan, or individual who performs labor or work in furtherance of any improvement. Laborers are individuals and can be employed by the owner, general contractor, or a subcontractor. They enjoy simplified rules that make it much easier for them to obtain mechanic’s liens.
2. Architects, Engineers, and Surveyors
(a) Architects and Engineers
Although not specifically addressed in the mechanic’s lien laws, Ohio courts have held that architects and engineers can have mechanic’s lien rights for services that they provide on the project site, as a contractor or subcontractor, such as work or construction management performed on the project site, but that they do not have lien rights for services performed off-site or in the office.
Surveyors also are not specifically addressed in the mechanic’s lien laws, but Ohio courts have held that surveyors have lien rights for services that they provide on the project site, to the same extent as a laborer under the mechanic’s lien laws.
3. Demolition, Cleaning, and Remediation Contractors
(a) Demolition Contractors
Demolition work is specifically included in the mechanic’s lien laws so that demolition contractors and those furnishing work or supplying materials for demolition work have mechanic’s lien rights.
(b) Cleaning Contractors
Cleaning services are not specifically addressed in the mechanic’s lien laws, and those who perform cleaning services are not able to claim mechanic’s lien rights.
(c) Remediation Contractors
Remediation activities such as excavation, cleanup, or removal of hazardous material or waste from real property, excavation and removal of contaminated soil, installation of soil remediation improvements, demolition and removal of contaminated structures and rebuilding, and other physical removals and installations are activities for remediation contractors can claim mechanic’s lien rights.
4. Corporations, Companies, Partnerships, Trusts, and Estates
(a) Ohio Corporations and Companies
Mechanic’s lien rights are not limited to natural persons. Corporations and limited liability companies and other entities can obtain mechanic’s lien rights.
(b) Out of State Corporations and Companies
Corporations, limited liability companies, and other entities that are organized in other states or foreign countries must qualify to do business in Ohio by making filings with the Ohio Secretary of State, before they can enforce their mechanic’s lien rights in Ohio courts.
(c) Partnerships, Trusts, and Estates
Partnerships, trusts, and estates also can obtain mechanic’s lien rights.
5. Material Suppliers
(a) Supplier to Owner, Contractor, or Subcontractor
Anyone who furnishes materials in furtherance of an improvement is referred to by the mechanic’s lien statutes as a “material supplier” or “materialman,” but in order to have mechanic’s lien rights, those materials must be furnished under contract to an owner, part owner, or lessee who contracts for the work, or furnished under a contract with an original contractor or subcontractor.
(b) Supplier to a Material Supplier
A supplier who furnishes materials to a material supplier will not have mechanic’s lien rights, since that supplier will not be furnishing under contract directly to an owner, part owner, lessee, original contractor or subcontractor. A supplier to a supplier cannot have mechanic’s lien rights. However, if a first supplier delivers materials to a second supplier, and second supplier performs some kind of installation work on the project in connection with furnishing materials, then second supplier is actually a contractor or subcontractor, so that first supplier will no longer be a supplier to a supplier, so that therefore, the first supplier will have mechanic’s lien rights.
C. TYPES OF LABOR, MATERIALS, AND SERVICES THAT ARE LIENABLE
1. Mechanic’s Lien for Improvements to Real Estate
(a) Statutory Provision for Improvement Liens, Ohio Rev. Code Section 1311.02
Every person who performs work or labor upon or furnishes material in furtherance of any improvement undertaken by virtue of a contract, express or implied, with the owner, part owner, or lessee of any interest in real estate, or his authorized agent, and every person who as a subcontractor, laborer, or materialman, performs any labor or work or furnishes any material to an original contractor or any subcontractor, in carrying forward, performing, or completing any improvement, has a lien to secure the payment therefor upon the improvement and all interests that the owner, part owner, or lessee may have or subsequently acquire in the land or leasehold to which the improvement was made or removed.
