Priority determines which lien gets paid first after a foreclosure sale, and which lien survives a sale of the property or bankruptcy. A Virginia mechanic’s lien may have the highest priority of any in the United States. The mechanic’s lien claimant will have priority over the construction loan bank. The Virginia mechanic’s lien will also survive a foreclosure or any other sale of the property. Bankruptcy will not defeat lien rights.

Partly because the Virginia lien is so powerful, the courts have “strictly construed” the mechanic’s lien law, meaning claimants must be extremely careful to follow each and every legal requirement or the mechanic’s lien will be invalid.

There is a “defense of payment” in Virginia. The owner is only required to pay for the project once. The owner can keep making legitimate payments until receipt of notice of a mechanic’s lien from a subcontractor. If the owner has already paid once for the project, all mechanics’ liens will fail.

Deadline Summary

Prefiling Before Construction. All contractors on residential property are required to give Mechanic’s Lien Agent (MLA) notice by certified mail within 30 days of beginning supply of labor or materials.

Lien Filing and/or Service After Labor or Materials Supplied. All contractors must file mechanics liens in land records within 90 days of last supply of labor or materials (may be a little more time, see below).

Enforcement. All contractors must enforce by filing a lawsuit within six months after lien filing.

Defense of Payment/Owner’s Responsibility for Payment to Subcontractors

The owner of a construction project must pay for the project only once. If an owner can prove that it has paid for the project in full, then all subcontractor liens will fail.1 Until the owner has received a notice of mechanic’s lien (in the form and the manner prescribed by statute), the owner can continue to freely make payments to the general contractor, eroding the subs’ ability to lien. This is the true deadline for filing a subcontractor mechanic’s lien: before your customer has been paid.

There is a “payment chain,” from the owner to the general contractor to the subcontractor to the sub-subcontractor or supplier. The mechanic’s lien of any lower tier contractor is only as strong as the weakest link in this payment chain.2 Accordingly, the further down you are on the payment chain, the greater the chance of a defense of payment. For this reason, a sub or supplier wants to file its lien and provide notice as soon as problems are apparent. A sub or supplier also wants to be aware of the status of account between the owner and general contractor at all times. If the owner is about to release all retention, then the subcontractor’s right to lien the project is about to disappear.

A defense of payment is an “affirmative defense.”3 This means that it is up to the owner to prove that it has paid in full for the project. An owner often has some indebtedness to the general contractor, but not enough to pay all subcontractor claims. In this case, the owner has a “partial defense of payment.”4 All subcontractors who have valid mechanic’s liens will share pro-rata in the fund held by the owner.5

A subcontractor or supplier should also consider sending Virginia Code § 43-11 Notices early in a project. These notices, sent by certified mail at the beginning of the project and again after delivery of labor and materials, can effectively eliminate this defense of payment problem and will make it the responsibility of the owner and/or general contractor to pay the claimant.

Remote Subcontractor and Supplier Liens

There is no known limit to how far down the contract chain lien rights exist. All claimants should file liens as long as they can “trace” their labor or materials to the property.

Priority

The timing of various liens on a property usually determines their priority. The first in time filed in the land records will be the “first mortgage,” with the first priority to any proceeds from a foreclosure or sale of the property. If another mortgage is filed in the land records later in time, it will be a “second mortgage.” If the property is foreclosed upon, this second mortgage will not receive any proceeds until after the first mortgage has been paid in full.

There are very few exceptions to this “first in time, first in right” general rule. One exception is county real estate tax liens, which will always have priority over other liens no matter when they are filed. Another exception is mechanics' liens that are “inchoate,” such as liens in Virginia. If a mechanic’s lien is inchoate, the lien “relates back” to and exists from the moment labor or material is supplied to the property, as long as the claimant eventually perfects the lien by filing and enforcing the mechanic’s lien. Any mortgage or judgment lien recorded after work began on the property will be inferior to the mechanic’s lien.

Although a mechanic’s lien for new construction will have priority over the construction loan, the bank will have first priority for money advanced to buy the land. In other words, the bank has the first lien on the land and the mechanic’s lien claimant has the first priority in the building. A contractor supplying labor and materials “for the repair or improvement of any building or structure” (not new construction) has a lower priority. A mortgage or other lien recorded prior to the commencement of work has complete priority over a mechanic’s lien for rehabilitation, remodeling or home improvement.6

Sale or Foreclosure of Property

The priority of various liens on real property also determines whether or not the liens survive foreclosure. Upon foreclosure by any lien holder, the inferior liens are eliminated and have no security interest in the property after foreclosure. All liens that are “prior” will survive the foreclosure. The foreclosure purchaser now owns the property “subject to” the prior liens.7

Since Virginia mechanics liens are prior to most other liens, they survive most foreclosures. Since a mechanic’s lien is inchoate, it can actually be filed after foreclosure. A first trust lender may foreclose on a piece of real estate, only to see a mechanic’s lien filed after they have taken title. The mechanic’s lien claimant must be certain to name the new property owner in the mechanic’s lien, but lien rights otherwise still exist.8

Virginia mechanic’s lien rights similarly survive any other type of sale of the property.9 Any real estate purchaser must be aware that mechanic’s liens might be filed after they purchase the property, for labor and materials supplied to the prior owner. For this reason, real estate purchasers and title insurance companies always insist that the real estate seller sign an affidavit stating that no labor and materials have been supplied to the property in the last 90 days or that payment has been made for all such labor and materials.

Bankruptcy

Because the lien is inchoate, the “automatic stay” of the United States Bankruptcy Code does not stay the perfection (filing in the land records) of the mechanic’s lien. The claimant already had the lien, so the filing does not create new legal rights and is not a preference. In fact, it is important to keep in mind that the mechanic’s lien must still be filed within the normal time limits.

The enforcement of a mechanic’s lien by filing a lawsuit, however, is stayed by the bankruptcy of the owner, general contractor or other upstream contractor.10 It is not permissible to enforce a mechanic’s lien without permission of the bankruptcy court, but the claimant is provided additional time later to enforce the mechanic’s lien.

Subdivision and Utility Improvement Off-Site Work

The Virginia General Assembly created special provisions for contractors supplying “site development improvements” to serve an entire subdivision, such as streets, storm or sanitary sewer or waterlines.

Section 43-3(B) solved most allocation problems for site development improvements. Logically enough, each lot in the subdivision bears an equal amount of the lien for any improvement that serves all the lots in the subdivision (even though the site development improvement may not physically be on the lot being liened). Claimants must be careful, however, to make sure they comply with the special provisions.

In order to get the benefits of Section 43-3(B), the claimant also must “prior to the sale of such lot or condominium unit, file with the clerk…a document setting forth a full disclosure of the nature of the lien to be claimed, the amount claimed against each lot…and a description of the development.” This is referred to as a “Memorandum of Disclosure.”

