Partial Lien Waiver Dilemma

photo of female constructor with blueprints

While working on an Illinois construction project or job, a contractor or subcontractor is often required to provide a partial lien waiver at the time it submits its pay application or invoice. A partial lien waiver is a very important document that operates to waive a contractor’s lien rights under the Illinois Mechanics Lien Act (770 ILCS 60/1 et seq.)

There are generally two types of partial lien waivers: 1) money waivers, or waivers that waive lien rights to the extent of payment, and 2) date waivers, or waivers that waive lien rights for work performed through a certain date. It is important for a contractor to know the distinction between the two so the contractor is not waiving more rights than intended!

In Illinois, it is common for a property owner or a title company to require a date waiver from a general contractor and its subcontractors in return for any progress payments on the construction project. If a contractor is continuously working on a project and is asked to submit a lien waiver through a certain date and the contractor has performed work in the amount specified in the waiver through that date, then the contractor or subcontract can safely submit such a waiver.

For instance, if the contractor has completed work through June 30, 2015 totaling $20,000.00 and the title company is requesting a partial waiver for work completed as of that date in return for payment of $20,000.00, the submission of a partial date waiver should generally not cause problems.

However, in construction projects, matters are rarely that simple.

It is common for a contractor or subcontractor to submit an application for payment which asks for payment completed during a time period preceding the actual date on which the pay application was prepared and submitted. Special care must be taken to assure that the time period covered in the waiver coincides with the time period for which payment is requested and does not include any additional time up to and including the date on which the application for payment or the actual lien waiver was prepared. Thus, a partial lien waiver intended to cover the work done in August should specifically say so instead of generally saying the lien covers the “work performed between the date of the last waiver and the date of this waiver” The latter language can include much more time and work than the contractor ever intended.

Change orders can present another problem. If a contractor has performed a portion of the work covered by the date waiver pursuant to unapproved and unpaid change orders, the contractor must identify and exclude that work from the waiver if the contractor wants to preserve its lien rights on that work. A date waiver covers all work performed during the specified time-period unless the contractor takes steps to limit the scope of the waiver within the waiver document, itself.

Another issue arises when there is a dispute on the balance due, on the contract amount, or the contractor has completed its work and payments are trickling in the subsequent months. For example, if a contractor completed its work on a building in Chicago on January 31, 2015 and is still owed $50,000.00 but the owner has a payment of only $10,000.00 ready to be paid February 28, 2015, the contractor could waive its entire lien claim if it were to submit a date waiver waiving its lien rights through February 28, 2015 in exchange for the payment of $10,000.00. Such a waiver would give up all of its lien rights including as to the remaining $40,000.00 because the contractor has already completed all of its work as of February 28, 2015.

In this situation, it would be more appropriate for the contractor to tender a money waiver that states that it is waiving its lien rights only to the extent of the $10,000.00 received. Using such a waiver would then preserve the contractor’s lien rights to the remaining $40,000.00.

As a practical matter, title companies are very reluctant to accept money partial lien waivers since title insurance is typically written to cover a piece of realty against clouds on title arising during a specified period of time. Title companies often require partial time waivers through the date that the payment is actually tendered.

It is inherently unfair for an owner or a title company to force a contractor to waive more of its lien rights than it has to. However, there is no easy solution if faced with a reluctant title company. The contractor can wait for final payment, if the contract terms allow it, and tender a final waiver of lien once final payment is ready. Such a tactic might violate the terms of the general or subcontract. It will certainly create financing difficulties for the owner whose construction lender should be demanding proof that the general and subs are being paid as the construction project unfolds as a condition precedent to further funding of the project. Furthermore, most subcontractors cannot simply finance an entire project and wait for payment until they are finished.

Worse, if payments are slow, the contractor needs to be mindful of the expiring lien notice and claim recording deadlines imposed by the Illinois Mechanics Lien Act. Often times, the contractor may have no choice but to submit the waiver that the title company requests and in the form that the title company demands.

There is no simple solution to these problems. The various risks must be weighed when deciding whether to submit a time waiver or wait for final payment. If faced with such a situation, it is important that general contractor or subcontractor consult with an Illinois construction lawyer or law firm to make some other arrangement to preserve your lien rights as much as possible while continuing to receive progress payments.

By: Mark B. Grzymala

Attorney and Founder of Grzymala Law Offices, P.C.

