Using Mechanic’s Liens to Collect Accounts Receivable

Every contractor should be aware of the potential to use mechanic’s liens as a means of enhancing collection of accounts receivable.

Every industry has problems collecting its accounts receivable. Contractors are afforded the right to file a mechanic’s lien against the property that was improved by their work. Because such a lien is an encumbrance against title to the property, it provides a contractor with security for its unpaid account, enhancing the chances of collecting the outstanding balance.

Both Ohio and Kentucky law allows a contractor who performs work on improvements to property to file a lien for unpaid amounts. If, prior to the delinquency, the contractor takes the necessary steps to assure the placement and validity of the lien, the chance of collection can be enhanced at a very affordable cost.

A contractor should have its accounts receivables officer in regular and early communication with legal counsel for the company, to identify delinquent accounts and initiate the process for collection. The accounts receivables officer and the attorney can work together to obtain the relevant information, send the necessary notices, and file appropriate lien documents within the deadlines required by law, and thus properly effectuate the lien on the property.

If the contractor is a subcontractor working under the general contractor, the lien provides an opportunity to put the owner on notice that the subcontractor has not been paid, thereby providing leverage for payment, whether by means of payment from the general contractor, a joint check, or a direct payment from the owner. The lien causes the owner to get involved since the lien impairs title to the owner’s property and raises the possibility of foreclosure. For example, an electrician who contracts with a general contractor to install electric service can file a lien against the owner’s property since it was benefited by the electrician’s work. A properly filed lien will require the owner to see that the subcontractor is paid, even though the electrician did not have a direct contract with the owner. If the lien is timely and properly filed, the contractor can effectively obtain payment from the source of the construction funds, without risk of the default by the general contractor or appropriation of the property owner’s funds to other projects or other subcontractors.

The procedures are fairly simple.

In Ohio, a contractor must take certain preliminary steps when it begins a new job (it cannot wait until payments are overdue). Upon being awarded a job, the contractor must obtain or request a Notice of Commencement from the property owner or general contractor. The Notice of Commencement advises of several important facts, including the following: (1) the identity of the property owner, general contractor, lender, and surety for the project; (2) the legal description of the property; and (3) the date of the initial contract between the owner and the general contractor. The subcontractor is required to serve a Notice of Furnishing on the owner and general contractor within 21 days after its first work on the project. The Notice of Furnishing notifies the owner and general contractor of the following (1) identity of the subcontractor claiming entitlement to be paid; (2) identity of the party the subcontractor is working through (the general contractor); and (3) date of its initial work. If the subcontractor is not paid, it can record an Affidavit for Mechanic’s Lien within 75 days after its work is complete (on nonresidential jobs). The subcontractor must also mail a copy to the owner and general contractor by certified mail. By doing so, the subcontractor has effectively protected its rights to payment upon proof that payment is due.

In Kentucky, a notice letter must be sent to the property owner by certified mail within 120 days after the last work performed by the contractor (the time period is shortened to 75 days if the claim is for less than $1,000). Subsequently, a lien statement must be filed at the courthouse within six months after the last work was performed. A title examination of the courthouse records must be done to assure the name of the property owner and the proper legal description of the property that was improved. A property address alone is an inadequate description of the property. Formalities required include the proper name and address of the property owner. In Kentucky, a suit to foreclose the mechanic’s lien must be filed within one year after the lien statement is filed, or the lien is dissolved by law. In Kentucky, because of the 120-day notice requirement, accounts receivables that are older than four months are not subject to this enhanced collection procedure.

Conclusion Every contractor who performs services or supplies material for the improvement of property should contact its legal counsel and implement a program for the timely fulfillment of the formalities required to assert a lien, if necessary, against the property. Filing a lien is an effective way to provide maximum leverage for collecting, rather than writing off, accounts receivable.

Tim Theissen works in Strauss & Troy’s Kentucky office and regularly practices in the areas of real estate, domestic relations, estate planning, and small businesses. For more information on mechanic’s liens, please feel free to contact Mr. Theissen at (513) 768-971