The code does not provide us a form for a Memorandum of Disclosure. In practice, however, a Memorandum of Disclosure usually looks very much like a mechanic’s lien. This Memorandum must “allocate” the claim, showing the amount claimed against each lot. The important point is the timing. Memorandum of Disclosure must be filed “prior to the sale of such lot.” This is the one situation in Virginia where a claim must be filed in the land records before the property is sold. Claimants providing labor or materials for site development improvements, therefore, may have an earlier deadline for getting their claim filed.

In some situations a contractor may have mechanic’s lien rights only under Section 43-3(B). This means that a road builder may not be able to lien for subdivision streets at all, except with a Memorandum of Disclosure under Section 43-3(B).11

“Off-site” improvements may also be lienable only through the use of Section 43-3(B). With off-site improvements a contractor is, by definition, liening a piece of property to which the contractor supplied no labor or materials. A developer is often required to make improvements in a public right-of-way, including street widening or sewers. Those improvements in the street right-of-way are on public property and cannot be liened. “Off-site easements” may be purchased from a neighbor for the construction of storm water drainage facilities. Section 43-3(B), with an early Memorandum of Disclosure, allows such an “extra-territorial lien” for a structure not physically on the property liened.12

Renovation or Repair Work

Contractors do have a mechanic’s lien for renovation and repair work. The rules work the same, except there is a difference in priority. See the section on “Priority” above.

Tenant Work

In general terms, a contractor can obtain a lien only on the property of the person ordering the work. An underlying property cannot be subject to a mechanic’s lien if the fee simple owner did not order or authorize the work. If it is the tenant ordering the work, the claimant can obtain a mechanic’s lien in the “leasehold interest” of the tenant, but cannot obtain a mechanic’s lien in the building and underlying ground. In theory, the mechanic’s lien holder can then foreclose upon this leasehold interest.

Special Problems—Title Search

The Virginia lien is land record based. This means that the claimant must perform a complete land records title search to make sure the lien names the exact legal owner and has an accurate legal description of the property. This takes time and additional expense.

Special Problems—Allocation and Tracing

Since the Virginia lien is “strictly construed,” the claimant must make sure that exactly the right piece of real estate is liened for exactly the right dollar amount. The labor and materials claimed must be allocated with reasonable certainty between the multiple parcels of land, such as separate townhouse units. If the lien claims too much money or includes some real estate that did not received labor and materials, then the entire lien can be ruled invalid.

Special Problems—150-Day Rule

There are actually two time limits operating from the day of last work. The time limit for filing the mechanic’s lien counts forward from the last day of work. The claimant must also count backwards 150 days from the last day of work. The contractor is generally not allowed to include labor and materials supplied outside this window in any one mechanic’s lien. The 150-day rule does not apply to retention held up to 10% of the total contract price or to sums not yet due because of a contract “pay when paid” clause. The entire lien is invalid if it includes some dollar amounts outside the 150-day window.13

Lien Waivers14

Under Virginia law, a lien waiver in a contract is effective. In other words, a construction contract can contain a provision stating that mechanic’s lien rights are waived.15 Any contractor signing such a contract will never be able to lien the project.

It usually is requested of contractors to sign waivers of lien at the time of each progress payment. Waiver forms presented for signature vary greatly in their wording and effect. Virginia Supreme Court case law suggests that some common waiver language is effective to completely waive mechanic’s lien rights for the future; waive lien rights for materials not yet delivered; or waive lien rights for retention, even if the initial progress payment is very small.16

PREFILING BEFORE CONSTRUCTION: NOTICE TO THE MECHANIC’S LIEN AGENT

Claimants must give notice to the “mechanic’s lien agent” (MLA) when the project involves construction of one and two family residential dwellings.17 A real estate owner may (but is not required to) designate a mechanic’s lien agent when a building permit is issued. If an MLA is designated, then any contractor supplying labor and materials to this project must provide notice that the contractor seeks payment for labor performed or materials furnished.

Form of Notice

There is no particular form required for a mechanic’s lien agent notice. By statute, however, the notice must contain:19

The name, mailing address and telephone number of the person (or company) sending the notice
The building permit number
A description of the property as shown on the building permit
A statement that the person filing such notice seeks payment for labor performed or material furnished

The building permit contains all outside information necessary to send an MLA notice. All other information necessary for the notice is obtained from the contractor’s own records. A convenient form for such a notice is found at Appendix 19 and at the end of this chapter.

A similar form at Appendix 21, if properly filled out, will also constitute the first notice necessary to create personal liability on the part of the owner pursuant to § 43-11 of the code.20

Section 43-4.01(B) states that “an inaccuracy in the Notice as to the description of the property shall not bar a person from claiming a lien under this title…if the property can otherwise be reasonably identified from the description.”

Deadline for Notice

Notice must be provided within 30 days after the contractor begins work if the contractor wants to preserve its right to lien for all labor and materials furnished. A contractor can provide notice at a later time but can then lien only for labor and materials furnished after the notice.21

Delivery of Notice

The MLA notice is not filed with the court or anywhere else at this point. The MLA notice must be sent registered or certified mail or physically delivered to the mechanic’s lien agent at the address shown on the building permit.22

The building permit is required to contain the name, mailing address, and telephone number of the mechanic’s lien agent. The return receipt for a registered or certified mailing should be kept in the file in order to prove delivery. If a notice is physically delivered, some type of affidavit should be placed in the file by the person delivering the notice, showing the date, place and person to whom the notice was delivered. A signature from the mechanic’s lien agent showing receipt is preferable.

The Building Permit

The mechanic’s lien agent code is focused upon the building permit. If a mechanic’s lien agent has been named, the name will appear on the building permit. If there is no name on the building permit, then there is no mechanic’s lien agent. If a building permit has not yet been issued, there can be no mechanic’s lien agent.

The building permit contains all outside information necessary to send a mechanic’s lien agent notice, including the building permit number, a description of the property and the name and address of the mechanic’s lien agent. All other information for the notice is obtained from the contractor’s own records.

Since the mechanic’s lien agent statute is focused on the building permit, all construction contractors should also focus on the building permit. Contractors should seriously consider requiring a copy of the building permit from all owners and general contractors with whom they work. Contractors should already have company policies to make sure they have a signed contract before they begin work. A copy of the building permit should also be a required document before labor and materials are supplied.

By statute, the building permit “shall be conspicuously and continuously posted on the property.”23 As a practical matter, however, contractors cannot count on this. If permits are posted at all, they often are removed or damaged. Permits are often “conspicuously posted” inside the construction trailer or headquarters. While this protects the permit, it makes it harder for all contractors to find.

If a building permit is not posted, it is up to the contractor to “determine from appropriate authorities”24 whether a permit with a mechanic’s lien agent has been issued. For this purpose, all contractors should have an index of phone numbers and contact names of all the building departments of all counties in which they work. Counties vary in their practice, but many will advise on the telephone whether a mechanic’s lien agent has been designated. If the county will not advise by telephone, a trip to the building department may be necessary to obtain a copy of the permit. In any event, a contractor must be prepared to quickly determine whether notice is necessary since the notice must be sent within 30 days after the contractor begins work.

