Massachusetts Lien Law: When Is It Best to Record a Claim During a Slowdown in the Economy?
 
April 14, 2008
 
Paul M. James- Boston
Stanley A. Martin- Boston

With the economy in a downward trend, ensuring collection of contract funds becomes even more important. This alert is to remind general contractors and construction managers of an important benefit in the Massachusetts lien law available to those who file a lien notice early on in the project.

One anticipated outcome of the 1996 overhaul of the lien law was that prime contractors would more readily record a Notice of Contract at the outset of the project. It was also anticipated that owners and their lenders would accept such filings as routine because of the contractor’s ability to provide a partial waiver and subordination in exchange for each progress payment. Experience has demonstrated that the step of early recording of a Notice of Contract remains the exception and not the rule. But there is a good reason for reconsidering the natural reluctance to record a lien notice, particularly when a commercial lender is involved.

A lien claim takes its place in the priority line at the time it is recorded. A prime contractor Notice of Contract places the contractor’s right to retainage ahead of all subsequent construction loan advances. Recording a Notice of Contract near the end of the project, when all but the final construction loan draws have been advanced, means that the contractor’s lien for retainage will be subject to the lender’s lien for all loan advances made up to that point in time. If the value of the completed project has decreased during that time, due to economic forces, the effectiveness of a lien will be reduced or even wiped out if recorded late in the process.

Go on Record Early

Those who go on record early will have secured right to retainage ahead of the lender and will be in a much better position to get their final payment. The lender will not get back to “first place” in the priority line until the final draw has been released to the contractor. Absent resolution of its construction loan, an owner will probably not be able to transition to permanent financing. These two factors will add impetus to resolving the contractor’s last few payments, and give both owner and lender an incentive to close out the construction contract.

The process of identifying the project property and recording a Notice of Contract can easily be incorporated into the early project-related activity and, particularly in an economic downturn, can pay dividends over the long term.

The Holland & Knight Construction Industry Practice Group provides regular counsel to prime contractors on lien and contract issues.

For more information, email Paul James at paul.james@hklaw.com, Stan Martin at stan.martin@hklaw.com, or Jack DiNicola at john.dinicola@hklaw.com,
or call toll free, 1.888.688.8500.