July 1, 2005
The Illinois Mechanic’s Lien Act provides a powerful collection tool to general contractors, subcontractors and material suppliers who provide labor or materials for the construction of improvements on private projects. It allows a contractor or material supplier to attach a lien to the improved property and ultimately have the property sold to pay the balance due under the lien claim. Absent a mechanic’s lien, a general contractor is limited to a breach of contract action or unjust enrichment claim against the property owner, and a subcontractor or material supplier is limited to an action against the party it contracted with, usually a general or other subcontractor. On the other hand, the Act forces an owner to deal with a balance due to a contractor or a material supplier even though the owner did not directly contract with either party.
The Act is very specific about when liens can be used, and, because the mechanic’s lien is a powerful legal tool, the lien or must comply exactly with the Act’s requirements. A general contractor, that is the party contracting directly with the owner, must record its claim for lien with the Recorder of Deeds in the county where the property is located within four months of the last day of providing labor or materials for the property. In addition, the general must file suit within two years of the last day of supplying labor or materials to the property. If the general contractor fails to record its claim for lien within the four – month period, it may enforce its lien claim against the owner. However, the lien claim would not take priority over other parties with an interest in the property, such as lenders and other lien claimants.
Because subcontractors and material suppliers do not have a direct contractual relationship with the owner, the Act imposes an additional burden for these parties to perfect their lien claim. The subcontractor or material supplier must serve the owner and owner’s lender with a 60 – day notice of its intent to lien the property on single family owner – occupied property, and must supply the owner and the owner’s lender with a 90 – day notice on all other types of property. If a subcontractor or material supplier has not been paid within 10 days of service of its notice of intent to lien, it may record its claim for lien with the Recorder of Deeds in the county where the property is located. This claim for lien must be recorded within four months of the last day of supplying labor or materials on the property.
Similar to the general contractor, a subcontractor or material supplier must file suit within two years of last supplying labor or materials to the property. Failure to file suit within this two – year period renders the lien claim null and void. If a subcontractor or material supplier fails to serve its 60 – or 90 – day notice, as the case may be, it may still enforce its lien claim but only in an amount which is listed as being due on a sworn statement provided by the general contractor to the property owner.
Once a contractor or material supplier records a claim for lien against the property, that lien becomes a blemish on the title to the property. During the period that the lien is valid, the lien must be addressed in order for the owner to sell or refinance the property. In addition, the owner may be pressured by its lender to address the lien claim, due to the fact that the recording of a lien claim by a contractor or material supplier affects the lender’s security position in the property. Under the Act, a properly perfected mechanic’s lien dates back to the date of the general contractor’s contract with the owner. While unusual, it is possible that the general contractor contracted with the owner for the construction of improvements prior to a lender’s security interest attaching to the property. If this is the case, the lien claim takes priority over the lender’s mortgage in the property. To the extent there is insufficient equity in the property to pay both the lien claim and the mortgage interest, the lender becomes unsecured in its position. In addition, a lien claimant may take priority over the lender’s mortgage to the extent the labor or materials supplied by the lien claimant enhance the value of the property beyond the value of the property at the time the mortgage was recorded. For these reasons, most mortgages contain clauses which provide that it is an event of default under the mortgage if a mechanic’s lien is recorded against the property unless the owner provides the lender protection from the lien claim.
Every participant in a private construction project should have a fundamental understanding of the mechanics lien process. Perfecting your lien and knowing what to do once a payment dispute arises is crucial. D&L has been practicing in the area of construction law for over 35 years and regularly counsels parties in the construction industry, including general contractors and subcontractors, homeowners and condominium associations, owners and developers, and material suppliers. Our next issue will address the mechanic’s lien process from the private owner’s viewpoint.