In this post, I discuss construction liens and the exceptional protection they provide contractors. It provides a means to ensure that contractors get paid.
Contractors, subcontractors, and suppliers of construction materials face the ever-present threat that they will go uncompensated for their efforts. The nature of the industry often makes it difficult to receive payment in advance, and the improvements usually cannot be repossessed.
Fortunately, however, the Arkansas General Assembly has recognized the unique nature of the construction business and provided it with a special method to obtain security for payment: construction liens. Every contractor, subcontractor, or material supplier who contracts to improve real estate has the right to place a lien upon the improved property to secure payment due. Securing such a lien, however, requires strict compliance with the multi-step process that Arkansas law provides.
A construction lien is available on residential property only if the contractor, prior to the performance of any work or the provision of any materials, informs the property owner that a lien may be filed against the property to secure payment. This notice must be in the exact wording and format provided by statute. Failure to provide this notice not only bars a contractor from later filing a lien if payment is not forthcoming but also bars the contractor from ever bringing any kind of lawsuit to enforce the terms of the contract. This essentially means that if the contractor fails to provide this notice and the property owner later fails to pay the amount due, there is little that the contractor can do about it.
This protects the property owner, as many property owners are unaware that an uncompensated contractor, subcontractor, or material supplier may file a lien on the property. This also serves to protect the subcontractors and suppliers, as these professionals are precluded from filing their own liens if preliminary notice is not provided to the property owner. (Subcontractors and suppliers may, however, provide their own notices.)
There are, however, some important exceptions to this notice requirement. First, if the residential contractor supplies a performance and payment bond, this notice requirement does not apply. Second—and perhaps the most important—the notice requirement does not apply where there is a direct sale to the property owner, that is, where the construction professional enters into the contract directly with the property owner and performs the work him or herself. This direct sale exception protects plumbers, electricians, and other artisans that work directly for property owners.
It is also important to note that this notice is not required for work performed on commercial property, as the Arkansas legislature has determined that owners and developers of commercial real estate are familiar with construction liens. For commercial property, therefore, construction professionals have 75 days after the completion of work or delivery of materials to provide the notice the statute requires.
Notice of Intent to File a Lien
Assuming the proper preliminary notice has been provided, when a construction professional is not paid for work performed or materials supplied, that professional may file a lien on the property. This is true even where an innocent property owner fully pays the contractor, but the contractor fails to pay the subcontractors.
Before actually filing the lien, however, the construction professional must provide at least 10 days notice to the property owner, stating the amount due and from whom it is due. This requirement applies to both residential and commercial real estate. Since a lien must be filed within 120 days of the completion of work or the provisions of materials, this notice must be provided within 110 days.
Foreclosing Construction Liens
Within 120 days after the work has been completed or supplies provided, a construction professional wishing to take advantage of the construction lien statute must file a lien with the clerk of the circuit court of the county in which the real estate is located. This filing must include the following information:
- A lien account specifying the amount due and containing the correct description of the property subject to the lien.
- An affidavit of notice attached to the lien account containing a sworn statement that the contractor has complied with the notice requirements specified above and a copy of each applicable notice.
A construction lien is a powerful remedy because it clouds the title to the property and therefore provides great incentive to the property owner to pay the money owed. (It also serves as a powerful incentive for property owners to ensure that their contractor pays the subcontractors.)
If the property owner still does not pay within 20 days of the filing of the lien, the lien holder may foreclose, thereby forcing a sale of the property to pay off the debt. Such an action, however, must be commenced within 15 months of filing a lien.
Clearly then, the construction lien provides a powerful tool to ensure proper payment for work performed. The filing and perfecting of such a lien, however, can be highly complex and a small mistake can result in the complete loss of the remedy. Therefore, those wishing to avail themselves of the benefit of this aspect of Arkansas law should seek the counsel of a competent attorney.