Why Diligent Project Owners Should Never Lose Mechanics Lien Claims

Written by Jeremy S. Baker

You are a project owner or real estate developer. You want to avoid lien claims. But how? Yes, the Illinois Lien Act – first passed in 1825 – contains arcane and confounding rules. But here is the truth: real estate developers and project owners should never lose lien claims … IF they follow the Lien Act, as they make periodic payments on their design and construction projects.

The Myth: Liens Are Just About Getting Contractors and Designers Paid

The Lien Act balances competing interests. Sure, one of its goals is to help designers and contractors secure payment for services rendered from owners, developers, and lenders. However, the Lien Act contains very specific requirements for lien claimants to meet…with exacting precision. This furthers another goal: to empower property owners, developers, lenders, and purchasers to confidently transact in real property – without being subject to an undue risk of mechanics lien claims. If a lien is untimely, or mis-describes the property or parties, or has another error, it is likely invalid. The Lien Act is about predictability, not fairness. Developers and project owners should almost never lose lien claims if they understand the rules while promote that predictability.

The Truth: Project Owners Can Completely Protect Themselves from Liens

Illinois project owners’ essential obligation, under the Lien Act, is to not pay those general contractors who are not paying their subcontractors. With each payment request, the owners must require certain paperwork from both the general contractor and its subcontractors.

These “Sworn Statements” and “Lien Waivers” take a variety of forms. What’s most important is their content. The Lien Act explains what they require, specifically. The dollar figures stated should tie out with mathematical precision, and have other indicia of reliability.

Together, this paperwork should provide an owner assurances that its money is being used to pay the general contractor’s subcontractors. If a project owner collects the right paperwork, with the right content, at the right times, it should almost always win mechanics lien claims.

The Risk: Project Owners Are Exposed to a Risk of Double Payments

This may be a surprise: Illinois project owners and developers who pay every dollar they owe to general contractors do not, by virtue of making those payments, completely protect themselves from lien claims. Project owners can still lose subcontractor mechanics lien claims, even if they fully pay the general contractor. Surprising, huh?

Red Lights and Green Lights: When Is It Safe To Pay?

This “double payment” risk arises when owners and developers break the payment-related rules set out in the Lien Act. The Lien Act contains payment-related “red lights” and “green lights” for project owners to observe. Each month, they need to look at the Sworn Statements and Lien Waivers to see if they have a green light to pay the general contractor… or whether a red light means they must halt payments to it, and take other action.

When project owners run the red lights of the Lien Act, the payments they make to the general contractor are said to be “wrongful” as between the owner and the subcontractors. Those wrongful payments are no defense to subcontractor lien claims. Simply put, owners need to know when the Lien Act prohibits them from paying general contractors.

What if General Contractors Owe Subcontractors More than the Owner Owes?

In a “fixed price” contract with the project owner, the general contractor has the potential to make or lose money. If it owes subcontractors less than the adjusted fixed price of the prime contract with the owner, the general contractor wins. The general contractor loses when the total amount it owes to subcontractors is less than the final fixed price of the prime contract. This is the contractor’s essential deal with the owner. Basic dollars and sense.

But what happens, to project owners, if the general contractor owes more to its subcontractors than what the owner owes to the general contractor? Who pays the cost overage? Who gets the short end of the stick? The project owner? The general contractor? Or the subcontractor?

You might think the loss falls on the general contractor. Often, that is the legally, contractually, and academically correct outcome. But there is often a twist, and it can lead to liens:

  • What if the general contractor wrongfully disputes what it owes to the subcontractors? What if it fails to pay the subcontractors the greater amounts they seek?
  • What if the general contractor becomes insolvent, or otherwise absconds with all the owner’s project payments? What if the subcontractors are paid nothing at all?

The owner and subcontractors are “innocent” parties, at least in some sense, under these facts.

Among Innocent Owners and Subcontractors, Who Loses?

Often, when mechanics lien claims are recorded, there is not enough money to go around. The owner might have fully paid its contract price to the general contractor, exhausting its project funds. The general contractor might be financially unstable and unable, from month-to-month, to meet its payment obligations to subcontractors on various projects. Sometimes the project is fraught with change order disputes, which further exacerbates payment problems.

The point? In mechanics lien disputes, some party – often an innocent one – will sometimes get the short end of the stick. The Lien Act is about predictability, not fairness.

