The construction lien: a necessary evil?

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Construction liens in Oregon date back to statehood in 1859. The modern form of a construction lien was first conceived by Thomas Jefferson to encourage construction of the new federal capital city of Washington, while still a city in Maryland. Even prior to that, a lien-like privilege existed in many European countries.

A lien is a means of recovery, beyond the contract claim, for contractors and suppliers against the owner or general contractor who fails to pay for services or materials in the first instance. The lien is designed to create a security interest in the improved real property. With a properly perfected construction lien, the unpaid contractor or supplier may foreclose the lien and seek recovery through the value of the real property itself. In Oregon, unlike other states, the lien claim may even have priority over a prior recorded mortgage in favor of a lender.

So, what are the public policy considerations that have led legislatures in all 50 states to create this recovery mechanism for contractors and suppliers?

First and foremost, lien rights stimulate construction activity. Contractors or material suppliers are more likely to extend credit to the owner or general contractor knowing the real property itself may be an asset to ensure payment of claims. To avoid foreclosure, owners or lenders often pay claims promptly. This allows the contractor or supplier to move to the next job and create more construction activity.

Also, there is a sense of fairness associated with the lien process. With every new wall, roof or toilet installed on the building site, value is added to the real property. A construction lien means that the person who supplied the labor or materials to the site will be paid for the added value their construction activity created.

Finally, construction lien statutes set up an equitable and timely procedure to treat all potential lien claimants fairly. The process avoids the “race” to the courthouse or to the construction lender by competing claimants and makes sure all valid claims are treated equally. Multiple claims are consolidated into a single lawsuit and, by law, that lawsuit is given priority on the calendar docket ahead of other civil lawsuits.

But what about a situation in which the general contractor has already been paid in full by the owner/lender, but has failed to pay a contractor or supplier? Is it fair to force the owner or construction lender to pay twice for the same services or material in order to save the property from foreclosure?

Public policy issues almost always seek to strike a balance between competing interests, and the construction lien law does the same. To help offset the tilt in favor of the contractors and suppliers, strict compliance with many procedural requirements is mandated by Oregon law in order for the contractors or suppliers to take advantage of that “tilt.”

Unless the person has been asked to furnish the labor or materials directly by the owner, all potential lien claimants must deliver to the owners a notice of a right to a lien, informing the owner that the contractor or supplier has commenced furnishing the labor, materials or equipment to the construction site. Without delivery of the notice, no lien may be filed. Armed with this knowledge, there are several alternative steps an owner can take to avoid being forced to pay twice, such as writing joint checks or demanding lien waivers from the contractors or suppliers.

Oregon law also mandates very restrictive timing on when liens and related notices must be filed or delivered to interested parties. Failure to follow the procedure may result in the loss of the right to collect attorneys’ fees in the enforcement of the lien, or even a waiver of the lien itself.

To gain the benefits of a lien, the contractor or supplier must be prepared to prove it followed the statutory procedure in strict conformance with its terms. That procedure is designed to give the owner the necessary information to identify the parties working on the property and take the necessary protective precautions.

A construction lien can be a useful and valuable tool to enable a contractor or supplier to recover the value it adds to a construction project. However, great care must be taken to assure those rights are protected.

Owners, contractors/suppliers and lenders all have substantial legal interests at stake in the creation and enforcement of construction liens. Each one should seek competent legal advice when faced with construction lien issues.

Tom Hillier focuses on real estate – especially acquisitions, dispositions and development of real property – as a partner in the Portland office of Davis Wright Tremaine LLP. Contact him at 503-778-5317 or at [email protected].