Reposted from the On the Level Newsletter.
Ohio’s Mechanic’s lien laws, codified in R.C. §1311, provide a contractor, a subcontractor, material supplier, and more recently, an architect or professional service provider (in limited circumstances) with a statutory tool to protect oneself from the threat of nonpayment for services rendered on a private project. Filing a mechanic’s lien appears to be a relatively easy and straightforward process that can be done without the assistance of an attorney. However, many details must be met to file a perfect an enforceable mechanic’s lien, and as a result, many invalid and improper mechanic’s liens are recorded, both intentionally and unintentionally. In the event you are the owner of a residential or commercial private project and an invalid or improper mechanic’s lien has been filed against your property, you have several options available to address the lien.
Residential “Home Construction” Project
1. File an Affidavit of Full Payment.
Ohio law provides the owner of a residential project with a streamlined process to remove an invalid mechanic’s lien against the owner’s property. If, and only if, the owner of the property has made full payment to the lien claimant, or if the owner paid the general contractor in full for the amount of the contract, the owner of the residential property can file an affidavit attesting that full payment has been made and that no additional balance is owed. In the event work remained on the project and a replacement contractor was brought in to correct deficient work or complete the project, the cost to complete is taken into consideration when determining whether full payment has been made. The affidavit of full payment needs to be filed with the recorder in the county in which the property and lien were filed. If the lien was filed after full payment was made by the owner, the lien is deemed void as a matter of law and the property wholly discharged from the lien. See R.C. §1311.011(B)(1). This special statutory dismissal is preferable as it does not require the property owner to take further action with respect to the lien once the affidavit is recorded. Moreover, recording the affidavit of full payment shifts the burden of proof back to the lien claimant to resuscitate its lien by demonstrating that full payment was not actually made.
Residential and/or Commercial Projects
1. Serve the Lien Claimant with a Notice to Commence Suit
Contractors frequently file mechanic’s liens as a way to leverage payment from an owner or general contractor. Often times, these liens are either facially invalid or fail to conform with the statutory requirements for perfecting a mechanic’s lien. If the property owner feels that the claimant has no intention of pursuing the lien, or if the owner knows the lien is either deficient or invalid, the owner can serve the lien claimant with a notice to commence suit on the lien. Doing so forces the lien claimant to foreclose on its lien claim within sixty (60) days of service of the notice. If the lien claimant fails to initiate the lawsuit in a timely fashion, the lien is deemed void and is discharged from the property. The cost of the title work required to initiate a lien foreclosure suit can be disincentive enough for a lien claimant to abandon its lien. However, an owner that serves a notice to commence suit should be prepared to defend against the lien foreclosure claim if the claimant does in fact file suit within the time permitted by law.
2. File A Lawsuit Against the Lien Claimant
The general best practice is to serve the notice to commence suit (discussed above) prior to filing a lawsuit against the lien claimant, as the costs of litigating the dispute may be avoided altogether if the lien claimant fails to commence the lawsuit within the statutory time limits. However, if the owner does not wish to wait the sixty days, or if the owner prefers to be the plaintiff in the action, the owner can forego serving the notice and sue the lien claimant directly. While the exact claims asserted in such an action will vary on a case-by-case basis, the action will likely include a declaratory judgment to determine the validity of the lien, as well as a slander of title claim seeking to recover damages incurred from attempting to remove the lien.
3. Bond Off the Lien
Commercial construction contracts often require the general contractor to remove a mechanic’s lien that has been filed by a lower tier subcontractor on a project, regardless of the validity of the lien. In such an event, it is imperative to take timely action and have the lien removed from the property as quickly as possible to minimize the property owner’s damages or potential breaches of the contract. Fortunately, Ohio law permits an owner or general contractor to substitute a bond as collateral for the lien. A court must approve the lien bond as alternative security for the lien, and specific statutory requirements must be met before the bond can be approved by the court. However, once approved, the lien is deemed discharged from the property, and the lien claimant can only pursue payment directly against the bond. Substituting the lien bond as collateral in place of the property does not operate as an acknowledgement as to the validity of the lien. Rather, it simply removes the lien from the property and permits the parties to continue to address the validity in a different forum. The party that bonds of the lien will continue to incur bond premium costs until the underlying claim is discharged or declared void.
4. Pay Off the Lien
Paying off the lien is generally only considered and/or reserved for relatively minor liens which need to be removed quickly. It may ultimately cost less to simply pay off the lien rather than disposing of it through one of the methods discussed above. Once full payment is received, the lien claimant has an affirmative obligation to release the lien within thirty (30) days or face potential liability for any damages arising from the failure to timely release the lien.
5. Take No Action
Under Ohio law, a mechanic’s lien is only valid for a period of six (6) years. Mechanic’s liens cannot be renewed. If the owner has no plans to sell or otherwise dispose of the property, or if there is no immediate need to remove the lien, the owner may choose to ignore the lien and either wait out the six years or address the lien in the future. No statutory time limitations exist as to when an owner can serve the lien claimant with a notice to commence suit or bond off the lien, so the owner can wait until action is required before deciding how to best address the lien.
Conclusion
As is customary in the construction industry, addressing a seemingly simple issue of an improper mechanic’s lien is never as easy as it may seem. The nature of the private construction project - i.e. residential or commercial, whether payment has been made, the parties’ obligations under the contract, and the imminent disposition of the property can all factor into what action an owner should take to remove a mechanic’s lien from the property. Whatever direction the owner chooses, it is imperative to understand all the nuanced statutory requirements of each option and to discuss all options with a legal professional.
