Top 5 Mistakes Contractors Make When Dealing with Construction Liens
This brief guide will discuss the top 5 mistakes we see contractors making on a daily basis when it comes to liens. Florida construction lien law is not extremely complicated, but does require strict compliance. Seemingly minor mistakes can have disastrous consequences if you're not very careful.
Exaggerating the Lien AmountThis one comes first because it is probably the easiest mistake to make, but can have the most negative impact on a contractor's right to enforce a lien. When preparing a claim of lien, an accounting of job costs must be made. This is important not only for compiling the lien, but for other uses (such as preparing a Sworn Statement of Account, if demanded by the property owner).
The purpose of a construction lien is to recover the value of "labor, services, or materials furnished" to the property (See Section 713.08, Florida Statutes). The purpose of a construction lien is NOT to punish a property owner for not paying you, or to recover your profit and overhead on the job. Therefore, you may NOT include separate amounts for profit and overhead, for items not actually furnished to the property (such as materials that were ordered, but not yet delivered), or for things like a "nuisance fee" charged for having to deal with an obstinate property owner.
To make sure that contractors are careful when preparing their claim of lien, the Florida Legislature created a "Fraudulent Lien" mechanism (see Section 713.31, Florida Statutes). The statute reads, in part, as follows:
"Any lien asserted under this part in which the lienor has willfully exaggerated the amount for which such lien is claimed or in which the lienor has willfully included a claim for work not performed upon or materials not furnished for the property upon which he or she seeks to impress such lien or in which the lienor has compiled his or her claim with such willful and gross negligence as to amount to a willful exaggeration shall be deemed a fraudulent lien."
Once a lien is deemed to be fraudulent, a property owner will have a "complete defense" against a lawsuit to enforce the lien. What's more, the property owner (or other contractors) who have been damaged by the fraudulent lien, will now be entitled to sue the lienor for damages. If prevailing, the damaged property owner may recover "in damages, which shall include court costs, clerk*s fees, a reasonable attorney*s fee and costs for services in securing the discharge of the lien, the amount of any premium for a bond given to obtain the discharge of the lien, interest on any money deposited for the purpose of discharging the lien, and punitive damages."
In conclusion, the penalty for exaggerating a lien amount can be steep. Therefore, your attention to detail in preparing a construction lien is JUST as important, as if not MORE important than your choice in attorney.
Failing to Serve a Notice to Owner (if required)Under Section 713.06, Florida Statutes, certain contractors who are NOT IN PRIVITY with the owner must jump through the additional hoop of serving a 'Notice to Owner' (NTO) as a condition precedent of enforcing a lien. The relevant statute reads, in part, as follows:
"All lienors under this section, except laborers, as a prerequisite to perfecting a lien under this chapter and recording a claim of lien, must serve a notice on the owner setting forth the lienor*s name and address, a description sufficient for identification of the real property, and the nature of the services or materials furnished or to be furnished."
What does it mean to be 'not in privity'? In short, it means you don't have a contract directly with the property owner. A common illustration of this is when a general contractor (GC) has a 'prime contract' with a property owner, and one or more subcontractors have contracts with the GC. The GC is in privity with the owner, but the subcontractors are not. Another way to think about it is this: If there is a middleman between you and the property owner, then you are likely NOT in privity with the property owner.
If you determine that you are NOT in privity with the property owner, then you must make sure you prepare and serve an NTO on the property owner. "The notice must be served before commencing, or not later than 45 days after commencing, to furnish" labor, services, or materials. Furthermore, an NTO must also be served on any persons designated in the owner's Notice of Commencement (NOC) to additionally receive notices.
What happens if you don't comply with this requirement? "failure to serve the notice, or to timely serve it, is a complete defense to enforcement of a lien by any person". In short, you lose your right to a lien.
Therefore, it is very important that a determination is made, BEFORE beginning work, whether an NTO is required. If it is, a review of the NOC is necessary to determine WHO will get the NTO. Once ascertained, the NTO should be prepared in accordance with the statutory requirements, and sent via certified mail.
Failing to Timely Record a LienPreparing a Claim of Lien is relatively easy. Section 713.08, Florida Statutes, sets out the exact requirements of what is to be included in a claim of lien. In fact, the statute even includes a template form for the claim of lien. It's essentially 'painting by numbers' for contractors.
