Lien and Payment Bond Right Preservation is a MUST

Recently, I have been involved in more than a few matters where a party failed to preserve their construction lien rights or payment bond rights, as applicable to the project.  Why?  Failing to properly preserve lien or payment bond rights is avoidable.  Instead of a party hiring a construction attorney or devoting the resources to lien or payment bond right-preservation, they delegate this issue in-house or are not knowledgable regarding deadlines.   By failing to preserve lien or payment bond rights, as the case may be, a party is severely losing potential leverage to maximize collection.  What if the party was hired by an entity that has a collectibility concern?  What if there is a pay-if-paid provision in the contract?  These questions can be minimized by preserving rights against a lien or payment bond where the debt is collateralized by the real property (e.g., lien) or a surety (e.g., payment bond).  Lien and payment bond right preservation is a MUST!  Don’t put your self in a position where you wait until it is too late to understand how to preserve your lien or payment bond rights only to find out you are out of luck!  Because you will be out of luck!

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

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Owners: Be Prudent, Engage Counsel, Don’t Deal with Liens on Your Own

I receive numerous calls from owners that have a construction lien recorded against their property.  Of course, in most instances, the owner disputes the lien amount and, in fact, the lien in its entirety.  This is ok.

The owners are interested in recording a Notice of Contest of Lien.  But, surprisingly, the owners want to undertake this process themselves to presumably save a few bucks.  Technically, owners can do this themselves.  But, you have to ask the question, why?  The prudent thing for an owner to do is to engage a construction counsel to walk you through the pros / cons, available options, and to prepare the Notice of Contest of Lien for you.  Saving a few bucks is always ok, but it is not always prudent. When owners call me I do not render legal advice because no one benefits from legal advice in a vacuum – no one!  Owners that appreciate the risk of a lien will engage counsel to ensure their rights are protected and options are vetted to ensure they are undertaking the right option.  Also, the owner will spend money to ensure the Notice of Contest of Lien is done correctly.  It is a relatively small investment when considering the impact of the lien.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

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Recording a Notice of Contest of Lien Against Payment Bond

As a general contractor, if you receive a notice of nonpayment from a claimant that is preserving its rights under your payment bond, you can record a Notice of Contest of Claim Against Payment Bond.  This is similar to a Notice of Contest of Lien.  By recording this Notice of Contest in the official records, you are shortening the time frame for a claimant to file suit against your payment bond to 60 days from the date of service of the notice.  This can have the effect of putting pressure on the payment bond claimant to determine whether they really want to file a lawsuit against your payment bond.  For more information, please check here.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

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Am I a Lienor?

I was hired to perform or furnish labor, services, or materials for a construction project.  Do I have construction lien rights?  It is a pretty important question, right?  I think so!

If I have lien rights then I need to ensure I properly perfect those rights.  But, in order to have lien rights, I need to be a proper LIENOR under Florida’s Lien Law.  To be a proper lienor, I need to be a contractor, subcontractor, sub-subcontractor, materialman, laborer or professional lienor, within the statutory definitions in the Lien Law.  If I am doing work on a construction project, I need to know what definition I fit in based on who hires me, the scope I was hired to perform, and how far downstream I am from the owner.  This will also help me determine what I specifically need to do to perfect lien rights.  To learn more about whether you are a proper lienor, read this article.

For example, if I am a sub-sub-subcontractor, I have no lien rights.  If I am a materialman to a materialman, I have no lien rights.  If I am a materialman to a sub-sub-subcontractor, I have no lien rights.  If I am a professional engineer and I did not have a contract with the owner, if my professional services wasn’t per the direct contract and didn’t go towards the improvement of the project, I have no lien rights. If I am a temporary labor company, I am not a laborer within the definition of the Law Law.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

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Conditional Payment Bond Requirements

Conditional payment bonds are becoming more popular on private construction projects. From a general contractors’ perspective, the conditional payment bond provides it security in the event the owner does not pay. With an unconditional payment bond, a claimant can still sue the bond and the pay-if-paid defense does not apply.  That puts a tremendous amount of risk on the general contractor that is furnishing the bond because it is assuming all of the risk associated with the owner’s nonpayment. With a conditional payment bond, the bond can reap the benefits of the pay-if-paid defense since the bond is not on the hook if the owner does not pay.

Conditional payment bonds are governed under Florida Statute s. 713.245.  For a conditional payment bond to be effective, a few important things need to take place:

  1. The subcontract must contain pay-if-paid language.  Most do, and if a general contractor is furnishing a conditional payment bond, it would be very surprising for a subcontract not to expressly condition the general contractor’s payment to the subcontractor on its receipt of payment from the owner.
  2. The bond is listed in the Notice of Commencement as a conditional payment bond and recorded with the Notice of Commencement prior to construction.
  3.  The words “conditional payment bond” must be in the title of the bond at the top of the front page of the bond. And,
  4. The bond must contain on the front page in at least 10-point font, “THIS BOND ONLY COVERS CLAIMS OF SUBCONTRACTORS, SUB-SUBCONTRACTORS, SUPPLIERS, AND LABORERS TO THE EXTENT THE CONTRACTOR HAS BEEN PAID FOR THE LABOR, SERVICES, OR MATERIALS PROVIDED BY SUCH PERSONS. THIS BOND DOES NOT PRECLUDE YOU FROM SERVING A NOTICE TO OWNER OR FILING A CLAIM OF LIEN ON THIS PROJECT.”

Fla. Stat. s. 713.245(1).