How to Perfect and Enforce Your Lien and Bond Claim Against Illinois Public Construction Projects

BuildersProtective Equipment

Introduction

This is our fourth and final installment in our series on Illinois Mechanics Liens.  We have gone through the process of enforcing a lien claim against privately owned projects. Now we will now look at the steps that need to be taken in order to perfect and enforce a lien claim against Illinois public projects such as municipal buildings, public schools, city parks or Illinois roads.

‘Perfecting’ your Illinois Mechanics Public Lien Claim

General Contractors

With respect to public projects, General Contractors (those who contract directly with the public entity/owner) generally do not have lien rights.  Because public liens are liens against funds and not against real estate, they must recover any the balance due from the owner. 

Subcontractors and Material Suppliers

If you are a subcontractor working on a public project and are unpaid, you are then entitled to assert a lien claim against the funds that the public entity is holding.  This right is granted pursuant to Section 23 of the Illinois Mechanics Lien Act. This type of lien claim is often referred to as a “trapping lien” and traps any funds that are left to be paid for the project.  A subcontractor asserts or perfects its lien claim against the funds by serving a Notice of Claim.

A Subcontractor’s Notice of Claim for Lien against Public Funds must:

  1. Be written and verified
  2. Identify the name and address of the subcontractor asserting the claim
  3. Identify the the subcontractor’s contract and the project the work is performed
  4. Identity the general contractor and any upper tier contractors
  5. Describe the work the subcontractor performed
  6. State the balance due the subcontractor

The Notice of Claim must be served upon the general contractor and the clerk or secretary of the local public entity (or director if a state agency) via registered or certified mail with return receipt requested.  The notice can also be served by personal delivery and is good upon acceptance by the public entity.

There is no statutory deadline to assert such a lien claim, however, once the general contractor is paid there will be no more funds left to assert a lien against.  It is important to assert your rights as soon as you suspect difficulty in receiving payment.

Once the Notice of Claim is served, it can be enforced.

Enforcing your Illinois Public Mechanics Lien Claim 

In order to enforce a claim for lien against public funds, a subcontractor must file a lawsuit for an accounting and to enforce its lien claim within ninety (90) days of serving the Notice of Claim.  The lawsuit is filed in the county where the project is and must include all parties in the chain of contract between you and the owner.  The public entity does not need to be named unless you are seeking action against it or alleging some type of wrong doing (e.g. you are seeking interest under the Illinois Local Government Prompt Payment Act)

In the lawsuit, you will be asking the court to order to pay the public entity the balance due in addition to interest and attorneys fees incurred as provided by the Illinois Mechanics Lien Act.  The lawsuit can also contain other causes of action such as breach of contract against the owner or general contractor, fraud, actions for bounced or NSF checks, account stated, and any thing else related to the contract or project.  The complaint can also and should include an action to enforce your bond claim as explained below. 

Please note that whether or not the subcontractor names the public entity, the clerk or secretary of the public entity must always be served with a copy of the filed complaint within ten (10) days after filing

If the lawsuit is not filed within 90 days, the subcontractor will lose its lien rights.

Enforcing your Illinois Bond Claim

The Illinois Public Construction Bond Act (30 ILCS 550/1 et seq.) requires that for any public project over $50,000.00 a general contractor provide bonds that guarantee performance of the contract by the general contractor and payment to the subcontractors. This law is often referred to as a “Little Miller Act” in reference to the federal law governing bond requirements on projects owned by the federal government or its agencies. 

In order to assert a claim against a payment bond against an Illinois or local project, the subcontractor or material supplier needs to prepare and send a Notice of Claim. 

A Subcontractor’s Notice of Claim Against Payment Bond is very similar to a Notice of Claim Against Public Funds and must:

  1. Be written and verified
  2. Identify the name and address of the subcontractor asserting the claim
  3. Identify the the subcontractor’s contract and the public project the work is performed
  4. Identity the general contractor and any upper tier contractors
  5. Describe the work the subcontractor performed
  6. State the balance due the subcontractor
  7. Although not required, the notice should state the name of surety and bond number if known

The Notice of Claim against Payment Bond must be served upon the local public entity via registered or certified mail with return receipt requested or by personal delivery and a copy to the general contractor within 10 days of service.  However, it is good practice just to send the notice out at the same time to everyone, including the surety if known.  The claim is good upon acceptance by the public entity and can be enforced immediately.

In order to enforce a claim against payment bond, a subcontractor must file a lawsuit to enforce its lien claim within 1 year of its last date of furnishing.  The lawsuit is brought on behalf of the public entity for the use and benefit of the subcontractor and against the surety.   The lawsuit is filed in the county where the project is. 

