| CONSTRUCTION LIENS AND UNDERTAKINGS |
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| Wednesday, 04 October 2006 | |
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Construction liens can be a sticky problem when disputes occur between contractors and owners of property. In 1849, the legislature first created a statutory construction lien law which is presently codified in Sections 779.01-779.17, Wis. Stats. It was created to protect contractors, subcontractors, material suppliers and laborers when they provide construction services or materials for real estate. The statute sections set forth a detailed procedure by which a contractor or subcontractor is able to enforce its rights against the real property of the owner regardless of a lack of contractual relationship. The lien laws insure that the contractor or subcontractor will receive payment for providing labor or materials to improve real estate. The statutes establish a process of notices which must be given before the contractor or subcontractor may obtain a lien and/or take the real estate owner to court on the basis of that lien. The notice requirements are time-sensitive and must be met for the lien to attach to the real estate. (This is not to say that the contractor or subcontractor would not have another cause of action against the real estate owner, but in order to have a “lien” on the property, these steps must be met). The lien covers only services or materials – including work, labor, materials, plans or specifications – provided for the improvement of land. “Improvement” of land is defined as any building, structure, erection, fixture, demolition, alteration, excavation, filling, grading, tiling, planting, clearing or landscaping which is built, erected, made or done on or to land for its permanent benefit. If the materials or services do not relate to an improvement of the real estate, there can be no lien. Notices may be required when work is first started or when labor is first supplied, but those notices do not indicate that a dispute is imminent. Rather, they are, simply put, “notices” that work or materials are being supplied which could ultimately result in a lien being claimed. All notices are sent to the “owner of record” of the real estate. Most are sent by certified mail. In most cases, the Notice of Intent to File Claim for Lien is the first indication that there may be a claim against the real estate. A contractor or subcontractor must provide such a notice to the real estate owner that the contractor or subcontractor has certain lien rights that it may exercise by filing a lien within 6 months after work has been performed by the contractor if the contractor is not paid within that time period. The Notice of Intent to File Claim for Lien is the first forewarning that a lien may be filed. It is the “shot across the bows.” It is filed to ask that the owner step up and pay the claim. (All of the times are strictly enforced, and individuals involved on either side of the lien process are well advised to consult an attorney or, at least, to review the relevant statutes). The contractor or subcontractor is then able to file a lien during that period, which becomes a cloud on title. Once a lien is filed it becomes an encumbrance against the real property. That real property cannot be sold “free and clear of all encumbrances” until the lien claimant is paid and/or the lien is released. A filed lien also provides a vehicle by which a lien claimant can force an involuntary foreclosure of the real property. The statute further provides that the contractor must file a Claim for Lien within one month of that Notice of Intent (and the Claim for Lien must be filed within 6 months from the date labor or materials are last supplied) or the lien will be extinguished. However, if the deadline is missed, the contractor or subcontractor can still bring suit for damages under an “unjust enrichment” theory which argues that services or benefits were supplied and the supplier should receive a fair payment for those services or benefits. In that case, there would not be a lien on the property. Only after a judgment was obtained and docketed in the county where the real estate lies would there be a judgment lien against the property. The rights of the contractor or subcontractor can serve to tie up property and affect construction loan lending and transfers of the real estate. Of course, the lien law only comes into real play where the contractor or subcontractor has not been paid. If there is a good faith dispute between the parties which lead to the non-payment of the claim, however, the lien law creates immediate problems for the real estate owner. In addition, in given situations the lien can be used by the contractor as a club to force the owner to pay. The owner of real estate can pay a bond which results in the release of the lien. Wis. Stats. §779.17. However, this can be expensive for the owner of the real estate as the bond must be in an amount sufficient to insure payment of the lien claims and judgments. Due to this factor, the bond procedure is not utilized in many cases. Another – and none too familiar – provision is found in Section 779.08 Wis. Stats. That section provides that two (2) or more sufficient sureties may file an “undertaking” (a promise or security) to pay the amount of the claim and all costs and damages that may be awarded. This has been interpreted by at least one court so that the “debtor” (land owner) may be one of the sureties, and the other can be a person or another entity affiliated with the debtor. Of course, the lien claimant can challenge the credit-worthiness of the two sureties but if the sureties can show their net worth is in excess of 125% of the lien, the lien will be released. This has the effect of thwarting the value of the lien claim: its encumbrance upon the real property. It provides a means by which, before a final determination of the lien claimant's rights and without prejudice to those rights, the real property may be freed of the lien, so that it may be sold, developed or used as security for a loan. This statutory procedure protects the owner of the real property by allowing the undertaking to substitute for the land as the object to which the lien attaches. At the same time, it protects the lien claimant by providing an alternate source of recovery on the lien. In essence, it gives the owner a “clear” title while leaving the contractor or subcontractor to pursue its claim in a court of law. However, the owner of the real property can now litigate the matter without the pressure of an outstanding lien. This has great value to the owner. |