July 15, 2016
A disgruntled contractor or supplier may attempt to collect a payment from owners by filing a Memorandum for Mechanics Lien against the real estate. Under Virginia law, claimants (contractors or material suppliers) can interfere with owners’ ability to sell or refinance property by filing a lien in land records without first filing a lawsuit and obtaining a judgment.
A March 2016 opinion by federal Judge Leonie Brinkema shows why purchasers at Virginia foreclosure sales must give care to mechanics liens. In April 2013 and October 2015 Jan-Michael Weinberg filed a Memorandum of Mechanics Lien against a Fairfax County property, then owned by Ann & James High. J.P. Morgan Chase Bank later foreclosed on the High property. In early 2016, Mr. Weinberg brought a lawsuit to enforce the mechanics lien against J.P. Morgan Chase and the property.
If a claimant pursues a Memorandum for Mechanics Lien correctly, the property may be sold to satisfy the secured debt. A Memorandum for Mechanics Lien is a two-page form that anyone can download online for general contractors or subcontractors. The filing fee is a few dollars. By contrast, removal of the lien may require significant time and attention by the owner. Overall, it is best for owners to work with their advisory team to avoid having contractors file mechanics liens in the first place. Sometimes, disputes cannot be easily avoided and owners must deal with recorded liens. A Memorandum for Mechanics Lien differs from a mortgage or a money judgment. Fortunately for the owner, Virginia courts apply strict requirements on contractors pursuing mechanic’s liens. Just because a contractor fills out all the blanks in the form that doesn’t meant it necessarily is valid. This blog post is a brief overview of key owner considerations. The Weinberg case provides a good example because the court found so many problems with that lien.
- Who? The land records system in Virginia index by party names. For this reason, the claimant must correctly list its own name and the name of the true owner of record. The owner’s team will need a title report and the construction contract. Whether the claimant is a general contractor, subcontractor or supplier will determine which form must be used. Mr. Weinberg’s Memorandum for Mechanics Lien claimed a lien of $195,000. Virginia law requires a contractor to have a “Class A” license for projects of $120,000 or more. Judge Brinkema found this Memorandum defective because Weinberg’s claim was not supported by a reference to a Class A license number. In some residential construction jobs, the Virginia Code requires appointment of a “Mechanic’s Lien Agent” to receive certain advance notices of performance of work from claimants that might later become the object of a mechanics lien. This creates an additional hurdle for the contractor, suppliers and subcontractors. In many construction projects, the builder works with the owner’s bank to obtain draws on construction loans. If mechanics lien disputes arise, owners can work with the bank to obtain documents.
- What? The Memorandum for Mechanics Lien must describe the dollar amount claimed and the type of materials or services furnished. The written agreement determines the scope of work, payment obligations and other terms. Generally speaking, only construction, removal, repair or improvement of a permanent structure will support a mechanics lien. Mr. Weinberg claimed that he conducted “grass, shrub, flower care,” “week killer,” “tree removal/cutting,” general property cleanup,” “infrastructure work,” “planting grass,” “site work,” “general household work” and “handy man jobs.” The Court found that this description of work was invalid. The work described was either landscaping or too vaguely connected to actual structures. Where the agreement was for work that could actually be the basis of a mechanics lien, the owner should consider how much of the work the contractor actually performed? Is the work free of defects? Does the Memorandum state the date the claim is due or the date from which interest is claimed?
- When? The contractor or supplier must meet strict timing deadlines for the mechanics lien. Generally speaking, the Memorandum for Mechanics Lien must be filed within 90 days from the last day of the month in which the claimant performed work. Judge Brinkema observed that Mr. Weinberg failed to indicate on the Memoranda the dates he allegedly performed the work. Also, no Memorandum may include sums for labor or materials furnished more than 150 days prior to the last day of work or delivery. Furthermore, the claimant must bring suit to enforce the lien no more than 6 months after recording the Memorandum or 60 days after the project was completed or otherwise terminated. Weinberg’s 2013 Memorandum was untimely because he did not sue to enforce it until 2016. Because Weinberg’s 2015 Memorandum was the same as the 2013 version, they both probably describe the same work on the property.
- Where? The Memorandum for Mechanics Lien must correctly describe the location of the real estate that it seeks to encumber. If it lists the wrong property, the lien may be invalid. Property description problems frequently arise in condominium construction cases because the same builder is doing work in the same building for multiple housing units. The Memorandum must be filed in the land records for the circuit court for the city or county in Virginia where the property is located.
- Why? There is usually a reason why a contractor decides to file a Memorandum for Mechanics Lien instead of pursuing some other means of payment collection. The Highs allegedly didn’t pay Weinberg for his landscaping and handyman services. The Highs’ weren’t able to pay their mortgage either. Weinberg filed for bankruptcy. In order to resolve a mechanics lien dispute with a contractor, an owner should consider how the dispute arose in the first place. Is someone acting out of desperation, confusion, or is the lien a predatory tactic? Could investigation need some other explanation?
- How? The owner must understand how the mechanics lien dispute with the contractor relates to the overall plan for the property. Mr. Weinberg tried to use mechanics liens to collect on debts. At the same time, he went through bankruptcy and the property went through foreclosure. Context cannot be ignored. Few owners can afford to remain completely passive in the face of a dispute with a contractor. The owner may have a construction loan or other debt financing to consider. An unfinished project is difficult to sell at a favorable price. Potential tenants won’t lease unfinished property.
On March 15, 2016, Judge Brinkema denied Mr. Weinberg’s motion to amend his lawsuit and dismissed the case. When a contractor or supplier files a Memorandum of Mechanics Lien against property, the owner must carefully consider whether to pay the contractor directly, deposit a bond into the court in order to release the lien and resolve the dispute with the contractor later, bring suit to invalidate the lien on legal grounds or simply wait 6 months to see if any suit is brought in a timely fashion to enforce the lien. Fortunately for owners, there are strict requirements on contractors for them to take advantage of mechanics lien procedures. A Virginia property owner should consult with qualified legal counsel immediately upon receipt of a Memorandum of Mechanics Lien to protect her legal rights.
Case Citation: Weinberg v. JP Morgan Chase & Co. (E.D. Va. Mar. 15, 2015)