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PROTECTING SUBCONTRACTORS’ MECHANICS LIEN RIGHTS

With the recent slowdown in the real estate market, developers are slower to pay their contractors and general contractors are slower to pay their subcontractors. Even worse than slow pay is the possibility of a large construction project ending up in bankruptcy or receivership, with no assurance of payment at all.

Under these circumstances, it is especially important for construction trades subcontractors and material suppliers to protect the rights afforded to them by the Mechanics Lien Act. The Mechanics Lien Act provides several important benefits to construction subcontractors and material suppliers:

• First, it creates a security interest in favor of the subcontractor or supplier against the real property where the construction project is located, effectively giving the subcontractor or supplier “collateral” for the money owed to it by the owner, developer, or general contractor;
• Second, it allows a subcontractor or supplier to sue not only the general contractor (who may be insolvent or otherwise judgement proof) for breach of contract, but it allows the subcontractor or supplier to sue the property owner as well, providing another pocket to collect from;
• Third, in the worst case scenario, a properly perfected mechanics lien will give the subcontractor or supplier the status of a “secured creditor” in bankruptcy, with priority rights to collect funds superior to those of unsecured creditors.
• Fourth, it awards 10% per annum simple interest on the amount due, which begins to accrue at the time the amount is properly payable to the subcontractor or supplier under the parties’ agreement.

These are all important benefits for subcontractors and suppliers concerned about collecting funds due them. However, these benefits are available only to the subcontractor or supplier who has properly “perfected” its lien. In order to "perfect" a lien, the subcontractor or supplier must serve and/or record a lien notice in strict compliance with statutory deadlines. These deadlines generally begin to run on the “last day of work,” i.e., the last day the subcontractor performed substantive work at the project or the supplier delivered materials to the project. Although the “90-day deadline” is the most well-known to Illinois subcontractors, the deadlines vary depending on the type of project and the type of lien claimant: public job or private job? General contractor or subcontractor? Residential or commercial? Numerous factors need to be considered.

If the subcontractor fails to strictly comply with the deadlines and other technical requirements of the Mechanics Lien Act, it will typically lose all the benefits created by the Act. The subcontractor likely will still possess a breach of contract claim against the general contractor, but this is often an unsatisfactory remedy and, in some situations, no remedy at all.

For this reason, it is imperative that subcontractors and suppliers zealously protect their mechanics lien rights. If still owed funds more than 30 days after completion of a job, or if there is any indication that collection may become a problem, subcontractors and suppliers should contact their attorney to ensure that the benefits provided by the Mechanics Lien Act are not irrevocably waived.