Florida Construction Law Authority : Florida Construction Lawyer & Attorney: Becker & Poliakoff Law Firm: Construction Law

Florida’s lien law specifically prohibits a lienor from improperly increasing the amount of its lien beyond the amount owed or including amounts for work not performed. See Section 713.31, Florida Statutes. The lien law even imposes penalties against a lienor for recording such a "fraudulent lien." At the same time, however, the lien law provides that a lien will not be found "fraudulent" if the lienor’s actions in recording it were in good faith. It is important for a lienor to be aware, though, that "good faith" will only go so far in avoiding a finding that its lien is fraudulent.

The lien that a consultant recorded against Mr. and Mrs. Medellin’s home provides an example of how good faith will not always prevent a court from finding a lien is fraudulent. Medellin v. MLA Consulting, Inc., 69 So. 3d 372 (Fla. 5th DCA 2011). While the trial court found that the consultant’s lien was not fraudulent, because the consultant believed in good faith that the amount was due, the appellate court disagreed. The appellate court clarified the good faith exception to be limited to preventing a lien from being deemed fraudulent when the issue is whether the amount included in the lien was due, and there was a good faith dispute over whether it was due. The appellate court found that the Medellins’ consultant’s good faith was irrelevant because the issue was whether the amount included in the consultant’s lien was for work that entitled the consultant to record a lien against the Medellins’ house. Because the work underlying the disputed amount in the consultant’s lien was not lienable, the appellate court found that the consultant’s lien was fraudulent.

With the Medellin court’s holding, it is now even more important that a lienor be sure the amounts it is including in its lien are for work that will properly support a lien.

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Today we conclude my series on differences in lien laws among the states you should consider when working in an unfamiliar state. We begin today with fraudulent liens.

Florida has a statute addressing fraudulent liens, defined as liens in which: (1) the lienor has willfully exaggerated the lien amount, (2) the lienor has willfully included a claim for work not performed upon the property; or (3) the lienor has compiled his or her claim with such willful and gross negligence as to amount to a willful exaggeration.

Ramifications of fraudulent liens usually include voiding the lien and may include affirmative claims for damages against the lienor by the property owner. Some states make fraudulent liens a criminal violation, which may be grounds for disciplinary proceedings against the lienor’s construction license. Florida is an example of that.

Given the serious consequences of compiling a lien incorrectly, you should know the standards, ramifications, and defenses for fraudulent liens in each state where your company is working.

Although this series of blogs addressed some of the nation’s prevalent lien law provisions, many states include other provisions that could impact contractors. Some states have specific statutes regarding the use and misappropriation of construction funds and the ramifications of failing to pay subs and suppliers after a contractor receives payment from the owner.

Many states have specific statutory provisions addressing releases of lien and the manner in which they may be used.  A number of states have statutory provisions permitting the owner to drastically shorten a lien foreclosure deadline before the lien automatically expires.

Provisions such as these could significantly impact your company’s rights and liabilities and they differ so much from state to state that you would probably be unaware of them unless you researched the state’s lien laws and related statutes before beginning construction in that jurisdiction.

In Summary

Past experience in one state is almost never enough to protect your company’s lien rights in others. In fact, it may harm you to the extent you act in accordance with your state’s laws when they may be contrary to the foreign state’s laws. Before you sign any contract, you should investigate the applicable lien law. Also, understand all of the elements previously described, in addition to the following:

1)                  Types of Property Interests Subject to Liens: Most states exempt public projects from lien laws. Other projects may also be exempt or have limited lien rights (for example, construction performed for a tenant or work approved by one spouse when both own the property).

2)         Multiple Liens When Working on Multiple Lots: If your company needs to lien a platted

             subdivision project, do you record a single lien for the entire subdivision or must you record

             separate liens for each lot? If the latter, then how do you determine the lien amount for each

             lien you record?

3)         Obligation to Disclose Information: Know if your company can be compelled to disclose its

             subs and suppliers to clients and if your subs must make disclosures to your company.

4)         Involvement of Construction Lenders: Understand the role construction lenders may play on

             the project and how those roles impact the lien law. This is especially critical in the current

             economy where mortgage foreclosures are wiping out junior liens. Find out what you can do

            during the project to give you possible recourse against a lender at the end of the job.

5)         Conditional Payment Bonds: Some states may authorize conditional payment bonds in

             which the sureties will pay the lienors only if the bond principal (usually the GC) has been

             paid for the lienor’s scope of work.