If the lawsuit is not filed within 1 year of the last furnishing date, the subcontractor will lose its bond rights.

Combining Notices and Law Suits 

Given that the requirements for clams against public funds and payment bond are so similar, is it common and good practice to combine both notices of claims against public funds and payment bond into one document and serve that.  A subcontractor can then commence one lawsuit and enforce both claims, as well as any other claims it may have against its customer in the same action. 

Bankruptcy – Lien and Bond Claims

What happens if your customer, the general contractor, the owner or any other interested party file for bankruptcy?

As in the case of a lien against a private project – bankruptcy stays enforcement of a lien or bond claim but not perfection.

Once a party files for bankruptcy protection, the automatic stay applies and the debtor is protected from any collection attempts by creditors. Creditors cannot commence or continue any litigation against the debtor. However the stay DOES NOT prohibit a party from asserting or perfecting its Illinois mechanics lien and bond rights.  A contractor who is not paid should still serve its Notice of Claim in order to trap any funds that are left due the general contractor. 

The automatic stay does, however, prevent enforcement of the lien claim.  A subcontractor first needs to file a motion in the bankruptcy court and seek modification of or relief from the automatic stay so that it can enforce its lien claim. The bankruptcy courts often allow this request as long as the contractor does not seek money damages from the bankrupt debtor . Once the bankruptcy court grants the motion to modify or lift the automatic stay, the contractor can then proceed to file a lawsuit to enforce the lien against the public funds. 

With respect to bond claims, a subcontractor can still assert a claim and file suit to enforce a bond claim even if its customer is bankrupt.  Only bankruptcy of the surety would stay any such action. 

Lien and Bond Claim Deadline Summary

Here is a summary of the deadlines that subcontractors need to adhere to in order perfect and enforce their lien and bond rights against public projects. These are the most important to remember.

  • Subcontractor – Lien Claim

    • Serve Notice of Claim Against Public Funds once payment issues are suspected

    • File a lawsuit to enforce lien within 90 days of serving the Notice of Claim of the last date of furnishing.

    • Serve a copy of the lawsuit to the Clerk or Secretary of the public entity
  • Subcontractors – Bond Claim

    • Serve Notice of Claim within 180 days of the last date of furnishing.

    • File suit to enforce the bond claim within 1 year of the last date of furnishing.

Both the Notice of Claim Against Public Funds and Notice of Claim Against Payment Bond can be combined into one document.  One lawsuit can be filed to enforce both claims and it is much more efficient and cost effective to do so. 

The deadlines must be followed exactly and the lien claim and bond claim notices must contain all of the necessary information described above in order to perfect and enforce your rights.  However, it is always best to consult an attorney if you suspect you are having payment issues and need to protect your lien and bond rights.

Mark B. Grzymala

President and Founder of Grzymala Law Offices, P.C.

mark@grzymalalaw.com

How to perfect and enforce your Illinois Mechanics Lien Claim on private projects

at a construction site

Introduction

This is our third installment in our series on Illinois Mechanics Liens.  Now that we have looked at what a lien claim is, the parties entitled to file a lien claim and what is required to entitled to file a lien claim, we will now look at the steps that need to be taken in order to perfect and enforce a lien claim against a private project.

‘Perfecting’ your Illinois Mechanics Lien Claim

General Contractor’s Claim for Lien

Perfection is the process of converting a general lien right into an enforceable and valuable right in the real estate.  This is done by a written document called a claim for lien.  It is important that the contractor first obtain a title report or search public records to determine the legal description, the owner of record and whether any other parties have an interest in the property at issue.  Once you have reviewed the the title work, you must now draft the claim.

A General Contractor’s claim for mechanics lien must be contain:

  1. A brief statement of the contract and the work performed;
  2. Date the work was completed;
  3. The balance due after all payments and credits; and
  4. A sufficiently correct description of the property and a PIN if available
  5. Names of the owner(s) of record, the party the contractor contracted with, and any mortgagees or lenders

A claim for lien must be verified (i.e. signed in front of a notary) and be recorded within four (4) months of the last date of work or furnishing at the project. The lien claim is recorded in the office of the country recorder where the real estate lies.

Additionally if a general contractor is preparing a lien claim against an owner occupied residence, it must serve a recorded copy of the lien to the owner within 10 days of recording.

Once a general contractor records the lien claim it can be enforced.