Appendix 20 contains a list of some building departments in Virginia, their addresses, phone numbers and procedures for getting MLA information. There are also professional services available to supply building permit MLA information, including Construction Net. For more information on Construction Net, view their website at www.Construction-Net.com or call (804) 282-2372.

If no building permit has been issued, then there can be no mechanic’s lien agent, and all contractors can begin work without notice.25 If a permit with a mechanic’s lien agent is issued later in the project, however, all contractors already on the job must provide notice within 30 days after the permit has been issued. If a contractor has already filed a mechanic’s lien when the permit is issued, no notice to the mechanic’s lien agent will be necessary for that claim.

What if changes are made or if an agent is added after the building permit is first issued? A contractor may require the owner to provide a copy of the building permit before work is begun, but the building department may still issue the owner an amended permit adding a mechanic’s lien agent. This is an unanswered question in the law today. We would hope that the law would not allow an owner to fraudulently employ such methods for the purpose of defeating contractor mechanic’s lien rights. On the other hand, there may be legitimate reasons for amending a building permit.

Requirement of the Notice

The mechanic’s lien agent statute applies only to the construction of a “one- or two-family residential dwelling unit.”26 It does not apply to commercial construction, such as the building of shopping centers, office buildings and industrial sites. It is clear that the mechanic’s lien statute applies only to residential projects, but there is some uncertainty about the definition of a “one- or two-family residential dwelling unit.” Single family detached residential dwellings are obviously included, but what about townhouses or multi-family apartment buildings? “One-family residential dwelling unit” may refer only to single family detached dwellings but could also refer to any type of dwelling unit in which only one family lives, including a townhouse or a condominium apartment. “Two-family residential dwelling unit” seems to refer to a duplex.

We need a clarification from the Virginia legislature or a few Virginia Supreme Court cases to straighten out this confusion. This law became effective June 19, 1992, and we expect future changes to clarify its applicability. Meanwhile, contractors and owners should assume that this statute may apply to any residential construction except for site development improvements. The key is to obtain a copy of the building permit on any residential construction. If a mechanic’s lien agent is named, then a contractor should send the notice. If the permit contains no MLA, then contractors do not need to worry about the notice.

Any contractor filing a lien for site development improvements under Virginia Code § 43-3(B) (streets, storm or sanitary sewer, waterlines or roads) is expressly excluded from the mechanic’s lien agent statute.27 Section 43-3(B) liens for site development improvements are discussed in greater detail below. If such a lien is filed, however, there is no need to provide notice to any mechanic’s lien agent to preserve Section 43-3(B) lien rights, discussed below. A site utility contractor should still provide notice to any mechanic’s lien agent named in order to preserve the right to file a lien under other portions of the mechanic’s lien code.

The Mechanic’s Lien Agent

By law, the mechanic’s lien agent must be a licensed attorney at law, a licensed title insurance company or a financial institution (bank).28 As a practical matter, most mechanic’s lien agents are the title insurance companies that the property owners intend to use to settle out sales of residential lots to consumers.

Practical Application and General Recommendations

There is no doubt that the mechanic’s lien agent statute has reduced the number of valid mechanic’s liens. Most contractors will simply fail to get over this hurdle. The notice must be sent early in the project, usually well before the contractor senses any trouble.

For this reason, contractors must make the notice a part of their normal project initiation procedure, even for healthy projects, in order to preserve mechanic’s lien rights. In fact, all contractors on all jobs should provide notice to any mechanic’s lien agent named. There are some internal costs involved in filing mechanic’s lien agent notices, but these costs are usually minor. Contractors can usually provide mechanic’s lien agent notices without the assistance of counsel. There are also benefits to providing the notice beyond the preservation of mechanic’s lien rights. Providing notice increases the chances of payment and decreases the chance that a mechanic’s lien will ever need to be filed. Contractors can also consider splitting their customers into two groups: MLA notice customers and non-MLA notice customers. Contractors can decide to avoid the costs and trouble of an MLA notice for customers that are well capitalized or have a long track record. MLA notices should always be sent to customers that are new or of questionable financial strength.

There is no doubt that owners and title insurance companies want mechanic’s lien agents named whenever possible. Most contractors will fail to give notice and the number of mechanics liens will be reduced, making life easier for owners and title companies. If notices are sent and received to preserve mechanic’s lien rights, this puts the owner in a better position to administer the project.

Together with the MLA law, the Virginia General Assembly also requires builder-owners to provide an affidavit at settlement stating that all labor or materials have been paid for or listing all contractors that have not been paid. The settlement company can compare this affidavit with the MLS notices that have been received. Because of these mechanic’s lien notices and the payment affidavits, owners, purchasers and title companies are in a much better position to know whether all contractors have been paid. Owners and title companies have a strong incentive to make sure all contractors have been paid, especially when mechanic’s lien agent notices have been sent. Accordingly, the sending of a mechanic’s lien notice by a contractor will increase the chances of getting paid at settlement and decrease the chances that a mechanic’s lien will ever need to be filed.

Viewed in this light, the mechanic’s lien agent statute is not just another technical legal hurdle to deprive contractors of their mechanic’s lien rights. Instead, the mechanic’s lien statute can be viewed as a system requiring a freer and more complete flow of information among owners, contractors and title insurance companies that will help insure that all contractors get paid.

Similarly, owners and general contractors should not view mechanic’s lien agent notices as a threat. Contractors should be encouraged to send notice so that the owner and its title insurance company are aware of which contractors are on the project and which contractors have not been paid. Owner-developers should also be ready and willing to provide copies of building permits to all contractors. In time, contractors requiring such information before they begin work will be the norm and not the exception. Owner developers will view such contractors not as a threat but as contractors that are better organized than others, more likely to be better organized throughout the project, and more likely to complete their portion of the project promptly and competently.

TIME LIMITS FOR MEMORANDUM OF MECHANIC’S LIEN

In Virginia, the contractor perfects its mechanic’s lien rights by filing a “Memorandum of Mechanic’s Lien.” This is a piece of paper filed in the land records of the county where the real property is located.29 It is not necessary to prove anything at this point, although an affidavit must be attached. No court order is necessary and the contract debtor need not agree. The contractor simply prepares a one or two page memorandum of lien, takes it to the land records of the county where the property is located, and pays a small filing fee.

Section 43-4 of the Code of Virginia states that any lien claimant, in order to perfect its lien:

...shall file a memorandum of lien at any time after the work is commenced or materials furnished, but not later than 90 days from the last day of the month in which he lasts performs labor or furnishes material, and in no event later than the 90 days from the time such building, structure, or railroad is completed, or the work thereon otherwise terminated.