These statutory requirements must be complied with.  The contractor should initially ensure that the conditional payment bond satisfies the requirements of the statute by making sure the words “conditional payment bond” is in the title at the top of the front page and the bond contains the capitalized language on the front page.   Then, because the owner is responsible for recording the Notice of Commencement, or if there is a construction lender, the lender is responsible for recording it, the contractor must work with the owner and lender, as required, to ensure the Notice of Commencement is properly recorded with the conditional payment bond. If the owner or lender do not, the contractor should ensure an amended notice of commencement is properly recorded ASAP so that the contractor does not lose the benefits of the conditional payment bond.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

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Elements for Subcontractor to Prove Miller Act Payment Bond Claim

As a subcontractor on a federal construction project, it is imperative you know what you need to do to perfect your Miller Act payment bond rights.    A subcontractor must prove the following four elements in a Miller Act payment bond claim:

  1. The subcontractor supplied labor and/or material per its subcontract;
  2. The subcontractor is unpaid for the labor and/or material supplied per its subcontract;
  3. The subcontractor had a good faith belief that the labor and/or material supplied was for purposes of the project (and prime contractor’s scope of work); and
  4. The subcontractor satisfied jurisdictional requirements in bringing the Miller Act payment bond lawsuit.

The  subcontractor’s performance of labor and/or materials will be determined in reference to the subcontract. This includes the subcontractor’s payment for the labor and/or materials performed.

For more information on the Miller Act, please check out my ebook that goes into all aspects of Miller Act payment bond claims.

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Do Not Ignore the Surety’s Demand for Collateral Security

If you are furnishing a payment bond or performance bond to an owner or contractor (the obligee), whatever the case may be, then you are the principal of that bond.  Sureties, however, are not issuing bonds on your behalf out of the kindness of their hearts.  It is a business and they are issuing the bonds with a risk-free mentality, unlike liability insurance.

When a surety issues a bond on your behalf, you are executing an agreement of indemnity with the surety.  It is personally guaranteed by principals (and their significant others) and potentially affiliated entities.  This is a powerful document and gives the surety stern options and rights in the event they perceive a risk.  One of those stern options is to demand that you, as the bond principal, furnish the surety with collateral security.

Furnishing the surety with collateral is oftentimes resisted since the  principal may not have the collateral demanded or the collateral may be perceived as unreasonable.   But, by resisting, the principal puts itself in a lose-lose position.  And, I mean a lose-lose position.  The principal can no longer argue the surety acted in bad faith if it refused a demand for collateral security.  Review this article for more information on this issue dealing with a subcontractor that refused to post collateral security upon demand from its performance bond surety.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

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Owners: Take Notice of Listed Lienors in Contractor’s Final Payment Affidavit

If you are an owner, you should receive a contractor’s final payment affidavit, which you are required to receive at least 5 days before anyone you hire directly files a construction lien foreclosure lawsuit. The contractor’s final payment affidavit should identify those lienors that are still owed money.  Notably, as an owner, you can request your contractor or anyone you directly hire to furnish such affidavit.

Take notice of listed lienors in the affidavit and, importantly, amounts these lienors are owed. Florida Statute s. 713.06(d)(2) states:

If the contractor’s affidavit required in this subsection recites any outstanding bills for labor, services, or materials, the owner may, after giving the contractor at least 10 days’ written notice, pay such bills in full direct to the person or firm to which they are due, if the balance due on a direct contract at the time the affidavit is given is sufficient to pay them and lienors giving notice, and shall deduct the amounts so paid from the balance due the contractor. Lienors listed in said affidavit not giving notice, whose 45-day notice time has not expired, shall be paid in full or pro rata, as appropriate, from any balance then remaining due the contractor; but no lienor whose notice time has expired shall be paid by the owner or by any other person except the person with whom that lienor has a contract.

This section allows an owner to pay directly those lienors that preserved their construction lien rights (by serving a Notice to Owner) after giving the contractor 10-days’ notice.

Section 713.06 contains germane information for an owner that receives a contractor’s final payment affidavit.  Many owners do not capitalize on this, but this allows an owner to start paying those listed entities downstream from the contractor directly (ideally, eliminating their lien rights) all the while reducing any monies that would be owed the contractor.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

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Lien Priority goes Hand-in-Hand with the Notice of Commencement

As a contractor (or subcontractor if a payment bond is not furnished by the contractor) you always want to make sure (1) there is a notice of commencement that was recorded for the job and (2) you are working under an effective notice of commencement.  Why?  Because if you are not paid, you will want to lien (and you should be preserving any lien rights you may otherwise have).  The lien allows you to secure your nonpayment against the real property.  This means your lien is only as good as the equity in the property and the priority of the lien.  An effective notice of commencement allows your lien to relate back to the date the notice of commencement was recorded.

Conversely, as an owner, there are times you want to terminate the notice of commencement.  Perhaps the job is completed and the notice of commencement is still in effect and you want to cut off lien priority rights.  Perhaps you want to convert your construction loan into a permanent loan.  Perhaps you want to re-finance.  Perhaps you want to secure a construction loan during construction.  Any one of these factors will support recording a notice of termination of the notice of commencement.  When you borrow money from a lender, a lender will typically want their mortgage to be first priority.  This means the mortgage cannot be recorded after an effective notice of commencement otherwise potential liens can take priority over the mortgage.  Not a good idea from a lender’s standpoint.  For more information on terminating a notice of commencement, check out this article.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

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