SUMMARY OF MECHANICS LIEN LAW FOR MINNESOTA As of 2013 Section Contents Pre-lien Notice(s) Name of Notice Who Must Use This Notice When How to Serve Verified or notarized? Section Contents Mechanic s Lien Who is Entitled to a Lien? When to File/Record Where to File/Record How to Serve Amount of Lien Property Subject to the Lien Furnishing Information Verified or Notarized Priorities Lien Release Bond Miscellaneous Issues Section Contents Lawsuit to Foreclose Lien Introduction When Where to File Arbitration Need a Lawyer? Page 1 of 12
General Notes Be Careful: The courts consider a mechanic=s lien to be a privilege and not a right. You receive its benefits only if you strictly adhere to the state law requirements. Bottom line: miss a deadline by one day and you have lost it. Unlike other areas of the law where you can argue equities, find technical exceptions, and lawful excuses, there is no forgiveness here. In this case, knowledge is not only power, it=s a necessity. In this State you will be writing down dates for at least four documents: a) General Contractor=s Notice; b) Lien Claimant=s Notice; c) Mechanic=s Lien; and d) lawsuit to foreclose the mechanic=s lien. Write down all the deadlines in your calendar. Use a highlighter or red pen. If you have a staff, use a Afail safe@ system by doubling up and putting it in their calendar also. This reminds you twice. The first calendar entry should be two weeks before the due date as a preliminary reminder. On the second calendar entry, do a white lie to yourself. Put the due date as one week before it is actually due as insurance in case you get busy or need legal advice. Time is money. You will waste a lot of valuable time running around and doing it at the last moment, as opposed to doing it early. PRELIEN NOTICE This state requires Notices be sent out before the mechanic=s lien is filed/recorded. For simplicity, these notices will be referred to as APrelien Notices@. The basic information on these notices is as follows: GENERAL CONTRACTORS Name of Notice: Who Must Use this Notice: General Contractor=s Notice All contractors who have a direct contract with the owner and who, in turn, sub out portions of the work to subcontractors. For example, a traditional general contractor with a direct verbal or written contract with the owner who acts as the prime and who hires one or more subcontractors is required to give the Notice. But if the prime contractor does all the work with his or her own crew, the Notice would not be required. And, a Page 2 of 12
subcontractor who has a direct contract with the owner would not have to serve the Notice, assuming there are no subsubcontractors involved. This notice is only required for smaller residential projects in which it is assumed by the State that the owners are not sophisticated. There is no need to serve this prelien notice on the following projects: (1) work is done to commercial (and non-agricultural) property or part commercial and residential property in which you are performing the following work: a) new commercial construction of 5,000 or more square feet of usable space; b) adding an additional 5,000 square feet to an existing commercial structure; c) not adding-on, but working on a commercial structure that is already 5,000 or more square feet. 2) as described above, the notice is only required for smaller residential property (remodels and new construction). If the improvement is for five or more family residential units, especially condominiums and subdivisions, the notice is not required. Finally, the notice is not required, regardless of the nature of the project, if the general contractor will not be entering into a contract with any other subcontractors or suppliers and will do everything himself or herself by the company=s own crew. When: How to Serve: Verified or Notarized?: See Time Deadlines table. This notice must be included in all written contracts with the owner, in 10-point bold type or typewritten in capital letters. It is served upon the owner by giving him or her a copy of the contract which contains these provisions. If there is only a verbal contract, the notice must be delivered to the owner by certified mail, return receipt requested. A verified notice simply means you sign it and are representing the contents are true and accurate. A notarized notice is signed in front of a Notary Public or other official. The notice need not be notarized or verified. Page 3 of 12
Name of Notice: Lien Claimant=s Notice SUBCONTRACTORS AND SUPPLIERS Who Must Use this Notice: How to Serve: All contractors, subcontractors, laborers, and material/equipment suppliers who do not have a direct contract with the owner or the owner=s agent. For example, a general contractor with a direct verbal or written contract with the owner who acts as the prime is not required to give the Notice. The prelien notice is not required if the project falls into the same categories as described above for the GENERAL CONTRACTORS= notice. In other words, the same exceptions apply, including the fact that the notice is only allowed for small residential projects and is excluded for most commercial and industrial projects. See the discussion above under GENERAL CONTRACTORS. If there is such an exception, there is no requirement whatsoever for the subcontractor or supplier to send out any prelien notice before recording the mechanic=s lien. Assuming the prelien notice is required, it should be served on the owner or agent by certified mail, return receipt requested. As seen by