(b) Definition of “Improvement”
“Improvement” means constructing, erecting, altering, repairing, demolishing, or removing any building or appurtenance thereto, fixture, bridge, or other structure, and any gas pipeline or well including, but not limited to, a well drilled or constructed for the production of oil or gas; the furnishing of tile for the drainage of any lot or land; the excavation, cleanup, or removal of hazardous material or waste from real property; the enhancement or embellishment of real property by seeding, sodding, or the planting thereon of any shrubs, trees, plants, vines, small fruits, flowers, or nursery stock of any kind; and the grading or filling to establish a grade.
(c) Definition of “Material”
\"Materials\" means all products and substances including, without limitation, any gasoline, lubricating oil, petroleum products, powder, dynamite, blasting supplies and other explosives, tools, equipment, or machinery furnished in furtherance of an improvement.
(d) Additional Qualifications for Mechanic’s Lien for Materials
A mechanics' lien for furnishing materials arises only if the materials are:
(1) Furnished with the intent, as evidenced by the contract of sale, the delivery order, delivery to the site by the claimant or at the claimant's direction, or by other evidence, that the materials be used in the course of the improvement with which the lien arises;
(2) Incorporated in the improvement or consumed as normal wastage in the course of the improvement;
(3) Specifically fabricated for incorporation in the improvements and not readily resalable in the ordinary course of the fabricator's business even if not actually incorporated in the improvement;
(4) Used for the improvement or for the operation of machinery or equipment used in the course of the improvement and not remaining in the improvement, subject to diminution by the salvage value of those materials; or
(5) Tools or machinery used on the particular improvement, but limited to either of the following cases:
a. If the tools or machinery are rented, the lien is for the reasonable rental value for the period of actual use and any reasonable period of nonuse taken into account in the rental contract.
b. If the tools or machinery are purchased, the lien is for the price, but the lien only arises if the tools or machinery were purchased for use in the course of the particular improvement and have no substantial value to the purchaser after the completion of the improvement on which they were used.
(e) Presumptions regarding Materials
The delivery of materials to the site of the improvement, whether or not by the claimant, creates a conclusive presumption that the materials were used in the course of the improvement or were incorporated into the improvement. All of the deliveries or the sales, or both, by a lien claimant of materials, including tools and machinery to or for an improvement, give rise to one mechanics’ lien for the unpaid portion of the sales.
2. Mechanic’s Lien for Oil and Gas Wells; Roads, Sidewalks, and Sewers
(a) Liens on Oil or Gas Wells, Ohio Rev. Code Section 1311.021
Every person who performs any labor or work upon or furnishes material for digging, drilling, boring, operating, completing, or repairing, any well drilled or constructed for the production of oil or gas or any injection well which furthers the production of oil and gas or which disposes of waste products generated by oil and gas operations, or for altering, repairing, or constructing any oil derrick, oil tank, or leasehold production pipe line by virtue of a contract, express or implied, with the owner or part owner, or his authorized agent, of any oil and gas lease or leasehold estate or, in the event there is no lease or estate, any mineral estate, and every subcontractor, laborer, and materialman who performs any labor or work or furnishes material to an original contractor or any subcontractor, in carrying forward, performing, or completing the contract, has a lien to secure the payment thereof upon the oil and gas lease or leasehold estate or, in the event there is no lease or estate, any mineral estate, the oil or gas produced therefrom and the proceeds thereof, and upon all material located thereon or used in connection therewith.
(b) Lien for Road, Sidewalk, or Sewer, Ohio Rev. Code Section 1311.03
Any person who performs labor or work or furnishes material, for the construction, alteration, or repair of any street, turnpike, road, sidewalk, way, drain, ditch, or sewer by virtue of a private contract between him and the owner, part owner, or lessee of lands upon which the same may be constructed, altered, or repaired, or of lands abutting thereon, or as subcontractor, laborer, or materialman, performs labor or work or furnishes material to such original contractor or to any subcontractor in carrying forward or completing such contract, has a lien for the payment thereof against the lands of the owner, part owner, or lessee, upon which the street, turnpike, road, sidewalk, way, drain or sewer is constructed or upon which any such street, turnpike, road, sidewalk, way, drain, ditch, or sewer abuts, as provided in Section 1311.02 of the Revised Code.