The legislature has just passed the most sweeping revision to Massachusetts’ lien law since 1915. The New law maintains a similar format for establishing and enforcing a mechanic’s lien to secure payment on private construction. But it expands the scope of lien protection (it now includes construction management services, rental equipment, appliances and tools); it broadens the type of project covered (it now covers all improvements to real property not just building projects); and it extends the time limit for claiming a mechanic’s lien. The New law’s most revolutionary feature is its complete elimination of contract completion dates as the basis for establishing lien eligibility.
Under the old lien law (see Construction Law Comments - Fall 1993) a mechanic’s lien was claimed by filing a Notice of Contract in the Registry of Deeds on or before the original contract completion date. This made the statute difficult to use because this deadline frequently passed long before the claimant could decide whether to file, and sometimes even before its work commenced. Under the New law a lien is still claimed by filing a Notice of Contract. However, the deadline will now be tied to the date the work is substantially completed in the field (except where the general contract is terminated before substantial completion). The date of project substantial completion (or termination) will be established by a notice filed by the owner and general contractor in the Registry of Deeds.
Under this new approach the completion date stated in the contract no longer has any relevance to acquiring or enforcing a mechanic’s lien. The New lien law was passed on August 9, 1996, and is not yet in effect. The New law will apply to all private construction projects on which either the project’s mortgage or first Notice of Contract is recorded in the Registry of Deeds on or after February 9, 1997. Until that time, the old lien statute will remain in place and will govern the validity of mechanic’s liens.
Here in a nut shell is how the New mechanic’s lien statute works:
Anyone providing labor, material or equipment under a written contract may acquire a mechanic’s lien by filing a timely Notice of Contract in the Registry of Deeds. That Notice may be filed as soon as the contract is signed. It may be filed before any work is performed or any time during performance. It may also be filed as late as 60 days after the owner and general contractor file a Notice of Substantial Completion of the entire project in the Registry. If the owner terminates the general contract before substantial completion, the claimant may file its Notice of Contract within 90 days after the owner files a Notice of Termination in the Registry. If a Notice of Substantial Completion, or a Notice of Termination is not filed, the claimant may file its Notice of Contract as late as 90 days after the general contractor or any subcontractor last furnished labor, materials or equipment.
As with the old law, the New lien law also requires subcontractors and suppliers to provide actual notice of that filing to the owner before their lien becomes effective. That requirement does not apply to the general contractor who need only file in the Registry.
The forms of the Notice of Contract to be filed by general contractors, and by subcontractors and suppliers, are included in the statute. The Notice of Contract the general contractor must file under the New lien law is substantially similar to the notice required under the old law except reference to contract completion date is eliminated. The Notice of Contract subcontractors and suppliers must file is also similar, but with one significant addition. The new form requires a summary statement of the subcontractor’s or supplier’s account at the time the notice is filed. The summary is not intended to be a binding or final statement of claim. Its purpose is simply to advise the owner as to the approximate amount of its lien exposure.
The second step in enforcing a mechanic’s lien (after filing the Notice of Contract) involves filing in the Registry of Deeds a true and accurate Statement of Claim setting forth the amount due for contract and extra work less any payments and credits. Usually that statement will be filed after the claimant completes its work. But it must be filed no later than 90 days after the owner and general contractor file the Notice of Substantial Completion; or no later than 120 days after the owner files a Notice of Termination; or, if neither notice is filed, within 120 days after the last work is performed by anybody. Failure to file this Statement of Claim by these statutory deadlines results in automatic dissolution of the lien. Of course there is no necessity to wait for these deadlines to approach. The most sensible practice is for the claimant to file the Statement of Claim as soon as its work is complete, or immediately after learning of the termination of the general contract.
The third step in enforcing a mechanic’s lien is to file a timely law suit. The New lien statute requires the lawsuit be filed within 90 days after the Statement of Claim is filed. An attested copy of the complaint, which starts the lawsuit, must be filed in the Registry of Deeds within 30 days after the law suit is commenced. Failure to meet these deadlines automatically dissolves the lien.
Because the various deadlines for establishing and enforcing a mechanic’s lien are tied to the date either the Notice of Substantial Completion or Notice of Termination is filed, subcontractors and suppliers need to know when that happens (the general contractor will already know because it must agree to the substantial completion date and it will be the first to know if its contract is terminated). The New lien law addresses this need by requiring the owner and the general contractor to provide actual notice to most subcontractors and suppliers. First, the owner is obligated to notify every subcontractor and supplier who has filed a Notice of Contract. Second, the general contractor is required to notify those subcontractors and suppliers with whom it has a direct written contract. And third, the general contractor is required to notify all lower tier sub-subs and suppliers who previously sent the general a notice identifying themselves, the work they are providing, who they are working for and the amount of their contract.