So between a project owner that has fully paid its general contractor, and an unpaid subcontractor who records a lien on the owner’s property, who wins? As between the owner and subcontractor, two “innocent” parties, who gets the short end of the stick?

The answer is simple: whoever complies with the Lien Act more closely wins.

The “Contract Price” Defense

Luckily, if project owners and developers follow the Lien Act when making periodic payments, they should never have to pay more than their contract price with the general contractor, plus legitimate extras. Section 21(d) of the Lien Act sets out this “contract price” defense.

In something of an oversimplification, if the owner or developer (1) collects the correct form of Sworn Statements and Lien Waivers, (2) correctly interprets their content as payment “green lights” rather than “red lights,” and (3) makes payments, without knowledge of unpaid subcontractors, they should never have to pay more than their contract price with the general contractor. In that case, each subcontractor (of every tier) cannot use a lien claim to collect more dollars than are owed to the contractor right above it in the chain of contracts leading to the owner.

That sounds complex, I know. And there are many other rules and exceptions which protect owners and developers under the Illinois Mechanics Lien Act. But they all share one thing in common: whoever complies with the Lien Act more closely wins. If they follow the rules, real estate developers and project owners should never lose lien claims.

Isn’t This Unfair for Subcontractors?

The Lien Act provides ways for subcontractors to avoid this fate. They can provide “Notice of Intent to Lien” to project owners and developers, possibly triggering a payment-related “red light” for them to observe. Usually, this happens within 90 days of their last date of work, at the end of the project, or the start of project-related work stoppages. 

By that late point in the project, when subcontractor lien notices hit, the project owner or developer might have paid out too much money to the general contractor for both it and the subcontractor to be made whole, setting up a “who-gets-the-short-end-of-the-stick” problem.

Of course, in Illinois, subcontractors need not wait this long to alert owners, developers, and lenders to the amounts of money they are owed from the general contractor. They can provide notice of the sums they are owed much earlier, thus triggering certain Lien Act protections in their favor. They can send a notice to the owner or developer, and lender, which will trigger a payment “ red light” much earlier in the project. But subcontractors seldom take this precaution.

Also, even when subcontractors have no valid lien claims to bring against owners, developers, and lenders, the subcontractors – often – have legitimate claims for breach of contract against the general contractor. In other words, the subcontractors can look to the general contractor for payment of all sums they are owed even in the absence of a lien claim.

Conclusion… And Exceptions

Real estate developers and project owners should almost never lose lien claims. They should never have to pay more than their contract price with the general contractor – if they comply with the Lien Act – even in the event of lien claims. These prudent owners and developers should be able to supply their attorneys the paperwork they need to defeat the lien claims, if they have truly followed the Lien Act. Therefore, project owners and developers would be well-advised to understand what the Lien Act requires of them each time they make a project payment.

So who gets the short end of the stick? Owners and developers who take a casual approach to collecting Sworn Statements and Lien Waivers might suffer this fate. They might fully pay the general contractor, and see their project hit with valid subcontractor mechanics lien claims, and be forced to make a double payment. However, it is within the power of owners and developers to ensure that someone else, some contractor, gets the short end of the stick.

A word about the Illinois Mechanics Lien Act, and exceptions. In Illinois, every rule has an exception. And every exception has an exception. And on, and on, and on. These multi-layer exceptions are often fact driven. Often, they exist in legal gray areas. No lawyer can guarantee that its prudent owner and developer clients will always win lien claims. However, prudent lawyers can help their clients understand how to create good facts and documents for themselves, vastly increasing the odds of winning mechanics lien claims.

This publication is prepared for the general information of friends of Baker Law Group LLC in Illinois. It is not legal advice for you, or legal advice regarding any specific matter. Jeremy S. Baker is licensed to practice law only in Illinois. Under rules applicable to the professional conduct of attorneys in various jurisdictions, it may be considered attorney advertising material. Prior results do not guarantee a similar outcome.

Real estate developers and project owners should never lose lien claims - IF they follow the Illinois Mechanics Lien Act as they make payments.

Real estate developers and project owners should never lose lien claims – IF they follow the Illinois Mechanics Lien Act as they make payments.

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Jeremy S. Baker is an experienced Chicago-based attorney who provides transactional, dispute resolution, and general counsel services to the design and construction industry. He uses creative project structuring and intelligent contracts, plus dispute avoidance and early cost-efficient claim resolution techniques, to help his clients complete challenging projects.

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