This means that a lien:

Can be filed at any time after the claimant has commenced work, but not before
Must be filed within 90 days of the last day of the month in which the claimant last performs labor or furnishes material
If the claimant happens to be one of the last contractors on the project, the claimant’s time limit may be shortened. If the project is completed, or the work thereon otherwise terminated, then the mechanic’s lien must be filed within 90 days of such completion or termination (instead of 90 days from the last day of that month)

This means that most mechanic’s lien due dates will be in the last few days of a month. Unless the project has been completed or terminated, the claimant focuses on the claimant’s own last work. The claimant determines in which month the claimant’s last work was performed. The claimant then counts 90 days (not three months) from the last day in that month. Some months have 31 days, so the deadline usually will not fall on the last day of month but rather a few days earlier. February, with its 28 or 29 days, throws this general rule off. The deadline can fall after the first of the month, if last work was performed in November, December or January. Weekends or holidays can also impact the deadline, since county land records are closed. If a filing date falls on a weekend or holiday, then the deadline seems to be the next day in which courts are open in that county.30

Since most mechanic’s liens are due in the last few days of each month, construction law firms are often flooded with requests for mechanics' liens at the end of each month. For this reason, it is important to avoid waiting until the last minute to contact your attorney.

Completion of the Project and Claimant’s Last Work

How do contractors know when a project has been completed? Does trivial work, warranty work, or repair work extend the deadline for mechanic’s lien filing? The general rule is that any original contract work required to complete the contract will extend the deadline for filing a mechanic’s lien.

In a 1994 Virginia Supreme Court case,31 the architect issued a Certificate of Substantial Completion. The general contractor was required to complete several punch list items thereafter. Eventually, the general contractor filed a mechanic’s lien and the bank foreclosed upon the property. In defending against the mechanic’s lien, the bank contended that the 90-day deadline for mechanic’s lien filing ran from the date of substantial completion.

The Virginia Supreme Court disagreed, ruling that the 90-day deadline runs from when the project is complete. The court stated that the general contractor was required to complete the punch list items in order to fulfill its contract obligations. The contract was not complete, therefore, until these punch lists items were complete. The court made it clear that a mechanic’s lien can be ruled invalid if the general contractor purposefully delayed completion in order to extend its mechanic’s lien rights or committed some type of fraud. The mechanic’s lien may also be invalid in other extenuating circumstances.

This case confirms that minor work will extend a contractor’s mechanic’s lien rights, if it is a part of the original contract scope of work. The status of replacement items, repair work or warranty work is still uncertain.32 If a contractor is replacing or repairing work already in place, this may not extend lien rights.

Work “Otherwise” Terminated

All claimants must file their mechanic’s lien within 90 days from the date the project is completed or the work thereon is otherwise terminated. There is not much case law on the “otherwise terminated” wording, but it seems to get a common sense reading.33

In one case before the Virginia Supreme Court, the general contractor abandoned the project. The Supreme Court ruled that the work thereon had “otherwise terminated” when the project was abandoned, and the subcontractor’s deadline for filing a mechanic’s lien began at that time.34 There is often uncertainty whether and when a contractor has abandoned a project or been terminated. Contractors may simply fail to appear for long periods of time without any clear statement that they will not return. What if a general contractor has a lengthy punch-list remaining and continues to claim that punch-list items will be completed? What if the general contractor never, in fact, returns? Does a subcontractor’s mechanic’s lien deadline begin to run on the last day the general contractor actually performed work or when it became “obvious” that the general contractor was not going to return? Owners may send letters “terminating” the general contractor only to allow the general contractor back on the project at a later time.

There is no way for contractors to eliminate this uncertainty. The safest course is to simply lien earlier rather than later. If there is ever a gap of 90 days since the general contractor and the subcontractor have performed work on the project, then both the general contractor and subcontractor should have liens filed before the 90th day.

Multiple Contracts

What if a contractor has two different contracts to supply labor and materials to the property? Do labor and materials supplied under the second contract extend the deadline for filing a mechanic’s lien under the first contract? The Virginia Supreme Court has ruled that each contract has its own filing deadline.

The Virginia Supreme Court has been moving more towards a “contract analysis” to answer many mechanic’s lien questions, including filing deadlines.35 In the Addington-Beaman case, the Supreme Court implied that each shipment by an open account supplier was a separate contract.36

Soon after this, the Virginia Supreme Court employed a similar “contract analysis” to a mechanic’s lien filing deadline issue in the American Standard Homes case. In this case, American Standard Homes supplied complete house packages pursuant to a “material order contract” that listed all of the materials to be delivered. More than 90 days after all the materials listed in the “material order contract” were delivered, the customer requested and American Standard Homes delivered some replacements for items that had been “lost, damaged or stolen.” The Virginia Supreme Court ruled that the delivery of these replacement items did not extend the time for filing a mechanic’s lien on the basic delivery. In other words, the supplier may still file a lien solely for the new replacement materials, but cannot file lien for the original delivery months earlier.37

The court was concerned with the fact that all of the materials listed in the original contract had been delivered earlier. This contract was then complete. The customer was not obligated to buy from this building supplier and the supplier was not obligated to ship. The delivery of replacement materials was a different contract for which a different mechanic’s lien filing deadline would begin.

It is fairly clear, therefore, that if a contractor has more than one contract for a project, the contractor should count the mechanic’s lien deadline separately for each contract.

Deadlines for Open Account Suppliers

These cases have generated considerable debate on the filing deadlines for open account suppliers, since they have suggested that each delivery by an open account supplier would be a separate contract with its own mechanic’s lien filing date. In other words, the supplier would not be able to file a mechanic’s lien within 90 days of the last delivery. A mechanic’s lien would have to be filed within 90 days of each delivery. Three different Circuit Court opinions moved up to the Virginia Supreme Court and are now collectively referred to as the “Jim Carpenter” case.38

The Carpenter decision does not give us a perfectly clear rule, but is generally very helpful to open account suppliers. The opinion differentiates between “specific continuing contracts” and “merely marketplace suppliers under general open accounts.” “[W]here work or materials are furnished as part of a continuing contract related to a single property,” then the contractor can count its mechanic’s lien deadline from the last work or materials. “[W]here the course of dealing between the parties shows that each understood that the materials were being supplied for a particular project, rather than merely for general use by the contractor, and nothing in the records suggests that a mere open account was intended, a continuing contract will be found.”

The Supreme Court upheld the mechanic’s liens in all three cases. It was important to the court that one supplier had performed a “take-off,” listing the materials for each house and then furnished a “30-day firm offer” on the materials it could supply. The materials were furnished along with an invoice referencing each individual parcel of land supplied.

This decision will bring Virginia in line with other jurisdictions in the area, including Maryland. Generally speaking, if the supplier and customer “contemplate” that the supplier will provide all materials for an entire project, then the supplier should have extended lien rights. Suppliers who provide quotes committing themselves to supply an entire project should have lien rights from the date of last delivery to each parcel. It will still be very important to allocate the materials supplied to each home or town home. This information must be required from the customer at the point of sale.39

Some suppliers will still be a “mere market place supplier under general open accounts,” who must count their mechanic’s lien deadline from each delivery.40 This will especially be a problem for customer pick-ups, where suppliers are not delivering materials and will have difficulty tracing materials to a project. The knowledge that a supplier has about the project and the wording used in contracts will make a big difference in preserving mechanic’s lien rights.