Subcontractor Notices and Lien Claim

In order for a subcontractor to enforce its lien claim, it must also prepare the same mechanics lien claim as a general contractor but it also needs to identify all parties in the chain of contract between the subcontractor and the owner which includes the general contractor and any other subcontractors in between.

Section 24 Notice

In addition to recording a lien claim, subcontractors also have notice requirements that must be followed. A subcontractor is required to serve a Notice of Claim to the owner within 90 days if its last date of work or furnishing pursuant to Section 24 of the Illinois Mechanics Lien Act.  

The Notice of Claim must

    1. Identify the contract;

    2. Identify the general contractor and upper tier subcontractors the work was done for;

    3. Describe the work done and when it was performed;

    4. Sufficiently describe the property; and

    5. State the total amount due and unpaid as of the date of the notice.

The requirements of the Subcontractor’s Notice of Claim are very similar to those of the claim for lien and can be the same document. The notice must be served via certified mail with return receipt requested or served personally.  If the notice is not timely served, the subcontractor will lose its lien rights.  

There is an exception to the notice requirement.  A notice might not be required in instances when the General Contractor has tendered a sworn statement pursuant to Section 5 of the Illinois Mechanics Lien Act which identifies the subcontractor, its contract amount and balance due. The sworn statement can provide sufficient notice to the owner of the subcontractor’s claim.  However, it is often difficult to determine whether or not this has happened especially if the relationship between the general contractor and the subcontractor has deteriorated.  It is always best to serve the Notice of Claim within 90 days. 

Once the notice is served and the lien claim is recorded, a subcontractor can proceed to enforce its lien claim.

Section 5 Notice

Subcontractors who work on single family owner occupied residences have yet another notice to send out pursuant to Section 5 of the Illinois Mechanics Lien Act.  Within 60 days of the subcontractor’s first date of furnishing, a subcontractor must send a notice to the property owner via certified mail, return receipt requested with a copy to the general contractor which contains:

    1. The name and address of the subcontractor or material supplier;

    2. The date he or she started to work or to deliver materials;

    3. The type of work done and to be done or the type of labor, services, material, fixtures, apparatus or machinery, forms or form work delivered and to be delivered; 

    4. The name of the contractor requesting the work; and

    5. The following warning:
      • NOTICE TO OWNER:  The subcontractor providing this notice has performed work for or delivered material to your home improvement contractor. These services or materials are being used in the improvements to your residence and entitle the subcontractor to file a lien against your residence if the labor, services, material, fixtures, apparatus or machinery, forms or form work are not paid for by your home improvement contractor. A lien waiver will be provided to your contractor when the subcontractor is paid, and you are urged to request this waiver from your contractor when paying for your home improvements.

This notice needs to be served in order to protect the subcontractor’s lien rights even if there are no payment issues.

Enforcing your Illinois Mechanics Lien Claim

In order to enforce a claim for mechanics lien, both general contractors and subcontractors must file a lawsuit or complaint to foreclose their lien claim within two (2) years of the last date of work or furnishing. The lawsuit is filed in the county in which the real estate lies. It must include all parties in the chain of contract between you and the owner along with any other party that has an interest in the property such as a mortgagee/lender and even other mechanics lien claimants.

In the lawsuit, you will be asking the court to sell the property in order to pay the balance due in addition to interest and attorneys fees incurred as provided by the lien act.  The lawsuit can also contain other causes of action such as breach of contract against the owner or general contractor, fraud, actions for bounced or NSF checks, account stated, and any thing else related to the contract or project.  

If the lawsuit is not filed within 2 years, the contractor will lose its lien rights. This period cannot be extended or renewed.

In some instances, the two year deadline can be accelerated pursuant to Section 34 of the Act. An owner or any other party with an interest in the property can issue a demand to the contractor to file suit within 30 days. If suit is not filed within that time, then the contractor’s lien is extinguished.

Bankruptcy – Automatic Stay and Mechanics Lien Claims

What happens if your customer, the general contractor, the owner or any other interested party file for bankruptcy?

Bankruptcy stays enforcement of a lien but not perfection.

Once a party files for bankruptcy protection, the automatic stay kicks in and the debtor is protected from any collection attempts by creditors. Creditors are prohibited from commencing or continuing any litigation against the debtor.  However the stay DOES NOT prohibit a party from asserting or perfecting its mechanics lien rights.  A contractor who is not paid must still serve its necessary notices and record its claim for lien within the time periods set forth above and in the Illinois Mechanics Lien Act. 