the Time Deadlines Table, this must be served within 45 days after the claimant first furnishes labor and/or materials to the project. However, it is recommended that it be sent out as soon as your contract is signed. Remember that the total amount of liens on an owner=s property will always be reduced by the payments made to the general contractor prior to receiving the lien claimant=s prelien notice. If you wait too late, the owner may have paid the general contractor completely and you will have no lien rights at all. If you do not know the owner=s name and address, you can call the county property taxation office or the county recorder and they, in many cases, will tell you over the telephone the name and address of the owner. You can also receive this information from a local title insurance company. Verified or Notarized?: The notice does not have to be notarized or verified. Page 4 of 12
MECHANICS= LIENS Who is Entitled to a Lien: A mechanic=s lien is primarily for general contractors, subcontractors, laborers, as well as material/equipment suppliers. Generally, there is no requirement that the materials furnished be actually used or incorporated into the improvement, assuming they were furnished in good faith to the site. There is still some uncertainty as to an architect=s lien. In one case decided by a Minnesota court, an architect prepared plans for a developer but the project was eventually abandoned. The court nevertheless held that a mechanic=s lien could be placed against the property, especially since the owner was not only aware of the contract with the architect and the developer, but actively participated in the architect=s work. It is uncertain what the rule would be if the owner had not participated so directly. Remember that in many states design professionals receive a lien only if the project begins and there some actual physical improvement. A supplier furnishing to another supplier or a supplier who furnishes materials merely to a contractor=s inventory, is not entitled to a lien. A subcontractor or supplier who has a contract with a subcontractor is allowed a lien, but not any further down on the tier. Thus, a subcontractor or supplier who has a contract with a sub-subcontractor is not entitled to a lien. If a supplier, even though it is custom manufactured, supplies materials to another supplier who sells same to a subcontractor, the first supplier is not entitled to a lien, as this is considered too remote. When to File/ Record: Where to File/Record: How to Serve: See Time Deadlines table. Recorded with the county recorder or registrar of titles in the county where the project is located. After recording the mechanic=s lien, it should be served by certified mail, return receipt requested, on the owner and the person with whom you have your contract. Page 5 of 12
Amount of Lien: Primarily for unpaid labor, material, and equipment supplied. Interest is recoverable and may be included in the lien. It is broken down into two as segments: 1. Legal rate of interest. Starts from the date of first billing on the delinquency per section 514.135. The actual language in the code states: from the time the underlining underlying obligation arises. This is based on the legal rate of interest in the state under section 334.01--that being 6%. It is not compounded. This segment ends 30 days after last furnishing the labor and materials. For example, assume you worked in the months of May, June and July (last day worked is July 31 st ), but were last paid through June. You have set out your July bill on August 1. You will receive interest at the legal rate on your lien from July 1 through September 1st. 2. Court rate of interest. Starts from the earlier of 1) filing a lawsuit to foreclose the mechanic s lien, 2) making a written demand for arbitration, or 3) the time of a written notice of claim, until paid in full. Technically, the written notice of claim could be anything in writing, including correspondence between the parties, an email demand, a fax copy of your invoice, or the mechanics lien itself. For claims of $50,000 or less, it is the rate set by the secondary market yield of a one year Treasury Bill (Section 549.90). For claims above $50,000, it is 10%. Again there is no compounding. On the other hand, if you have a higher rate of interest in your contract, this will apply. For this reason, it is a good idea to include finance charges in your contract. The only exception, logically, is you cannot charge usurious interest or finance charges. In the trade, is common to have interest at ½% per month. Costs includable in a lien also consist of the following work: Fence construction, grading, filling in or excavating, clearing, grubbing or first breaking, furnishing or placing soil or sod, planting material, insurance premiums (if included as part of overhead), withholding and sales taxes, transportation and freight costs for delivery to the project, and fuel used in connection with the performance of the work. Page 6 of 12