Open account suppliers and subcontractors should do their best to protect themselves. It is difficult to provide any sure-fire solution to avoid a problem. Each supplier\subcontractor must also decide for themselves what will work in the field and what level of administrative expense they can afford. There is a spectrum of options that may provide increasing levels of protection but may also involve increasing costs.

File More Mechanics Liens

The only certain solution is to file a mechanic’s lien for each unpaid delivery within 90 days of the unpaid delivery. Contractors have always known to watch whether the last unpaid invoice went over 90 days. The safest course is to watch every invoice, and not count on subsequent deliveries to extend time. Increased attorney’s fees are an obvious expense, but at least on large deliveries, this approach may be the best option.

Separate Contract for Each Parcel of Land

The American Standard Homes v. Reinecke court was very concerned that after the initial delivery, the supplier was not obligated to sell and the customer was not obligated to buy. If a supplier is committed to supply at set prices throughout the life of each project and the customer is obligated to buy from this supplier, this should take the supplier out of the “American Standard Homes problem” and put them in the Jim Carpenter “safe harbor.”

It can be a problem for a supplier to commit to prices for too long. Additionally, many customers will refuse to commit to one supplier. This may be the best option, however, where a supplier is confident prices can be held or that the project will be of short duration.

Similarly, “more conventional” subcontractors with one contract for an entire project need not be concerned with this problem so long as the subcontractor is still delivering the labor and materials described in that one contract. Such subcontractors should still be concerned, however, with extras supplied after the completion of all original contract work, especially if these extras are supplied long after the original contract work. These “extras” may be viewed as a separate contract for which a separate mechanic’s lien deadline runs. For this reason, it will be important that all extras or change orders state that the parties “intend to create an amendment or a change to the original contract.”

Base Contract with Purchase Orders

This is a variation of the previous idea but may be more workable in some situations. Developers and general contractors often wish to have a base contract covering the activities of subcontractors and suppliers on the project, including warranties, indemnities, insurance, billing etc. Consequently, it may not be necessary to commit to prices for the length of the project. Suppliers will want to make it clear that the base contract covers “all deliveries to this project.” Suppliers should also add language stating that “all deliveries to each lot shall be considered a single contract” or “shall be considered a part of this base contract.” Similar language can also be added to a credit agreement41, but the use of this type of base contract for each project has a better chance of standing up against “third parties” if a supplier later must enforce the lien after the lot has been sold or foreclosed upon.

Quotes with Commitment to Ship

Even if a customer will not commit to buying, it may be enough if the supplier is committed to sell. A supplier will be in a stronger position if it commits to prices long enough to cover each lot improvement.

Suppliers should submit quotes stating that the supplier “commits to ship sufficient quantities to complete this project” or “prices will be held firm for 30 days. Thereafter, supplier commits to ship sufficient quantities to complete the project, but the price will be subject to an increase to the extent supplier’s costs have increased.”

It will also be helpful to have “boot strap” language in price quotes. State that “all shipments to this project will be a part of this proposal” or “a part of a single contract.” Also state that the customer “can accept this proposal by making an order.”

This seems like a fairly painless solution that will be workable in many situations. This provides less protection than the solutions discussed above but should be helpful in determining mechanic’s lien deadlines from the date of last delivery to each parcel.

Agreements in Credit Agreement

A supplier can also add “boot strap” language to the credit application or open account agreement, stating that “all shipments to any single project shall be considered a single contract.” The supplier could also add commitments to “ship to complete any single project to which shipments have been made, subject to the customer’s continued creditworthiness and subject to a price increase to the extent supplier’s costs have increased.”

This sort of language is advisable and also seems fairly painless. This is also probably the weakest solution discussed, however, especially as against third parties. The owner of the property or their bank would argue that they cannot be bound by this language to extend their exposure to a mechanic’s lien.

Be Aware of Project Scope

It will make a difference if a supplier is even aware of the size of a project and the amount of materials to be used. Suppliers should obtain site plans for the project if possible, to help enforce lien rights if necessary. The more a supplier knows about the project generally or at least discusses project scope with the customer, the easier it will be to establish a continuing agreement. It will be helpful to have letters from the supplier discussing the project and the approximate quantities of materials that will be needed. This, together with a commitment to supply all materials needed for the project, will help prove that the parties “contemplated” that this supplier would provide all materials for this project.

How Soon Mechanic’s Lien Can Be Filed

Virginia Code Section 43-4 states that the mechanic’s lien may be filed “at any time after the work is commenced or material furnished” and further states that the lien shall identify the time that the claim “is or will be due and payable…” This makes it clear that the mechanic’s lien cannot be filed before the claimant has begun work but may be filed at any time thereafter. This may also mean that a claimant can claim a lien for labor and materials not yet provided, but doing so would be risky.42

The safer reading is that a contractor can lien for labor and materials actually supplied, even if payment for labor and materials is not yet contractually due. One example would be a contract in which materials are supplied and payment is to be made “within 90 days after invoice.” The claimant could lien any time after materials were delivered, even if it would not yet be possible to sue the customer for breach of contract. Another modern example is the “pay when paid” clause. A general contractor may be under no contractual obligation to pay a subcontractor until the owner makes payments. The subcontractor must still preserve mechanic’s lien rights by filing in a timely manner. The contractor is entitled to do this even though the funds are not yet “due.”

Retention can and sometimes must be liened before it is due. Retention may not be due until long after labor and materials are supplied, especially in the case of excavators and other contractors providing labor and materials in the early stages of the project.

Effect of Bankruptcy

The effect of bankruptcy on the enforcement of Virginia mechanic’s liens (lawsuit after lien filing) is discussed below. However, the “automatic stay” of the United States Bankruptcy Code does not stay the perfection (filing in the land records) of the mechanic’s lien. This means that if the owner on the project files bankruptcy, a general contractor or subcontractor can still file their mechanic’s lien without seeking the permission of the United States Bankruptcy Court.43 If a general contractor files bankruptcy, a subcontractor can still file its mechanic’s lien. In fact, it is important to keep in mind that the mechanic’s lien must still be filed within the normal time limits.

The enforcement of a mechanic’s lien through the filing of a lawsuit is stayed by the bankruptcy of the owner or general contractor.44 It is not permissible to enforce a mechanic’s lien without permission of the bankruptcy court, but the usual time limits for enforcement are also altered. The contractor is provided additional time later to enforce the mechanic’s lien.

Site Development Improvements

Contractors supplying labor or materials for “site development improvements” such as streets, sewers, stormwater drainage, etc. may want to file a lien pursuant to Virginia Code Section 43-3(B).45 Such a mechanic’s lien, however, requires that an additional “Memorandum of Disclosure” be filed in the land records before the sale of any lot in the subdivision.46 This deadline can easily pass while the claimant is still providing labor and materials to the project.

