Understanding Lien Law Key for Contractors and Buyers

There you were at the closing table, the sale of your home complete at last. The closer looked down her lornet with a piercing gaze and asked, “Have you done anything that might have caused a lien against your property in the last 90 days? Sign here.”

If you signed without thought, you were not alone. If you were the buyer, and the closer even brought up the subject of liens, you probably never gave it a second thought. Unfortunately, there are circumstances both in a resale home and in new construction where liens by contractors and vendors can be a major problem for a seller, a buyer, and for the title company.

Alaska’s lien law takes into account the competing interests of a lender’s wish to be in the first mortgage position, and the legitimate concerns of contractors and vendors who need to assured of payment. Those who can file liens have specific procedures to follow. If they don’t, they are at risk of not getting paid.

The magic of the 90 days is the statement in the law that a contractor has 90 days from when he or she first delivers material or labor to a job to file a lien against the property.

Consider the resale home. The seller has to replace the roof before the sale can close. At closing the seller signs an affidavit that says he will be responsible for paying the roofer, who might have only started the job 30 days before closing. The same affidavit says the title company is out of the picture if any liens are filed after closing.

The buyer needs to understand that the roofer might still file a lien after closing. The lien would be behind the deed of trust with the lender, but it still runs against the property, and the title company can’t be held responsible if the seller has skipped. The prudent buyer should inquire whether satisfactory arrangements for payment have been made.

In practice, closing agents don’t dwell on liens that might be filed after closing. They diligently clear liens of record that appear on a preliminary title report, collect the lien affidavit from the seller, and don’t always mention to the buyer the downside risk of liens being filed after closing.

In new construction, remodeling or commercial projects, prime contractors have the ability to shorten the 90 day lien filing period. When the project is complete, the contractor records a “Notice of Completion.” That gives subcontractors and suppliers only 15 days to file a lien.

To anticipate this scenario the law gives subcontractors and suppliers the opportunity to record a “Notice of Right to Lien.” This document gives the prime contractor the additional obligation to give five days advance warning that a Notice of Completion will be filed to anyone who has recorded a Notice of Right to Lien.

Complicated and confusing? Perhaps initially, but any contractor, subcontractor or supplier that seriously intends to be in business needs to know the rules. It is no surprise, however, that many small subcontractors and suppliers of materials and labor are uninformed. In practice almost all of these businesses don’t follow all the procedures all the time.

“Business is done on a buddy system in Alaska,” says Bill McAdams of Land Title. “Many of these vendors and small contractors in a competitive environment think they will tick off the contractor if they file a Notice of Right to Lien. It’s ridiculous not to, though. The law is there for everyone’s protection.”

Behind the scenes of the bankruptcy filing of Quigley Quality Homes will be arguments over whether the lien procedures were followed. If Quigley’s suppliers didn’t record their Notices of Right to Lien, they may have no claim in bankruptcy court. If Quigley didn’t notify those who had recorded lien rights five days before recording his Notice of Completion, his Notice of Completion might not be valid and those lien claimants will have 90 days to file liens.

According to McAdams, the state recorder’s office has been deluged with lien filings since word got out two weeks ago that Quigley was going under. Whether all these claims are valid is for the bankruptcy trustee to figure out.