“Residential” Lien Changes Have Broad Impact

by Richard A. Stockenberg
Gallop, Johnson & Neuman, L.C.

A highly controversial overhaul of the procedure to perfect mechanics' liens against residential property took effect August 28, 2010. The new law applies to any residential property transferred on or after November 1, 2010. While the law applies only to "residential real property," there is a broad definition of what kinds of property are included.

There are four basic components to the new law. Foremost, lien rights will be lost if the lien claimant does not record with the recorder of deeds a "notice of right" at least 5 days before the property is sold. Second, the law enumerates specific documents which must be included in the lien statement. Next, there are rules interpreting the efficacy of lien waiver forms. Finally, the law permits an owner to provide collateral in lieu of the lien as a means of clearing title. In other states this is referred to as "bonding around the lien."

Residential Property Defined
Current law restricts the ability to place liens against owner-occupied residential property. The new law does not change the law with respect to repairs, remodeling or additions to owner-occupied residential property. Rather, the new law applies only to construction of new residential property. The law defines "residential real property" as property intended to be used or is used for the construction of residential structures of four units or less but the law also applies to condominiums, townhouses and cooperatives, regardless of the number of units. Mixed use or Planned Unit Developments are covered by the new law to the extent they are located on separate identifiable parcels of land from non-residential uses. Also, the law applies to streets, sidewalks, utility services and improved common areas that are part of the residential structures. Nothing in the law applies to commercial, industrial or any other type of project except residential property.

New Notice Requirements
For the first time in Missouri, owners have the potential of denying contractors, subcontractors and suppliers the right to file liens against their property. They may do so by recording in the county recorder of deed's office a notice of sale. If the owner properly records its notice of sale, then a lien claimant must, as a condition precedent to filing a lien, record its notice of right at least 5 days before the property is transferred. The owner is also required to post its notice of sale at the jobsite, but failure to post at the jobsite will not relieve the lien claimant of the responsibility of recording its notice of right.
Lien Claimant's Notice of Right

If the owner records a notice of sale at least 45 days before the property is sold, then a lien claimant must record a notice of right at least 5 days before the property is sold. The notice of right must include the name of the owner, a legal description of the property, and the name, address and telephone number of the upstream party with whom the lien claimant has a contract. The lien claimant may list in its notice of rights the names, addresses and telephone numbers of its lower-tiered subcontractors and suppliers. If such downstream entities are properly identified in the lien claimant's notice of right, they are relieved of the responsibility of recording their own notice of rights. There is, however, no requirement that a lien claimant name its lower tiered subcontractors and suppliers.
Separate notices of rights do not have to be recorded for each lot or parcel of residential property where work is performed on multiple lots within the same subdivision and there is common ownership or if the lien claimant's work begins before platting or subdivision.

If a subcontractor/supplier preserves its lien rights by recording a notice of rights before the property is sold, it is relieved of complying with the current statutory requirement of serving the owner a notice of intent to file a lien at least 10 days before the lien is filed. It is unclear whether a subcontractor who does not file a notice of right because the owner does not file a notice of sale is also relieved of serving the 10 day notice if it wishes to file a lien. Prudence dictates that either the notice of right be recorded or the 10 day notice be served.

To the extent there is any misinformation contained in the notice of rights, which information causes prejudice to the owner, the lien claimant loses its lien rights to the extent of the prejudice caused by the error.

Owner's Notice of Sale
Lien claimants will only have to record their notice of rights if the owner records a notice of sale at least 45 days before the property is sold to the bona fide purchaser. The owner's notice of sale must include the name of the owner, the legal description of the property and the earliest date when title to the property will be transferred. If that date is extended, a new notice of sale is not required to be recorded. Lien claimants preserve their lien rights if they record their notice of rights at least 5 days before title is transferred. There is nothing in the law that prevents the lien claimant from recording its notice of rights before the owner records a notice of sale, except it will have to rely on other means for determining the name of the owner and the legal description.

If a lien claimant requests a copy of the notice of sale from the owner, the owner is required to furnish the notice to the lien claimant within 5 calendar days after receiving the request. A contractor receiving the owner's notice of sale is required to furnish a copy of the notice of sale to each of its lower tiered subcontractors and material suppliers. Notice of sale must be given to the lower tiered contractors within 10 days after the other contractor has received the notice of sale.
The owner is not liable for any error or omission contained within the notice of sale; however, if a lien claimant receives a copy of the notice of sale from the owner and relies in good faith upon the information contained within the notice and the lien claimant has otherwise complied with other requirements of the law, then the claimant's lien rights are not lost by reason of the faulty information provided by the owner.

What is Included in Lien?
Under prior law, lien claimants were required to include within their lien statement a just and true statement of their account. Rules defining what needed to be included were made by courts and vary case to case. The new law provides certainty as to what needs to be included within the lien statement. This does not necessarily mean that all lien statements will be simplified. It is probably safe to say that large liens are simplified by the new rules and smaller liens are not. The law identifies the following seven items as being mandatory for liens on residential property:
1. A copy of the recorded notice of rights;
2. Name and address of the lien claimant's upstream contractor;
3. Contracts, purchase orders or proposals and agreed-upon change orders or modifications;
4. If there is no written agreement, then a general description of the scope of work and the basis of payment;
5. All of the claimant's invoices for its work on the property;
6. An accurate statement of account, which shows payments and credits applied against amounts due and the calculation or basis for the amount claimed; and
7. The last date work was performed or materials were provided.

It is not necessary to include detailed time and material records itemizing each hour of labor and every piece of material used on the property.
Substitute Security for Lien

As a means of enabling property encumbered with mechanics' lien to be transferred free and clear, the law permits owners to provide substitute collateral. If the substitute collateral is provided in accordance with the statute, then the lien rights against the real estate are lost and payment of the debt is secured by the substitute collateral instead of the real estate. The substitute collateral may be in the form of cash or certified check, an irrevocable letter of credit or a surety bond. The value of the substitute collateral must be at least 150% of the amount of the mechanics' lien being released. If the substitute collateral is provided, then lien claimant is not relieved of its obligation to otherwise prove that it is entitled to a mechanics' lien against the property.

New Rules on Interpreting Lien Waivers
Lien claimants are often "asked", that is, required, to sign a lien waiver which effectively waives all lien rights through the date the lien waiver is signed even though the payment given in exchange for the lien waiver is for a lesser period. For example, suppose a subcontractor receives its payment for its first month's work in the fourth month of the project. If a lien waiver is given in the fourth month for only its work performed in the first month, then it is losing its lien rights for all of the other work it performed after the first month. The new law addresses this problem. Under the new law a lien waiver "shall not be deemed or interpreted to waive or release lien rights in exchange for a payment of less than the amount claimed due at that time unless the lien waiver is a final unconditional waiver." While the language of the new statute is not a model of clarity, it should provide lien claimants a safer harbor, especially if the lien waiver form makes it clear that the party signing the waiver claims entitlement to more than the amount being paid in exchange for the lien waiver. Lien waiver forms should be adjusted accordingly.

So What Does This Mean?
There will have to be changes in the way business is done or lien rights will be lost. Gone are the days of waiting to see if there are payment problems before starting the lien process. Now, projects will have to be assessed on the likelihood title is about to be transferred. Lien claimants will have to check real estate records to see if the owner has recorded the Notice of Sale. If none is recorded at the time of the first search, there is no guarantee that one will not be recorded the next day. To be safe, there will have to be repetitive searches, all at some expense of time and/or money. A failure to exercise due diligence may result in the loss of lien rights.

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