The 150-Day Rule

There are actually two distinct time limits operating from the last day that labor is performed or material is furnished. We have seen that the time limit for filing the mechanic’s lien is 90 days from the last day of the month in which the last labor is performed or material is furnished (last day of work). The contractor must also count backwards 150 days from the last day of work. The contractor is not allowed to include any labor or materials supplied earlier than this in the mechanic’s lien, except for retention or sums held on a “pay when paid” clause.

Code of Virginia Section 43-4 states the following:

The lien claimant may file any number of such memoranda, but no memorandum …shall include sums due for labor or materials furnished more than 150 days prior to the last day on which labor was performed or materials furnished preceding the filing of such memorandum. Provided however, any memorandum may include sums withheld as retainages with respect to labor performed or materials furnished at any time before it is filed, but not to exceed 10% of the total contract price and (ii) sums which are not yet due because the party with whom the lien claimant contracted has not yet received funds from the owner or another third party.

This means that each mechanic’s lien can only include labor and materials supplied within a window going back 150 days from the last day labor or material is furnished immediately preceding the lien filing. The 150-day rule does not apply to retention up to 10% of the total contract price and does not apply to money not yet due because of a “pay when paid” contract clause. The 150 days counts back from the last day any labor or material was supplied, not the last day of labor or material included in the lien amount.47 In other words, even if the claimant has been paid for that last labor or material and even if that last labor or material is not included in the lien, the 150-day window still counts back from that day of last labor or material preceding the filing of a memorandum of mechanic’s lien.

The Virginia Supreme Court has ruled that an entire lien is invalid if the lien includes dollar amounts outside the 150-day window. The 150-day requirement is not a filing deadline like the 90-day rule; rather, it is a limitation on how far back a mechanic’s lien may reach. The rule is a requirement of the statute, and failure to abide by it will result in a total invalidation of the mechanic’s lien. The court cannot simply subtract claim amounts beyond the 150-day period,48 although a claimant should have the opportunity to show that any lien amounts outside the 150 day window were an “inaccuracy” that was not “willfully false.”49

Contractors will rarely be on the project more than 150 days without receiving progress payments. Usually, only retention is held for labor and materials supplied more than 150 days earlier. The problem sometimes appears in change order work performed but unpaid for a long period of time while awaiting change order approval. In any event, if a contractor is approaching 150 days on the project and has not received progress payments of at least 90% on all work performed, it will be necessary to file a mechanic’s lien and then continue work. This may be necessary to preserve all lien rights even if the payment is not yet contractually due. The contractor’s only other choice is to waive lien rights for the unpaid work prior to the 150-day window and exclude that work from any mechanic’s lien eventually filed. A contractor may be in the position of explaining to an owner that a mechanic’s lien must be filed to preserve mechanic’s lien rights, even though the money is not yet due and the contractor intends to continue to work on the project. This may be an incentive to an owner or general contractor to expedite payments or approval of change orders.

There is no problem with filing more than one mechanic’s lien. The Code makes it clear that “a claimant may file any number of Memoranda”50 and it is sometimes necessary to do so in order to comply with the 150-day rule. If a construction contract calls for retention greater than 10% or if progress payments under the contract are not due for many months after work is performed, it may be necessary to file multiple mechanics' liens in order preserve rights.

MEMORANDUM OF MECHANIC’S LIEN

All contractors wishing to claim a mechanic’s lien must file a memorandum of mechanic’s lien in the land records of the county where the construction project is located. This is public notice that the contractor claims a lien on the property.

Form of Memorandum

The General Assembly of Virginia has provided a form to follow for a Memorandum of Mechanic’s Lien. Section § 43-5 of the Code of Virginia looks like this:

§ 43-5. Sufficiency of memorandum and affidavit required by § 43-4. The memorandum and affidavit required by § 43-4 shall be sufficient if substantially in form and effect as follows:

Memorandum for Mechanic’s Lien Claimed by General Contractor

Name of owner:.........................................

Address of owner:......................................

Name of claimant:......................................

Address of claimant:...................................

Type of materials or services furnished:.......………………………….……...………………….
Amount claimed: $.........................
Type of structure on which work done or materials furnished: ……………..…………………..
Brief description and location of real property:……………………………...…………………..
Date from which interest on above amount is claimed:………..…………..

Date:.....................….

.....………………….................(Name of claimant)

AFFIDAVIT

State of Virginia

County (or city) of .......…….........., to wit:

I, ......................... (notary or other officer) for the county (or city) aforesaid, do certify that ............... claimant, or ..............., agent for claimant, this day made oath before me in my county (or city) aforesaid that .................. (the owner) is justly indebted to claimant in the sum of ....................... dollars, for the consideration stated in the foregoing memorandum, and that the same is payable as therein stated.

Given under my hand this the …….... day of .......……......, 20…..

.……………………..................………...

(Notary Public or Magistrate, et cetera.)

Virginia Code Section 43-15 states that:

No inaccuracy in the memorandum filed, or in the description of the property to be covered by the lien, shall invalidate the lien, if the property can be reasonably identified by the description given and the memorandum conforms substantially [to the form shown above], and is not willfully false.

This statute is very comforting51 and the form provided is very helpful, but both are deceptively simple. Some of the items on the form have not caused much controversy and have not been the subject of court battles. This may be because such items are “simple” or “safe,” or it may be just because no one has raised the issue yet in court. The Virginia Supreme Court has ruled on the basis of this statute that a court should not simply dismiss a mechanic’s lien with amounts outside the 150 day window. A claimant should have the opportunity to show that any lien amounts outside the 150 day window were an “inaccuracy” that was not “willfully false.”52

Deadline for Memorandum

In order for a mechanic’s lien to be valid, the statute requires that all contractors do three things. First, the Memorandum of Mechanic’s Lien must be filed in the land records within 90 days from the last day of the month of the claimant’s last work, but in no event later than the 90 days from the time such building or structure is completed, or the work thereon otherwise terminated.53 Second, all contractors must serve notice of the mechanic’s lien on the owner and upstream contractors.54 Third, all contractors must file a Bill of Complaint to Enforce Mechanic’s Lien within six months of the Memorandum filing.55

Owner

The requirement of correctly naming the owner on the mechanic’s lien has led to many court rulings that a lien is invalid.56 The owner’s name must appear exactly as its appears in the land records. A developer named John Smith might form a corporation called John Smith Properties, Inc. John Smith Properties, Inc. might then buy a piece of real estate and begin development. John Smith, personally, might be on the project every day. He might act like the owner and everyone might say he is the owner. If a contractor eventually filed a Memorandum of Mechanic’s Lien identifying John Smith as the “name of owner,” it is an invalid mechanic’s lien. There are no mechanic’s lien rights whatsoever and the owner has a complete defense.

Related Entities and Artificial Tiers

In today’s market, a similar problem exists with related entities. Large Development Company, Inc. may be a well-known developer in the area and this may be the name appearing on its letterhead and building. Large Development Company, Inc. may create separate entities for each project, however. The owner may be Large Development Company of Fairfax, Inc. for one project and Large Development Company of Arlington, Inc. for another project. The precise corporate name of the property owner must appear for a valid mechanic’s lien.

