House Bill 1163 – Subcontractor liens. Rep. Orentlicher:
Provides that a contractor must pay all subcontractors within five business days after receiving payment from a homeowner or builder. Provides that a builder must disclose to a purchaser all subcontractors used in new home construction. Requires a contractor to provide notice to all subcontractors when the contractor has been paid by a homeowner or builder. Prohibits a subcontractor from filing a lien against a property if the primary contractor has received full payment for the contract. Allows a subcontractor to file an action against a prime contractor to recover any unpaid claims due under a contract between the prime contractor and the subcontractor.
Rep. Orentlicher delves into the exciting world of mechanic’s liens. I groan a little bit every time one of these cases comes across my desk. But, it’s generally a good way to get paid if you’re a contractor. There are generally two sets of rules for a laborer who wants to get paid for construction work, there being more hoops to jump through if the construction in question is a primary residence and less if the construction is something else. If the contractor adds value to construction, he can place a lien against the property until he gets paid. If, for some reason, the general contractor stiffs the subcontractor, the subcontractor has the option of foreclosing on his lien on the property, meaning the property owner has to pay up. The property owner then most likely has a cause of action against the general contractor. It puts the risk on the shoulders of the property owner rather than the laborer. Understandably, lawmakers have been more reluctant to have Joe Homeowner find himself embroiled in these kinds of messes and have offered more safeguards for primary residential properties.
Under this bill, a contractor would be required to notify subcontractors within one day of receiving full payment for the contract. Apparently no action is required if the contractor receives partial payment. The contractor is required to pay the subcontractor within 5 days of receiving payment.
I think the bill is worded a bit awkwardly. In subsection “c” it says that a contractor paid in full has to send notices out to subcontractors within 1 day. Then in subsection “d” it says full payment has to be made to subcontractors within 5 days of sending out the notice. Then, it says that if a prime contractor fails to make payment as described in “d,” the subcontractor can’t file a lien. So, my question is, what happens if the contractor never sends out the notices as required in “c”? Then the time period in “d” is never triggered and, therefore, arguably, the lien prohibition in “e” is also never triggered.
In any event, I like the notice requirement to subcontractors. It might not be a bad idea for all mechanic’s lien situations, not just residential. But, I’m a little uncomfortable about the lien prohibition. It basically turns laborers into unsecured creditors. In return, the laborers don’t get very much. They get a requirement that the general contractor send out a notice of payment, but I don’t see any special penalties to the contractor for noncompliance. The bill also says that the laborers can sue the general contractor for nonpayment. Big deal. They can already do that.
[tags] HB1163-2007, liens, labor[/tags]
This bill would apparently affect only primary residence construction.
Doug,
Thanks for the analysis. It does sound like there are multiple loopholes here that could enable the general contractor to leave the property owner in a problematic situation with the subcontractors. As you note, the general contractor could just fail to observe the reporting requirement.
Another possibility is that the general contractor could “accidentally” underbill the property owner, resulting in only partial payment, and the clock for notification never starts running.
Alternatively, if there were ever a situation where it could be advantageous for a property owner to have a mechanic’s lein against his property[*], then the property owner and general contractor could arrange for the GC to underbill the property owner, compelling the irate subcontractor(s) to attach a lein.
[*] I can’t imagine what one might be, unless it were some scenario where you had a real estate speculator defaulting on the property and trying to screw the mortgage lender out of recovery…but maybe the law gives prority to the mortgagor and the mechanic’s lein wouldn’t make a difference. I know next to nothing about this stuff.