It all seems daunting, but with a little foresight and research, you can master out-of-state lien laws

and avoid unpleasant surprises at the end of the job.

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In this fourth installment in my series of pitfalls in embarking on construction jobs in states in which you have not previously worked, we’ll consider differences between various state laws regarding transfer bonds and sworn statements of account. First, the transfer bonds.

In some states, liens may be removed from property by filing a transfer bond but these laws vary significantly from state to state. In Connecticut, any interested party may substitute a bond in lieu of the lien only after obtaining court approval.  The court will decide the good faith intent of the interested party to contest the lien and the sufficiency of the surety bond before the bond may be substituted for the lien. In contrast, other states allow an owner to transfer a lien to a bond as a matter of course without the court’s approval.

The deadlines by which to sue on transfer bonds also vary. Some states have deadlines as short as 90 days, while others allow one year from the last day of work on the project.

Most states permit an interested party to transfer a lien to a bond at any time, while some states preclude such a transfer once a foreclosure action has been filed. In Oklahoma, any interested party can discharge a lien by depositing either cash or a surety bond in an amount equal to 125% of the lien. If cash is deposited, the clerk will immediately show that the lien is released. In the case of a bond, however, the lienor may object to the bond within ten days, which would require a court hearing on the validity of the objections.  

Each state also has its own formula to determine the required bond amount to transfer liens.

Next, we address sworn statements of account. Some states have specific provisions regarding the exchange of written sworn statements of a project’s accounting. In Arkansas, a claimant may be fined up to $2,500 if:

•           Upon request, it fails within five business days to give a correct list of the parties furnishing materials, labor or services and the amount due, or

•           It falsely certifies that the owner or its agent has received the preliminary notice under the lien law.

In many states, including Florida, failure to respond to a request for a sworn statement of account within a specified time period will result in a complete loss of lien rights. In Michigan, the failure to provide a sworn statement does not render a lien invalid; however, the lienor is not entitled to any payment and may not sue to enforce the lien until the sworn statement has been provided.

Submitting a false sworn statement may result in criminal liability in many states. Requests for sworn statements of account are regularly used on projects throughout the country, so you should understand the statutory procedures governing them before your company begins work in an unfamiliar state.

We will conclude this series with my next post, in which we'll discuss differences in state laws regarding fraudulent liens and some miscellaneous lien law provisions.

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In this third installment of my series of pitfalls in embarking on construction jobs in states in which you have not previously worked, we’ll consider differences between various state laws regarding preliminary lien notices and the claim of lien itself. First, the preliminary notices.

As a prerequisite to lien rights, almost every state requires lienors to send some form of preliminary notice to the owner early in the project. The preliminary notice introduces the lienor as a potential claimant from whom the owner must obtain releases of lien. However, the forms and requirements for service of these preliminary notices vary drastically from state to state. For example, in New Jersey, before filing a lien arising under a residential construction contract, a lien claimant must first file a Notice of Unpaid Balance and Right to File Lien within 60 days after the last date that work, services, material or equipment were provided for which payment is claimed.  In Wyoming, a prime contractor must post a notice on the construction site notifying lienors that a notice of the right to claim a lien must be served on the contractor. The lienor will lose its lien rights if it fails to comply.  And sometimes more than one notice is required, depending on the type of work and the classification of the lienor performing the work. Texas requires different preliminary notices, which may be governed by different time frames, depending, for example, on whether or not the lien involves specially fabricated goods. If you work in an unfamiliar state and don’t comply with these unfamiliar preliminary notice requirements, you could inadvertently lose your lien rights, even if you’re not paid at the conclusion of the job.

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In the first part of this blog series, posted on August 4, 2011, we addressed differences between state laws on the protected class of construction lienors. Today, we’ll cover differences in contract provisions and required warnings or disclosures as prerequisites to lien.

As you venture out of state to find work, you should review the validity of the standard contracts your company sends to its clients, subs, and suppliers in light of local lien law requirements.

Most state statutes permit both oral and written contracts, but some states limit the enforceability of oral contracts. For example, many states (like Florida) require a contract to be in writing if a project cannot be performed in less than a year or involves the sale of goods exceeding $500. If you come from a state where all oral contracts are enforceable, you may be surprised if an oral contract is prohibited in another state.

“Pay if paid” clauses are also a big issue. Under these clauses, a contractor is not required to pay subs unless the contractor first received the corresponding payment from the owner. Some states freely enforce these clauses, while others prohibit them as against public policy; still others enforce them under limited circumstances.

There are many more examples of traps like these, so you must determine the enforceability of your company’s standard contracts before using them in unfamiliar states.

