The Mechanic's Lien and Pre-Lien Notices

08/18/2015 / James K. Sander

As most of us know, mechanic’s liens are a powerful statutory remedy for contractors to get paid for their work. The mechanic’s lien is an actual lien filed or recorded upon real property that puts the property owner and anyone examining title on notice that a contractor has done work on the property, but has not been paid for the work. Any contractor who has filed mechanic’s liens knows, however, that the process of properly filing such a lien can be filled with pitfalls. One of these pitfalls is determining when a contractor is required to give notice to the property owner of the possibility that a mechanic’s lien may be filed against the property if the contractor is unpaid – the concept of “pre-lien notice.”

Generally, the requirement to give the property owner pre-lien notice applies to smaller residential construction projects, the theory being that property owners engaged in these types of projects are less experienced and sophisticated than owners engaged in larger commercial or multi-family housing developments and are less likely to know about the mechanic’s lien remedy. Because of these differences in property owner sophistication, the mechanic’s lien statutes include a number of exceptions to the giving of pre-lien notice.

The recent case of Ryan Contracting Co. v. O’Neill & Murphy required the Minnesota Court of Appeals to decide a fundamental pre-lien notice question. No. A14-1472, 2015 WL 4507937 (Minn. July 27, 2015). The appeal turned on whether the underlying $350,000 mechanic’s lien claim would have been barred by the plaintiff’s failure to serve the statutory pre-lien notice required by Minn. Stat. § 514.011. The work done by the contractor was utility and street improvements for two phases of a mixed-use development in Otsego, Minnesota.

The District Court concluded that a pre-lien notice exception for “real property which is not in agricultural use and which is wholly or partially nonresidential in use” did not apply to excuse the contractor’s failure to give pre-lien notice because the property in question, before the planned improvement, was “undeveloped/raw land not in use,” and was not already in “nonresidential use.” The resolution of the appeal turned on what “nonresidential use” means in Minn. Stat. § 514.011, Subd. 4(c).

The Court of Appeals disagreed with the District Court’s interpretation. The appellate court concluded that the planned use of the property, as opposed to an existing nonresidential use on the property, determines whether the property is in “nonresidential use” for purposes of exempting the contractor from giving pre-lien notice. The appellate court looked to maps depicting the planned improvements, which clearly showed intended commercial tracts. The Court of Appeals thus reversed the grant of summary judgment and remanded for trial on the merits.

As with all appeals, the result matters most to the parties in the case but it can also serve as a learning opportunity by highlighting the importance of attention to the crucial detail of giving pre-lien notice to the property owner. Pre-lien notice is intended to notify an owner that the contractor may assert a lien. For subcontractors, the pre-lien notice must include an estimate of charges – i.e., the owner’s potential exposure – as well as steps that the owner needs to take to avoid incurring liens. Despite pre-lien notice and its exceptions being a feature of the mechanic’s lien statute since 1973, they seem to remain a vexing problem not only for contractors, but also for property owners and developers. The case law consistently emphasizes the importance of giving pre-lien notice and the consequence of failing to serve such notice where it is required. The cases have been less clear when it comes to the meaning and application of those statutory exceptions found in Minn. Stat. § 514.011, Subd. 4. Ryan Contracting Co. vs O’Neill & Murphy adds a point of clarification to the industry.

Apart from the finer points of mechanic’s lien law, the case highlights the importance of notice to owners, even for development contractors. Notice is not limited to residential contractors and best practices may dictate that contractors and suppliers avoid reliance on the rather confusing exceptions to the pre-lien notice requirement. Instead, contractors can best protect themselves by serving pre-lien notice in all cases. There is no penalty for serving more notice than the statute may technically require and the pre-lien notice represents an opportunity to speak directly to the owner about payment and obtaining lien waivers. This provides visibility to the owner and important information about contractors and suppliers that may play only a minor role in the project.
 
From the perspective of the owner or developer, the case provides a reminder of the importance of a correct understanding of the significant part the lien law plays in project financing. Virtually all the players from the general contractor down to the laborers extend credit to the project as they work or supply from day to day. This volume of credit is a hidden part of the project financing package and the pre-lien notice helps identify those supplying that credit and the importance of sound lien waiver practices to ward off the risk of lien claims. Minnesota’s mechanic’s lien statutes secure the important collateral without which all that credit might not be available.
 
Jim Sander was retained by the plaintiff as an expert witness in Ryan Contracting Co. vs O’Neill & Murphy. To learn more about the case or if you have any other questions about mechanic’s liens, please contact Larkin Hoffman’s Real Estate Litigation Practice Group.