The following are not included in a lien: Surety bond premiums, extra materials not authorized by the owner, and Asoft@ costs, including services related to obtaining project financing, zoning variances, and coordinating project leasing arrangements. Reasonable attorney=s fees are awarded to the prevailing party as part of the lien foreclosure lawsuit. The amount is determined by the court. It must have a reasonable relationship with the amount of the judgment. You cannot have a judgment for $5,000 with attorney=s fees for $50,000. Property Subject to the Lien: A mechanic=s lien applies only to private projects. No lien is allowed in public projects against government property. This usual rule that no mechanic=s lien may be against public property has been blurred in Minnesota. There is a case that involved the development by a city of private business sites. Because the property was not classic Apublic@ property, the court held that a mechanic=s lien was valid. Obviously, a mechanic=s lien would not apply to public facilities such as a firehouse, school, or county jail. There is a different issue as to tenant improvements. Most landlords do not want to have their property subject to a lien so they have the right, within 5 days after knowledge of the work, to post a special notice, in a conspicuous place on the project, advising persons that their property will not be subject to such a lien. This is one of the forms included in this section. So, if you do tenant improvement work, your only redress, after receiving such a notice, is to enforce the lien against the tenant=s interest in the lease or the improvements on the property. Generally, personal property or trade fixtures is not lienable, since they can be removed by definition and are therefore not considered a part of the real estate (only real property is subject to a lien). Furnishing Information: Upon request, the general should furnish others with information about the owner so the required notices and lien can be filled out properly. Verified or Notarized?: A verified notice simply means you sign it and are representing the contents are true and accurate. A notarized notice is signed in front of a Notary Public or other official. A verified Page 7 of 12
notice is all that is required in this state. The lien must be notarized but is not required to verified. Priorities: In the event of a foreclosure on the lien, all lien claimants recover Apro-rata@ on their liens regardless of when they were filed. In other words, their recovery is based upon the amount of the lien in relation to each other. A construction lender=s mortgage will take priority over mechanics= liens only if it is recorded before work begins. Surveyors= stakes, engineering services and land surveying, soil testing and boring do not constitute Aactual and visible@ work which triggers the beginning of the project. There must be something else, including grading or the setting of foundations. If this occurs before the construction loan is recorded, all mechanics= liens will take priority. Remember, if mechanics= liens are second in priority, and the mortgage lender forecloses on the property, there is usually left for the lien claimants. Lien Release Bond: A lien may be released from the property by the owner making a deposit in court or securing a surety bond for an amount not less than the combination of: (1) the mechanic=s lien; (2) 18% interest; (3) the expected court costs; and (4) the reasonable amount for attorney=s fees. If this is done, the lien claimant proceeds as usual in the court proceeding, but if a judgment is secured, you will go against the bond or deposit. Miscellaneous Issues: Owner=s Defenses: If an owner pays a general contractor for the subcontractor=s portion of the work before receiving a prelien notice, the subcontractor=s lien is reduced accordingly. That is why it is so important to send out the prelien notices early. Also, if the owner has paid the general contractor in full before receiving the prelien notice, the subcontractor or supplier will have no lien rights at all. Page 8 of 12
Definition of Completion: The completion date is important because this starts the time running for filing a mechanic=s lien. A contractor cannot go back to the project and perform minor work for the sole purpose of extending the time period. Similarly, warranty or Acall-back@ (going back and fixing what you have already done) does not extend the period. For example, there was a case in which going back and adjusting a screen door did not extend the period. Further, extra work not required by the contract and not authorized by the owner will not extend the period. To be safe, file early so you are not involved in this gray area. Final Payment: Under Section 514.07, an owner is not required to pay the general contractor until after expiration of 120 days from completion of the project. Obviously, this is much too long for anyone to make wait. As a consequence, the same code section states payment can be made before this date if the GC furnishes lien waivers signed by all subcontractors and suppliers who have given prelien notices. Itemized Statement Of Account: Caution: You may have to do more than simply file a mechanic s lien and commence a lawsuit to foreclose. Under section 514.07 the owner, within 15 days after completion of the project, may require anyone filing a lien to submit a written verified account of the monies owed. This includes the amount, itemization of charges, and your name and address. You cannot bring an action to foreclose the lien until 10 ten days after the statement is furnished. Interestingly enough, technically this means after the 15th day period, the owner can no longer demand this itemized statement. Presumably, this was meant so as not to impede the right of the lien claimant to quickly file a mechanics lien foreclosure and get the matter adjudicated. Insurance Requirements: Effective August 1, 2008, there has been a change in the law requiring different insurance coverage for licensed generals and subcontractors. Under the old law, the requirement was Page 9 of 12
