You have built a successful business. Now you are building your own office building. You have carefully calculated the cost of construction and are confident that everything is in order, but have you considered what would happen to your business if you had to pay twice for the same construction work? Don’t believe that could happen to you? Your risk may be greater than you think.
One of the most serious, and least understood, risks of new construction is the risk of construction liens. Anyone who does work to improve your property, such as the construction work to build a new office building, can file a lien against your property, if they are not paid for that work. This lien, just like a mortgage lien, can be foreclosed, if full payment of the amount due is not made.
Many owners believe that they face no risk of construction liens, as long as they pay, in full, for all work done on their property. Unfortunately and surprisingly, however, this is not correct. What protects an owner from a construction lien claim is not just the amount that the owner has paid, but also the identity of the party to whom that payment was made.
Many different contractors, subcontractors and material suppliers work on a typical construction project, and they all have a right to place a lien on your property, if they are not paid. The risk to you, as an owner, even if you pay for all of the work, comes from the fact that you will probably not pay each of these contractors, subcontractors and material suppliers directly. Instead, you will pay your general contractor for all of the construction work, expecting your general contractor to use that money to pay both itself and everyone else hired by your general contractor to work on your project.
But what if your general contractor only pays itself, leaving all of its subcontractors and material suppliers unpaid? You would obviously have a right to sue your general contractor for doing this, but your general contractor could then file for bankruptcy, leaving you with little or no chance of recovering your money. Meanwhile, each of the unpaid subcontractors and material suppliers who worked on your project would have a right to file a valid lien against your property, in spite of the fact that you have already paid the general contractor for their work. These subcontractors and material suppliers would have this right because they did not actually receive your payment. Moreover, to avoid foreclosure of these liens, you would then need to pay for the work done by each of these subcontractors and material suppliers, for the second time. In other words, having paid the general contractor, once, for their work, you would now have to pay each of these subcontractors and material suppliers, again, directly, in order to get their liens released. As a result, you could end up paying as much as twice the price originally quoted for their work.
The risk of a general contractor filing for bankruptcy in the middle of a project has grown, dramatically, in these challenging economic times, and, as a result, the risk of an owner paying twice for the same work has grown, dramatically, as well. Fortunately, there is a simple way to protect yourself from this risk. Never pay money for construction work without simultaneously receiving lien waivers in the full amount of your payment from all contractors, subcontractors and material suppliers who performed that work. Do not allow your general contractor to deliver lien waivers to you after you have paid your money (which is what most general contractors will want to do) because this will not protect you from the risk of construction liens. Make the delivery of lien waivers from all contractors, subcontractors and material suppliers who have worked on your project a condition to your obligation to make each and every payment, i.e. not just the final payment, but each progress payment as well. Note that most construction contracts prepared by general contractors will not contain this language (in fact, they often expressly provide that the general contractor is not required to do this), so you will need to hire an attorney to review and revise your contract so that it will protect you from this, as well as all of the other, risks of construction.
This article was written by Janice L. Gauthier, Esq. Ms. Gauthier has an A.B. from Harvard University and a J.D. from Harvard Law School. She is the owner of The Gauthier Law Group, LLC, a boutique law firm that represents dentists, physicians, health care providers, professional service practices and other businesses and business owners in Wisconsin and Illinois. You can contact Ms. Gauthier at 414-270-3857 or by email. To learn more about Ms. Gauthier’s background and experience, visit her Google or LinkedIn profiles.
© 2013 The Gauthier Law Group, LLC