What is a lien?
A lien is a legal claim or encumbrance placed on a property or asset to secure the payment of a debt or obligation. It gives a creditor the right to take or sell the property if the debtor fails to fulfill their financial obligations. In essence, a lien serves as a form of collateral or security for the creditor.
Liens can arise in various situations, such as:
- Mortgage Liens: When a person purchases a property using a mortgage loan, the lender typically places a mortgage lien on the property. This lien gives the lender the right to foreclose on the property and sell it to recover the outstanding loan balance if the borrower defaults on their mortgage payments.
- Tax Liens: Government authorities, such as the Internal Revenue Service (IRS) in the United States, can place a tax lien on a taxpayer’s property if they fail to pay their taxes. Tax liens ensure that the government has a claim on the property in case of non-payment.
- Judgment Liens: If a creditor successfully sues a debtor and obtains a judgment, they may seek to enforce the judgment by placing a judgment lien on the debtor’s property. This lien provides security for the creditor to collect the owed amount from the sale of the property.
- Mechanic’s Liens: Contractors, subcontractors, or suppliers who have provided labor or materials for a construction project and have not been paid may file a mechanic’s lien on the property. It allows them to seek payment by placing a claim on the property.
- Consensual Liens: Liens can also be created by mutual agreement between a debtor and a creditor. For example, when someone takes out a car loan, the lender may retain a lien on the vehicle until the loan is fully repaid. This ensures that the lender has the right to repossess and sell the vehicle if the borrower defaults on the loan.
It’s important to note that liens can vary in priority and may be subject to different laws and regulations depending on the jurisdiction. The specific procedures for enforcing or releasing a lien also depend on the applicable laws.
A lien creates a new and additional source to recover payment of the debt. For example, in the event of nonpayment, your first line of recovery would typically be a breach of contract claim against the party who hired you.
At McDonnell Coates LLP, our attorneys recommend you timely and properly file a Lien against the Property, then you will have the following additional rights and protections: (1) to file a Lawsuit to foreclose on the Lien and force a sale of the Property; (2) a Lien against any funds held by the Property Owner and due to the General Contractor; (3) the right to be paid directly by the Property Owner if the General Contractor does not timely dispute the amount owed in writing; and (4) if the Property Owner pays the General Contractor after receiving a timely Pre-Lien Notice (with “fund trapping” language), then the potential right to force the Property Owner to pay twice for your work.
The “Lien Process” is also an excellent way to gain leverage in negotiating a resolution of the debt. Moreover, if you file a Lawsuit and prevail on foreclosing on the Lien on a commercial project, then you are entitled to recover all reasonable attorneys’ fees and costs.