public property and bodily injury coverage of at least 300,000 per occurrence and 10,000 property damage coverage. Under the new law, one is required to carry commercial general liability coverage with premises, operations, and products and completed operation insurance with at least 100,000 per occurrence and 300,000 aggregate (Section 326.94(2)). LAWSUIT TO FORECLOSE LIEN Introduction: When: Where to File: Arbitration: Your lien is not valid forever. Because it directly affects the owner=s title, it has a limited shelf life and must be enforced within a short period of time. That enforcement is done by filing a lawsuit to foreclose. Just like the time deadlines for a Pre- Lien or Mechanic=s Lien, the courts strictly construe these time limits which are called statutes of limitation. Again, if you are literally one day late, the lien is ineffectual. Within one year from the date of your last furnishing of labor and materials to the property. District court of the county in which the project is located. Many construction contracts state that all disputes will be decided by binding arbitration, as opposed to a court proceeding by judge or jury. In fact, it has long been a tradition to do so in the construction industry. Arbitration is usually quicker and less costly, especially because it cuts down on expensive discovery. The decision is final and binding, with no right to appeal. You lose your right for a jury trial, but few contractors want that in the first place. You usually pick an experienced construction attorney or retired judge to hear the case in their conference room. It is just like a court proceeding with the same general rules of evidence, but more informal. On the other hand, you can only foreclose your lien through a court proceeding, not arbitration. So, how do you keep your arbitration rights and at the same time preserve your lien rights? Simple. You bring a lawsuit to protect the lien and then immediately request the court to stay the court proceedings. When arbitration is done, you go back to court and turn the arbitration award into a judgment. Page 10 of 12
Need a Lawyer? In this country, every individual has the statutory right to represent themselves. This means they can prepare all necessary papers, appear at hearings, and actually try the case. In so doing, the court considers you to be acting either in pro se or pro per. Before making this decision, consider the following factors: 1. You are a professional and thoroughly know the ins and outs of not only the construction industry but of the project itself. The best lawyer on his or her best day will probably not know more than 50% of what you know. 2. How is your public speaking abilities? If you are uncomfortable speaking to a group, you will even more uncomfortable in court or arbitration. You could be the sharpest wit in town but may not be able to present your arguments. Remember, appearing uncomfortable is perceived as having deficiencies in your case. People usually think that if you are not comfortable about your own facts, then they must not be that strong. 3. If the other side has a lawyer, you might want to think twice about representing yourself. You will certainly know the facts quite well, but you may be blindsided by legal technicalities. 4. You may also want to think twice if this is a really nasty and emotional case. In other words, if the other side is going for blood. Having a lawyer can shelter you from this emotional trauma. No matter how strong you are, lawsuits are taxing not only on your time, but on your physical and emotional energies. 5. If you have a good case in which you have complied with technicalities and performed good work, you are essentially engaging in a collection action. These actions are typically very simple because there are few defenses or defects alleged by the other side. It makes it easier for you to represent yourself because it is more a question of when and how much they will pay as opposed to whether you will win at all. 6. If you have a binding arbitration provision, you may consider representing yourself. These proceedings are much more informal and the arbitrator tends to give you more leeway. There are also fewer rules and not they are usually not quite as strict. Page 11 of 12
7. You could consider representing yourself but get advice along the way from a lawyer. It is much cheaper that way. On the other hand, the lawyer cannot watch over every move and you might slip up. Many times lawyers can also help you with preparing the forms, simply putting your name on the pleading. You can also bring in your lawyer at the end to actually try the case. 8. Judges and courts do not give legal advice. They only help you with what forms to use. However, clerks can be invaluable in steering you in the right direction as far as where to file, time limitations, the nature of the form or pleading, etc. But, remember when it comes right down to the ultimate advice, they cannot help you. 9. Judges usually treat you the same as an attorney which means they expect strict compliance with the rules. Although some judges give you more slack, don t count on it. 10. The biggest dilemma is whether you should hire an attorney for a smaller case, typically in the $5,000 to $10,000 range. You have to watch this because you may eat up that amount in attorney s fees. You never make money on lawsuits, only lawyers do. Try to settle for the best price you can get and move on. Page 12 of 12