The automatic stay does, however, prevent enforcement of the lien claim.  Even if the two year enforcement deadline is approaching, a contractor cannot file suit to enforce its lien claim. It first needs to file a motion in the bankruptcy court and seek modification of the automatic stay so that it can enforce its lien claim. The bankruptcy courts often allow this request as long as the contractor does not seek money damages from the bankrupt debtor and the real estate is not the only asset of the bankruptcy estate. Once the bankruptcy court grants the motion to modify or lift the automatic stay, the contractor can then proceed to file a lawsuit to enforce the lien. 

Lien Deadline Summary

Here is a summary of the deadlines that general contractors and subcontractors need to follow in order perfect and enforce their lien rights against private projects. These are the most important dates to remember!

  • General contractors

    • Record the claim for lien with the county recorder within 4 months of the last date of furnishing.

    • Send copy of recorded lien to the owner if the work was done on a single family owner occupied residence.

    • File a lawsuit suit to enforce lien within 2 years of the last date of furnishing.

  • Subcontractors

    • Serve Notice of Claim within 90 days of the last date of furnishing.

    • Record the claim for lien with the county recorder within 4 months of the last date of furnishing.

    • Send notice to the owner within 60 days of first furnishing date if working on a single family owner occupied residence.

The deadlines must be followed exactly and the lien claim and notices must contain all of the necessary information described above in order to protect and perfect and enforce your lien rights.  Mistakes can be easily made and it is always best to consult any attorney if you suspect you are having payment issues and need to protect your rights.

In our next and final installment, we will briefly review perfection and enforcement of a lien and bond claim against public projects.

Mark B. Grzymala

mark@grzymalalaw.com

Who is entitled to file an Illinois Mechanics Lien Claim?

Illinois mechanics lien claim claimants

This is our second post in our series providing an overview of Illinois mechanics liens. In this installment, we will examine what is required in order to be entitled to an Illinois mechanics lien claim and who is entitled to assert one.

In a typical construction project, there is generally an owner, developer or sometimes a tenant who hires a general contractor to perform work on a project. The general contractor then hires subcontractors for specific trade work such as electrical work or carpentry. Often, those subcontractors will also hire sub-subcontractors or material suppliers (for lumber, pipes, etc.) and so on.

For purposes of the Illinois Mechanics Lien Act (the “Lien Act”), a general contractor is one who had a contract directly with the owner, the owner’s agent or someone he or she has “knowingly permitted” to contract for improvements.  This means that even a plumber can be considered a “general contractor” as long as its contract for the work performed is with the owner.  A subcontractor is one who has a contract with a general contractor.  This is an important distinction and the steps needed to assert and perfect your mechanics lien rights can vary on whether you are a general contractor or a subcontractor under the Lien Act.

General contractors, subcontractors and material suppliers who have furnished labor or materials used to improve real estate from the general contractor to the lowest tier subcontractor or material supplier is entitled to a lien claim for his or her unpaid work against that real estate.

In order to be able to assert a mechanics lien claim under Illinois law, a party generally needs to have:

  1. A valid contract with an owner or his agent (such as a general contractor)  for permanent improvement to real estate;
  2. Performance of that contract or excusable non-performance (such as a failure to timely pay);
  3. The work or materials must actually improve or add value to the real estate; and
  4. The work and materials must be lienable.

Some examples of lienable work include: carpentry work including framing, installing flooring and carpeting, installing drywall,  excavation, paving, electrical work, roofing, masonry, installation of HVAC equipment, plumbing including installing storm and sewage drains, furnishing concrete forms, cabling, drilling for well water, rental of cranes and other construction machinery, whole house painting, installation of an elevator and landscaping.

Some examples of non-lienable work include: patching and painting, cleaning, repair work, maintenance, warranty work, and installing non-permanent fixtures such as kitchen appliances and other trade fixtures.

What about public projects? In our last post we touched upon mechanics lien rights for work performed on public projects.   Under Illinois law, a general contractor (one who has a direct contract with the owner or public entity) cannot assert a lien against the public funds pursuant to Section 23 of the Lien Act.  However, a subcontractor who has furnished labor or materials used to improve a public construction project can as long as the same requirements set forth above are met.

This concludes our second installment on Illinois mechanics liens.  Next we will look the steps necessary to take to perfect and enforce your Illinois mechanics lien claim against private projects.

Mark B. Grzymala
mark@grzymalalaw.com