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 Like everyone else, your construction company is likely feeling the pressure of our prolonged economic downturn with no end in sight. Some states, but perhaps not yours, are starting to show small upticks in economic activity, possibly leading you to consider joining the tides of contractors looking for work in other states. As your company ventures into other territories, you apply your existing lien law knowledge to out-of-state projects. However, as your out-of-state job approaches completion, something goes horribly wrong. Perhaps there is a change order dispute with a sub who liens the project, causing the owner to withhold payment from you.

Naturally, you attempt to lien the project too. But the out-of-state lien law is drastically different than the one you know, resulting in an inadvertent failure to perfect your company’s lien rights. Even worse, your sub perfected its rights and was paid by the owner to satisfy their lien, so now you must defend the inevitable claim from the owner for sums paid to the lienor.

What went wrong? Your unfamiliarity with the out-of-state lien law gave your sub an unfair advantage when it perfected its lien for sums to which you believe it was not entitled. Your company’s ability to resolve the payment dispute was compromised by the loss of benefits otherwise provided by that particular state’s lien law. Unfortunately, this scenario happens all too often. As contractors expand their business into other states, they seldom consider the differences in lien laws from state to state. 

Although lien laws differ significantly, most generally address the same topics – so, with a little advance research, you can learn about the most pressing provisions and perfect your company’s rights in the future. This is the first in a series of blogs that will list various subjects usually covered by lien laws that you should research in foreign states before you begin a construction job there. Today we will begin with differences in the protected class of lienors.

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 As you may know, construction liens are valid only for one year after recording unless suit is filed within that time to foreclose upon the lien. However, although suing to foreclose upon your lien within the year will continue the validity of the lien beyond the year until a court resolves it or the case is settled, a notice of lis pendens must also be recorded in the public records. If not, then the property owner may sell the property to a subsequent purchaser, or a creditor may lien the property, and, if so, they will take priority over the lien, even though the lien was recorded first, and is in foreclosure (and therefore has been extended). Sect. 713.22(1), Fla. Stats. This could wipe out the effectiveness of the lien even though foreclosure was filed within the one year duration.   For instance, it makes no difference whether your lien’s validity has been extended beyond the year after recording if the property owner can sell the property to a subsequent purchaser, whose title in the property is not affected by your lien. You would lose all rights to force a foreclosure sale against that purchaser. This would occur solely because you did not file the notice of lis pendens in the public records, which is a document that would have alerted the purchaser to the existence of your lien foreclosure. If the purchaser hasn’t been notified in that manner, then he or she could obtain clear title unaffected by the lien.

Of course, the lienor may have recourse against the seller if the property sale included affidavits or representations from the seller that no liens existed on the property. However, this recourse would lack the collateral of the property that the construction lien would provide, as well as the possibility of recovering your attorney’s fees for having to sue.

The moral of the story is to always ensure the notice of lis pendens is recorded in the public records when a lien foreclosure is filed.

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The Florida Legislature this year passed Senate Bill 1196, not yet submitted to Governor Scott for signature, amending section 713.10 of the Lien Law affecting construction liens on leased property. This bill, when signed, will significantly affect lien rights where a tenant, rather than the landlord, acts as the “owner” on a construction job.

Under the original version of section 713.10, a landlord could, in its leases with its tenants, prohibit liens, then record either the lease or a “short form memorandum” of lease (essentially a notice containing the actual lien prohibition language from the lease) in the public records. If multiple leased parcels are involved, the landlord can file a blanket form of short form memorandum covering all parcels, but under recent case law the lien prohibition language contained in the recorded memorandum must exactly mirror the language in each and every lease. Under the new statutory amendment, a landlord may now record a notice merely stating that all or a majority of the leases on the premises expressly prohibit lien liability, without requiring disclosure in the notice of the exact lien prohibition language or the exact units containing such language in their leases. The lease, short form memorandum or notice must be recorded before a notice of commencement is recorded.

Under the new amendment, any lienor may serve a written demand upon the landlord for a copy of the lease provision prohibiting lien liability. The landlord must provide a copy under oath within 30 days of the demand. Failure to do so, or service of a false or fraudulent copy, will subject the landlord’s interest to liens unless the lienor has actual notice that the landlord’s interest isn’t subject to liens (such as the actual lease provision being recorded in the public records). The lienor’s written demand must be in a document separate from the notice to owner and contain a statutory warning.

The new amendment also makes clear that a tenant contracting for improvements may sign the notice of commencement as owner, rather than the landlord.