The only deadline that could prove tricky is one triggered by the owner terminating the general contract long before substantial completion. But anyone paying attention should get wind of a termination even without actual notice. And even if news of that termination is slow in arriving, the deadline for filing a Notice of Contract does not occur until 90 days after the Notice of Termination is filed; and the deadline for filing the Statement of Claim does not occur until 120 days after the Notice of Termination.
Whatever the problems with the new deadlines, they are far more liberal and forgiving than deadlines tied to original contract completion dates as under the old lien law. Not many jobs finish within the original completion date, and many contractors and subcontractors lost their lien rights under the old law because the contract completion date passed before the need for payment security became apparent. That should not happen under the New lien law because, absent termination of the general contract, the time for filing a lien extends for several months beyond the actual (not the projected) completion of the work.
Even though claimants may now wait longer to assert their lien, filing a Notice of Contract early in the job is always an advantage because it increases the amount of security provided by the lien. The general contractor’s lien security is the owner’s equity in the land and buildings. To the extent the bank financing the project advances money on the loan before the contractor files its Notice of Contract, the owner’s equity, and therefore the contractor’s security, is diminished. The lien security of most subs and suppliers is limited to the balance remaining unpaid on the general contract at the time they file their Notice of Contract. The later in the job a sub or supplier files its Notice of Contract, the less the amount unpaid on the general contract, and consequently the lower the payment security afforded by the lien.
Lower tier sub-subs and suppliers to subs may have even less security. That group of claimants must provide the general contractor a notice identifying themselves and their work within thirty days of starting their performance. If they provide that notice, their lien security will be the same as direct subs and suppliers (the amount unpaid on the general contract when their Notice of Contract is filed). If they do not identify themselves to the general contractor within the thirty days, their lien security is limited to the unpaid balance of the contract between the general contractor and the direct subcontractor, at the time their Notice of Contract is filed.
In addition to changing deadlines allowing later opportunity to enforce a mechanic’s lien, the New lien law is also less adversarial then the old. Under the old law the filing of any Notice of Contract created immediate crisis because the owner’s bank immediately halted all further advances on the construction loan, stopping the project in its tracks. For that reason many general contractors were reluctant to file for a mechanic’s lien until the need for payment security became critical. Often that occurred late in the project after the time for filing a lien had expired. The New lien law prohibits the lending bank from refusing to advance funds solely because a general contractor files its lien, so long as the general contractor provides a statutory partial waiver and subordination of lien. That waiver and subordination lets the bank keep its priority ahead of the general contractor for loan proceeds advanced by the bank after the general files its lien, except for retainage on which the general acquires the priority right. This arrangement allows the bank to continue funding the project, and permits the general to assess its payment position each month before providing any waiver or subordination. That moderate concession in a general contractor’s lien security is outweighed by the benefit in added security most general contractors will enjoy by filing their liens early in the job.
The lending bank is not required to continue advancing loan proceeds over Notices of Contract filed by subcontractors and suppliers. That is because subcontractors and suppliers obtain a priority security interest ahead of bank loan advances from the moment they file their notice. However, liens asserted by subs and suppliers are less likely to result in a cut off of funding. First, the contract amounts of subs and suppliers are far less than the general contract price. Second, the New lien law requires subs and suppliers to include a summary of their account in their Notice of Contract, which enables the lender to more easily assess its exposure. And third, that summary makes it easier for the general contractor or owner to relieve the lender of risk by either bonding off liens of subcontractors and suppliers or bringing their payments current. The result is that under the New lien law it is far more likely a sub or supplier asserting its lien will either be paid or provided alternative payment security in the form of a bond, than it is the bank will stop further loan advances.
One of the more progressive features of the old law is preserved in the New lien law. The New law continues to prohibit any contract clause seeking to prevent a general contractor, subcontractor or supplier from asserting, pursuing or enforcing its mechanic’s lien rights. Any such contract clause is by statute void as against Massachusetts public policy, and unenforceable.
The New lien law also seeks to assure efficient court enforcement of procedural requirements governing lien eligibility. It allows the court to quickly resolve procedural disputes, and to clear the record of liens that are either invalid or unenforceable. The ability on short notice to clear the record of improper or dissolved liens facilitates the flow of funds and avoids the unnecessary posting of bonds.
While the New lien law remains complicated there is no doubt it increases lien security by pushing back filing deadlines and broadening the scope of work entitled to lien protection. The result is better payment protection for those building and supplying private construction, while at the same time maintaining a clear record at the Registry of Deeds.*
*Considerable credit belongs to those representatives of various trade groups whose tenacity and creativity in reconciling competing economic interests contributed to the drafting and passage of the New lien law, including David E. Wilson, a contributing editor to Construction Law Comments and a partner at Corwin & Corwin LLP.
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