When do you record a claim of lien? Section 713.08(5), Florida Statutes, provides that a "claim of lien may be recorded at any time during the progress of the work or thereafter but not later than 90 days after the final furnishing of the labor or services or materials by the lienor".
Where contractors often get into trouble is in the CALCULATION of the ninety (90) day limitation period. Just as important as what "final furnishing" of work IS, is what it is NOT. Section 713.01(12), Florida Statutes, provides the definition of "final furnishing" as follows:
"*Final furnishing* means the last date that the lienor furnishes labor, services, or materials. Such date may not be measured by other standards, such as the issuance of a certificate of occupancy or the issuance of a certificate of final completion, and does not include correction of deficiencies in the lienor*s previously performed work or materials supplied."
Therefore, it is not proper to look to the date of final inspection, or issuance of certificate of occupancy in calculating the "final furnishing" of work. Additionally, corrective work (i.e., warranty work or call-backs) should not be considered in making this calculation.
The critical question, then, is what constitutes the "final furnishing" of work? The answer to this question will depend on the scope of the work, and the industry in which the lienor works. By way of example, a roofer would likely consider the 'final furnishing' to be when the last shingle is nailed onto the roof.
There is a bevy of case law interpreting what "final furnishing" means. However, a safe rule of thumb that can be derived from the body of precedent is this: the ninety (90) day period for recording a claim of lien begins to run when the last work is done, which is necessary to finish the job and complete the contract work.
To be extra cautious, we recommend voluntarily imposing a shorter limitation period on your business. In other words, act as though you only had sixty (60), or seventy-five (75) days instead of ninety (90)--so as to give yourself your own grace period, just in case you get it wrong by a few days.
Failing to File Suit Within the Applicable Limitation PeriodSuit must be filed within one (1) year of recordation of a claim of lien to enforce the same. Failure to do so will make the claim of lien null and void. See Section 713.08, Florida Statutes.
However, a property owner is entitled to shorten this one (1) year period by recording and serving a Notice of Contest of Lien under section 713.22, Florida Statutes. This document essentially calls the lienor's bluff by shortening the enforcement period from one (1) year, to sixty (60) days. At this point, the lienor must decide whether they are serious about moving forward with litigation.
What happens if a lienor does nothing in response to the Notice of Contest? Section 713.22, Florida Statutes, answers this question: "The lien of any lienor upon whom such notice is served and who fails to institute a suit to enforce his or her lien within 60 days after service of such notice shall be extinguished automatically."
We recommend to our clients that they make the determination as to whether they are serious about enforcing their lien BEFORE they ever record a claim of lien. As a precaution, and just like our recommendation with the calculation of "final furnishing" discussed above, we also advise our clients to voluntarily shorten the one (1) year period (or sixty (60) day period, if they've been served with a Notice of Contest of Lien) in their business practices. Therefore, if an unforeseen event causes a delay in filing suit, our clients will have given themselves a bit of cushion to prevent their lien from becoming unenforceable.
Failing to Timely Provide Documents to Which a Property Owner is EntitledUnder Sections 713.16 and 713.165, Florida Statutes, property owners are entitled to obtain from a lienor certain information and documents.
Under Section 713.16(1), a property owner is entitled to obtain a copy of, or to inspect the contract with the lienor.
Section 713.16(2) provides as follows:
"The owner may serve in writing a demand of any lienor for a written statement under oath of his or her account showing the nature of the labor or services performed and to be performed, if any, the materials furnished, the materials to be furnished, if known, the amount paid on account to date, the amount due, and the amount to become due, if known, as of the date of the statement by the lienor."
A lienor's failure to timely provide the sworn statement of account will result in the loss of their lien.
Under Section 713.165, Florida Statutes, a property owner is also entitled to demand a list of subcontractors and suppliers who have a contract with a lienor. Once the demand is received, a lienor has only ten (10) days to provide the same. Failure to timely provide the list will also result in the loss of their lien.
Oftentimes, a property owner who has had a lien recorded against their property will send these demands, even if the information requested is already known or possessed by them, simply to see if they can knock out the lien by getting lucky with a contractor's untimely reply, or failure to reply at all. Therefore it is imperative that attention to detail is given when dealing with any written requests received by a property owner.