Owner’s Spouse

When working with individual owners, it is necessary to identify the full legal name of the owner and add the full legal name of any spouse or other owner who jointly holds title. A contractor may deal only with John Smith and not even be aware that John Smith is married. If legal title to the property is held by Jonathan A. Smith and Jane B. Smith, as tenants by the entirety, then the mechanic’s lien must identify the owners in exactly this manner.57

Tenants and Leaseholds

Labor and materials are often ordered not by the “fee simple” property owner, but by a tenant. Such construction contracts can involve a great deal of money, when the tenant is a restaurant, large department store or large corporate office.

In general terms, a contractor can obtain a lien only on the property of the person ordering the work. An underlying property cannot be subject to a mechanic’s lien if the fee simple owner did not order or authorize the work. If it is the tenant ordering the work, the tenant is the “owner” for mechanic’s lien purposes.58 The contractor cannot obtain a mechanic’s lien in the building and underlying ground but can obtain a mechanic’s lien in the “leasehold interest” of the tenant. In theory, the mechanic’s lien holder can foreclose upon this leasehold interest and become the owner of the leasehold interest.

Other than a discussion of these general principles, little guidance is found in Virginia Supreme Court cases and much uncertainty exists in determining when the fee simple owner’s interest is subject to the mechanic’s lien. Court cases make it clear that “mere knowledge” of the fee simple owner of the construction project is not enough.59 Even if a lease requires the tenant to construct a building, the fee simple owner’s interest in the real property will not be subject to the lien when the tenant does construct that building.60 On the other hand, at some point the tenant becomes the “agent” of the owner for construction purposes, or the owner is so involved in the construction process that a court would decide that the fee simple owner is authorizing the construction and consciously subjecting the property to mechanic’s lien rights.

It is not clear what level of involvement by the owner is necessary. In the modern shopping center lease, the tenant is often required to construct improvements. The tenant must submit to the landlord detailed blueprints of the planned improvements for landlord approval. The landlord often physically signs or initials the plans as approved. The owner’s participation is often necessary for rezoning applications and building permits. The landlord usually has the right to inspect and reject construction work. This collectively may be enough to subject the property to a mechanic’s lien. Unfortunately, the most recent Virginia Supreme Court cases were from the year 1911, when many of these features did not exist in the typical lease document.61

Modern tenant projects can exceed one million dollars in scope. Contractors may consider an attempt to lien both the leasehold and the underlying property in such a construction project. Owners will vigorously defend such mechanics liens. With any luck, the tenant will be able to pay to resolve the case. Otherwise, owners and contractors must decide whether they wish to settle the case or be responsible for the creation of new Virginia Supreme Court case law.

Most modern office or shopping center leases state that the tenant will be in default if the tenant fails to pay for labor and materials supplied or if a mechanic’s lien is filed. The landlord can declare the tenant in default as soon as a mechanic’s lien is filed and then terminate the lease. A contractor may have nothing, if the contractor is left with a mechanic’s lien in a lease that has been terminated.62 This makes the contractor more likely to seek a lien on the underlying property.

It is also possible that a contractor could have a lien in the leasehold improvements themselves, even if the contractor does not qualify for a lien in the fee simple owner’s interest in the real property. It may be helpful to have the right to foreclose upon the improvements, even if there is no right to foreclose up the real estate. There is also some support in some states for the theory of merger. When a landlord retakes premises, the leasehold and the fee merge, subjecting the owner’s interest to the lien against the tenant’s interest63

Contract Purchaser

A “Contract Purchaser” or “Vendee” may begin construction on real property which is “under contract” but has not yet gone to settlement. A contractor in such a case is in a similar position to a contractor working for a tenant.64

If the contract purchaser eventually takes title to the property, then the contractor will presumably be in the same position as if the contractor were always working directly with the owner of the property. If the contract purchaser never takes title to the property, however, Virginia Code Section 43-20 states that the contractor’s mechanic’s lien will still attach to the property so long as the owner had “actual knowledge” of the construction project. The priority of this mechanic’s lien must, however, be carefully considered.

Most “priority” issues are discussed in greater detail below. In this case, however, if the mechanic’s lien is foreclosed upon, the owner of the property is “preferred” or gets a “priority” in the proceeds of the foreclosure sale. The owner is preferred in the proceeds of sale to the extent of the purchase price in the contract to sell the property.

The owner, for example, may contract to sell the property for $100,000. The contract purchaser may have a house constructed on the property before settlement. The contract purchaser may then default on the contract to purchase the land and the contract to pay for the house constructed. The contractor can file a mechanic’s lien and then foreclose upon the property. Upon foreclosure, the owner of the property will get the first $100,000. The contractor will then get whatever proceeds are left, until the mechanic’s lien is satisfied. The law protects the owner of the property by making sure that the owner gets the amount of money it contracted for. The law also protects the contractor by allowing the contractor a mechanic’s lien. The contractor is entitled to the value added to the property by the labor and materials. If the foreclosure sale does not bring enough proceeds to satisfy both the owner and the contractor, however, the contractor will take the loss because the owner of the property has “priority.”

Notice of Mechanic’s Lien

A general contractor must also file with the memorandum of mechanic’s lien a certification of mailing to the owner of the property at the owner’s last known address.65 Presumably, this means that the memorandum must be sent to the owner before it is actually filed. Otherwise, it would be impossible to sign a certification that notice of lien was mailed and include that certification along with the lien filed. If a bring down title search at the time of lien filing necessitates an amendment to the lien before filing, the safe course would be to mail the amended lien to the owner and sign a new certification to be filed with the amended lien.

There is no specific form of the notice required by the code for general contractor with a direct contract with the owner. A subcontractor or more remote contractor, however, must send a specific form of notice of the lien to the owner and upstream contractors. This is for different “defense of payment” reasons, discussed below.66

Although not specifically required, it is advisable to send the memorandum to the owner Certified Mail Return Receipt requested.67

Address for Owner

Having the correct address for the owner on the face of the memorandum for lien has not caused much controversy, but the owner must actually receive the required notice for from subcontractors and other remote contractors discussed below.68 As discussed above, general contractor must certify that the memorandum was mailed to the owner at the owner’s last known address, but there does not seem to be any requirement of actual receipt of that notice from a general contractor.

An address for the owner can be obtained from the contract documents, correspondence, tax assessment rolls or the State Corporation Commission. The tax assessment rolls are a reliable source as this is where the county sends tax bills every year. If the owner is a corporation or limited partnership, it must have a registered agent listed with the State Corporation Commission. If either of these addresses are different from the address in the contract documents or correspondence, then a contractor should consider using more than one address to make sure the owner gets proper notice.