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When a tenant contracts for improvements, the leasehold interest is subject to construction liens.  Section 713.10 of the Florida Statutes addresses the extent to which the landlord may be liable to satisfy the lien. As a first step, a lien may not be recorded against the landlord’s interest unless the lease agreement requires the tenant to make certain improvements (called “pith of the lease”). However, if that standard is met, a landlord may limit its liability for liens by 1)prohibiting liability for construction liens in the express terms of the lease; and 2) recording the lease, or the relevant portion of it, in the public records in the county where the property is located. If a landlord expressly limits liability for liens in the lease, but fails to record it, the landlord may nevertheless be liable if the construction of improvements is an integral part of the lease. No lien attaches when the lease simply allows the tenant to make improvements; rather, the lease must require the tenant to construct improvements. 

Section 713.10 imposes a duty on the tenant to notify the contractor of the lien prohibition in the

lease. A knowing or willful failure of this requirement renders the construction contract between

the tenant and the contractor voidable at the contractor’s option. Lienors without lien rights

against the landlord’s interests may consider seeking recovery for equitable lien or unjust

enrichment. The lienor will also have lien rights against the tenant’s leasehold interest, meaning

you can foreclose against the lease interest rather than the property as a whole.

A landlord’s strict compliance with §713.10 is critical to its immunity from liens. One provision of

that statute allows the landlord to record in the public records the actual lease at issue or a short

form thereof reflecting the terms of that specific lease expressly prohibiting liability for

liens. Another provision permits the landlord, when all the leases entered into by that landlord for

those premises prohibit lien liability, to record in the public records a notice containing the specific

language contained in the various leases prohibiting lien liability.  Where, however, the landlord

avails itself of this second provision, yet any of the leases do not contain the exact identical lien

prohibition clause that was contained in the recorded notice, then the landlord will lose its

protection and its interest will be subject to liens.

The landlord’s interests are never subject to liens when the tenant is a mobile home owner leasing a mobile home lot in a mobile home park. 

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In this economic climate when construction liens are being wiped out by superior mortgages, I want to develop a point I made in a prior blog about a contractor’s potential ability to fight back and preserve its lien.  In my September 21, 2010 post, I discussed §713.3471 of the Florida Statutes, potentially making a construction lender liable to lienors should a construction loan’s funding be terminated before all loan proceeds were distributed to those performing work.  Under that statute, a lender can only cease funding under a construction loan, or reallocate construction loan proceeds to a non-construction purpose, if the lender first provides written notice of same to the contractor and lienors who served a notice to owner.  Absent the notice, the lender is potentially liable to the contractor and lienors for all actual construction costs incurred plus 15% for overhead and profit.

You might be surprised at how many construction loans were not completely funded.  Therefore, if you’re an unpaid contractor or lienor who recorded a construction lien on a job, don’t panic if a superior mortgage holder forecloses on the property and tries to wipe out your lien.  First, review the loan documents, which should be attached as exhibits to the lender’s foreclosure complaint, and determine whether it appears the loan was fully funded.  If not, then consider your rights under §713.3471.  You won’t be able to avoid the lender’s foreclosure, which may wipe out your lien, but you may nonetheless have recourse directly against the lender for your construction costs plus 15%.  Given the possible uncollectibility of the project owner (since they defaulted on the mortgage), this statute may give you a collectible judgment against a much more solvent bank.

You may also have an equitable claim like unjust enrichment if the lender knew you were working on the job while the loan was in default, but did not foreclose because they wanted you to continue building so their equity position would improve.  Long story short, before you throw in the towel when faced with a mortgage foreclosure, consider your options and think outside the box.
 

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In this economy, with such a high frequency of mortgage foreclosures, construction lienors often believe that a mortgage foreclosure would wipe out a construction lien. Although this is usually the case, you would be surprised at how often the lien actually takes priority over the mortgage. Before summarily assuming the mortgage foreclosure wipes out the lien, the lienor should consider a few angles to preserving the lien priority.

Run a title search and compare the date of recording the lien to the date of recording the mortgage. If the lien is recorded before the mortgage, then it likely takes priority over the mortgage. This means that the mortgagee foreclosing on the property will sell the property at judicial auction subject to the lien. Therefore, the successful bidder at the foreclosure sale will buy the property with the construction lien still on it. In this situation, the mortgage foreclosure doesn’t harm the enforceability and effectiveness of the lien. To the contrary, the bank may be interested in buying out the lienor’s position so they can sell the property free and clear of liens. 

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