Welcome to the DMV Construction Law Series, where each month we examine a different set of legal issues important to contractors. In our third installment, we briefly examine certain key parts of Maryland’s Mechanics’ Lien Law that contractors should be familiar with when undertaking projects in Maryland.
A mechanics’ lien is an encumbrance on real property or a leasehold that acts as security for unpaid labor, material, or construction services that is typically available to contractors and subcontractors. In our second installment, we provided an in-depth overview of mechanics’ liens in DC. This month, we cover mechanics’ liens in Maryland.
Are there threshold requirements to lien a project in MD?
At first glance, Maryland is more permissive in who may obtain a lien. Unlike DC, Maryland does not restrict access to mechanics’ liens to general contractors and those subcontractors with a direct contractual relationship with the general contractor, but rather, the state makes liens available to lower-tier subcontractors and suppliers. That being said, in certain circumstances the bar to obtain a lien in Maryland is set quite high. For example, when considering a lien on an existing building undergoing renovation work (as opposed to new construction), the Maryland lien statute mandates certain threshold requirements a contractor must meet to establish a lien. Specifically, the amount claimed by a lien claimant must exceed 15% of the value of the entire project. In the case of a subcontractor, or a lower-tier subcontractor or supplier, this means they must look to the value of the overall project, not their own scope of work, to determine whether a lien will be permissible. In the event that a tenant, not the owner, is the “owner” of the project, a contractor is still entitled to establish a lien, but only against the tenant’s leasehold interest, and only if the project has increased the value of the property by more than 25%. In either scenario, failure to establish that a project meets these threshold requirements at a show cause hearing (discussed further below) will bar a contractor from establishing its lien. Notably, new construction projects do not have a value improvement percentage requirement.
How do I perfect a lien on a project?
If a contractor feels it can meet the threshold requirements to establish a lien, then it must look to any preliminary notice requirements that may apply. Although general contractors in Maryland do not have any preliminary notice requirement, subcontractors and lower-tier subcontractors or suppliers do have preliminary notice requirements. As we noted in our first installment, subcontractors and lower-tier subcontractors or suppliers must submit a preliminary notice of intent to lien to the owner within 120 days after the last date of work. Maryland has eliminated much of the guesswork as to the contents of a Notice of Intent to Lien and has provided a statutory form that, if substantially followed, will be sufficient to provide an owner with preliminary written notice. However, when seeking to lien in any complex situation covering multiple buildings or a leasehold interest, contractors should consider seeking legal counsel to ensure the sufficiency of their written notice.
Unlike DC or Virginia, however, a contractor seeking to establish its lien in Maryland must ultimately initiate a lawsuit and obtain a court order establishing the lien (this can be done on a preliminary, or “interlocutory” basis, as explained in our first installment). Unless and until a court issues an order establishing the lien, a contractor does not have a lien. Therefore, it is vital for a contractor to move quickly when seeking to establish a lien, for until the lien is officially established, the contractor cannot claim priority over other would-be creditors. In the worst-case scenario, the contractor’s lien rights may be cut short entirely—such as in the uncommon event where a commercial owner sells the property subject to the lien before a court grants an order establishing the contractor’s lien. In general, this means the effort and expense a claimant must expend to perfect a lien in Maryland can be greater, and the process to secure rights initially can take longer, than what one can expect in DC or Virginia.
Practically speaking, a claimant has 180 days from its last day of work on a project to initiate a lawsuit by filing a petition with the circuit court where the property at issue is located. The court will then decide whether a lien should attach. The court will, by statute, schedule a show cause hearing within 90 days where it may request a presentation of supporting evidence, testimony from witnesses, and oral argument to determine whether a contractor has satisfied the requirements to establish a lien. For example, when dealing with an existing building, this could include requiring submission of evidence to prove that the project to which labor or materials were furnished was improved by 15% of its value (or 25% in the case of a tenant owning the project). If a claimant is successful at the show cause hearing, the court will enter an order establishing a lien, and thereby, finally, solidifying the contractor’s right to claim a security interest in the property subject to the lien.
It is important to note that a lien only persists for one year from the day on which the petition to establish the lien was filed. A contractor has until the end of this one-year period to file a petition to enforce its lien. Failure to timely file will result in the expiration of the contractor’s lien rights. Contractors should file a petition to enforce such rights concurrently with their petition to establish a mechanic’s lien. Such petitions can include additional claims for legal relief as well.
While these portions of the lien law include the basic requirements for pursuing a lien in Maryland, it is vital that contractors understand the more nuanced lien requirements set forth in the state’s mechanics’ lien statute when considering to lien a project. Certainly, a mechanics’ lien remains a powerful tool for contractors in Maryland, though, as with any legal protections, contractors should carefully weigh its costs and benefits beforehand. Contractors should consult legal counsel to ensure they can take full advantage of Maryland’s lien statute while navigating any costly pitfalls they may face.