on January 5, 2015
In laymen’s terms, a mechanic’s lien is a tool whereby a subcontractor can attach a security interest on property that it has contracted to do work on. This lien operates to protect the subcontractor’s interest in payment for work provided in the event that the general contractor does not pay in full. While a subcontractor can file a Notice of Contract, which is the first step in perfecting a mechanic’s lien, at any time after the ink dries on its subcontract, it is a common practice to defer asserting a lien against the property until it is clear that one is in danger of not getting paid. This “wait and see” approach, while good for business relations, can be risky for subcontractors. Given recent developments in Massachusetts law, subcontractors may need to start asserting mechanic’s lien rights much earlier in order to benefit from the remedy at all.
In Massachusetts, the first steps of the procedure that a subcontractor must follow in order to establish a mechanic’s lien are governed by G. L. c. 254, § 4. This section also defines the limit of the remedy provided. Specifically, § 4 states that “[s]uch lien shall not exceed the amount due or to become due under the original contract [i.e., the contract between the owner and the general contractor] as of the date notice of the filing of the subcontract is given by the subcontractor to the owner.” This quoted language is colloquially known as the “amount due” clause. The recent interpretation of this language by the Massachusetts Appeals Court will likely have far-reaching implications for subcontractors going forward.
The “amount due” clause was recently interpreted to severely limit the ability of subcontractors to recover payment due via the mechanic’s lien process. In Superior Mech. Plumbing & Heating, Inc. v. Ins. Co. of the West
, 81 Mass. App. Ct. 584 (2012) (“Superior Mechanical
”), the court stated a new rule for the interpretation of the “amount due” clause. Previously, so long as notice of a mechanic’s lien was filed prior to the formal termination of the contract between the general contractor and the property owner, the subcontractor could count on having the benefit of some security from the lien. Now, subsequent to the ruling in Superior Mechanical
, the test for whether or not the subcontractor has the ability to recover payment via a mechanic’s lien requires that the court “[l]ook to whether the general contractor was entitled to payment under the terms of the general contract, and not solely to when formal termination occurred, in determining whether additional payments were due the general contractor at the time the owner received notice of the lien.” This new test implies that a subcontractor may be precluded from accessing the remedy afforded by a mechanic’s lien much earlier in the process than before.
In Superior Mechanical
, for example, a mechanic’s lien asserted by a subcontractor was held to have no value where the lien was created after the general contractor had materially breached its contract with the property owner but before the property owner issued a formal termination letter to the general contractor. The original contract in question contained a clause that required the general contractor to promptly pay its subcontractors upon receipt of payment from the property owner in order to receive future payments. Accordingly, once the general contractor stopped making payments to its subcontractors, it materially breached its contract with the property owner and no more money was “due or to become due” to the general contractor from that point forward. Thus, the court ruled that the date of the material breach of the terms of the general contract (rather than the formal termination date) was the decisive factor and that the subcontractor could not recover because, at the time its lien was filed, no money was due (or to become due) to the general contractor under the original contract. In other words, the reason the subcontractor filed the lien in the first place – nonpayment by the general contractor – was the material breach that excused the owner from liability to the subcontractor under the lien statute.
Further, it is important to note that this new interpretation of the “amount due” clause has been cited in a subsequent Appeals Court case as good law supporting a similar holding. More specifically, in Nat’l Lumber Co. v. Blackwood Dev. Corp.
, 2014 Mass. App. Unpub. LEXIS 657 (Mass. App. Ct. May 20, 2014), a subcontractor was barred from recovery via a mechanic’s lien where the property owner had a judgment against the general contractor. The judgment against the general contractor both exceeded the amount due under the original contract and predated the subcontractor’s assertion of a lien. As a result, the court held that there was no amount due or to become due to the general contractor at the time the lien was filed, which effectively barred the subcontractor’s right to access payment via a mechanic’s lien.
The positive treatment of this new “amount due” rule by the courts is indicative of its staying power. Thus, subcontractors need to be aware of what this means for their business going forward. This new rule shifts the incentives and risks regarding the timing of filing a mechanics lien. In the past, with relatively little potential for loss of security, subcontractors could wait and see whether a situation necessitating a lien actually arose. Now that approach may be too risky.
In the course of a project, there are an infinite number of situations that could prevent any further payment from becoming due to the general contractor prior to the formal termination of its contract. Under the new rule, this creates much more uncertainty for subcontractors. Accordingly, subcontractors now have an incentive to initiate the lien process much earlier, and prior even to a payment issue arising. Failure to do so can cost the subcontractor the security that mechanic’s liens were designed to provide.
Strang Scott is a dynamic business and litigation firm, dedicated to serving the needs of businesses of all sizes.