Description of Property

This is a troublesome portion of the mechanic’s lien. Needless to say, if you lien the wrong property, you have an invalid lien. The “Description of Property” portion of the mechanic’s lien is linked to the “legal description” of the property to which labor and materials were supplied. The correct description of the property is found in the county land records and a thorough title search is again indispensable. Some types of property are not lienable at all. The extent of the reach of a mechanic’s lien is also often a question, even if the exact legal description of the property is not.

Extent of the Lien

Virginia Code Section 43-3(a) states that “all persons supplying labor or materials shall have a lien upon the building or structure constructed” and “so much land therewith as shall be necessary for the convenient use and enjoyment…” of the building or structure.

In other words, if a contractor builds a shed in one corner of a 350-acre farm, the lien filed can and should describe the full parcel; however, the contractor will not be able to foreclose upon the entire 350 acre farm. The mechanic’s lien will be a lien upon the shed itself and the amount of land necessary to make “convenient use and enjoyment” of the shed.

In one early 20th century case, a Virginia Circuit Court was faced with a farmhouse constructed on a large farm. The court ruled that the mechanic’s lien extended to a small amount of acreage surrounding the farmhouse.69 The court created a road easement across the balance of the farm to reach this farmhouse, presumably deciding that such an easement was necessary for the “convenient use and enjoyment” of the farmhouse. In another 19th century case, a contractor built a house in a town. The Virginia Supreme Court decided that the entire lot in such a town would be necessary for the convenient use and enjoyment of the building.70

Public Property

Contractors are not allowed to lien public property.71 Any lien filed on public property is invalid. It is as if no lien was ever filed. In most cases, contractors who work on public property such as schools, firehouses and highways have protection in the form of Little Miller Act payment bonds. Bond rights are in many ways better than mechanic’s lien rights, so the contractor is not injured.

A special problem exists when a private developer must perform some “off-site improvements.” An office building or residential subdivision developer may need to widen the public road fronting the project. The portion of the labor and materials (asphalt, stone, etc.) that is used on the public road right-of-way is on public property. The public right-of-way cannot be liened for that portion of the labor and materials. Consequently, the contractor must be very careful liening the office building for the labor and materials in the right-of-way. This is the same over-burdening case in Amount Claimed, Overburdening, above.72 The only possible solution to this problem is to file a Virginia Code Section 43-3(B) Memorandum of Disclosure.73

Title Search

To properly prepare a mechanic’s lien, there is no substitute for a thorough title search in the land records. A complete title search is the only way to determine the legal name of the owner and the correct legal description of the property.74 It is the title search that requires the greatest lead time in preparing a mechanic’s lien, reveals the greatest complexities in preparing a mechanic’s lien, and has the greatest impact on the costs of preparing a mechanic’s lien.

In a clearly defined residential subdivision, a title search will be relatively simple, fast and inexpensive. When there is no doubt that labor and materials went on Lot 2, a title search will show that Lot 2 is owned by John and Jane Smith. In complex and large developments, however, the development property has often been assembled by joining several parcels of land, then later subdivided. The developer may re-subdivide one or more times after that, as the developer becomes aware of the needs of new tenants or purchasers. These changes can be very hard to follow through the land records. A lawyer has to be part surveyor to figure out exactly which parcel of land now contains the labor and materials supplied. A title search may take one hour or it could take 15 hours and is the greatest variable in determining the costs of a mechanic’s lien.

The title search also creates the greatest need for lead time to prepare a mechanic’s lien. A complex title search can easily take a week. They are often performed by outside title search companies who are very busy. If an account is more than 60 days past due, the creditor should consider ordering a title search. An attorney should be willing to order a search without spending any further attorney time on the file. If the search proves to be relatively simple, costs should be $50-$150. Once the title search is obtained, a Memorandum of Mechanic’s Lien can be prepared in just a few days. If the search proves to be complex, or if there are multiple parcels for allocation, then the contractor will be very glad that it got started early.

The end of each month is a very busy time for mechanic’s lien work and residential real estate settlements. It may be possible to perform one title search and prepare one mechanic’s lien on short notice. The reality is, however, that many clients get the same idea at the end of the month. During this time period, title search companies are also very busy on real estate settlements. Waiting until the end of the month increases chances of mistakes, drives up costs and increases the chances of missing deadlines altogether.

Claimant

The claimant should provide its correct legal name, which should be the same name appearing on any contract to supply labor or materials. This should also be the same name appearing on business and contractor’s licenses. If the claimant is a partnership or corporation it should also be qualified to do business in the State of Virginia through the State Corporation Commission, although the status of out of state material suppliers in less certain. A contractor providing labor and materials for a construction project in the state must have a Virginia Contractor’s License.75 Lack of proper contractor’s license can be a complete defense to a contract claim or a mechanic’s lien. If all of these prerequisites are not met, the claimant may not be entitled payment for labor and materials supplied.

The claimant should provide a good address for the purposes of future notice. The claimant will want to receive notice of any attempts to have the lien removed or bonded off. If an address is changed after a mechanic’s lien is filed, but before a Bill of Complaint to Enforce Mechanic’s Lien, a claimant should consider filing a Notice of Change of Address in the land records.

Remote Suppliers and Subcontractors

It is not clear exactly how far down the contract chain lien rights go. All claimants should file liens, as long as they can “trace” their labor or materials to the property. It is clear that lien rights extend to general contractors, subcontractors, and sub-subcontractors, but the status of lower tier contractors is somewhat uncertain. The Code provides a definition of “general contractor” and “subcontractor” but does not provide a definition for sub-subcontractors or any lower tier contractor.76 The Code provides forms to be used by general contractors, subcontractors, and sub-subcontractors, but does not provide any further forms. However, these omissions probably do not preclude lower tier contractors from mechanic’s lien rights. Section 43-3 of the Code states that “all persons performing labor or furnishing materials…shall have a lien…” This indicates that there would be no limit to lien rights for lower tier subcontractors so long as an upstream debt is established.

Architects and Engineers

Virginia Code Section 43-2 makes it clear that lien rights exist for “any surveying” required for the improvement. The status of other engineers and architects, however, is less clear. Virginia Supreme Court case law states that an architect actually involved on site in the construction process does have mechanic’s lien rights.77 It is unclear, however, about lien rights of an architect with no on-site responsibilities. Although it is certain that a set of plans is essential to the construction of the improvement and also contribute to the value of the property, it is not certain whether mechanic’s lien rights exist. Engineers are in a similar situation. On-site surveying provides mechanic’s lien rights. The status of drafting time back in the office, after surveying has been performed, is less certain.

Lien rights for architects, engineers and even surveyors are much more in doubt if no structure is ever constructed. Surveyors and engineers providing boundary surveys, topographic studies, site plans, etc., will add considerable value to unimproved property, especially if these documents are used in a rezoning process or are recorded in the land records. It is very questionable, however, whether an engineer or surveyor will have lien rights if that owner does not utilize the engineering and surveying work to build a structure in connection with or around the same time that surveying or engineering work is performed.78

Materials or Services Furnished

This part of the mechanic’s lien has not resulted in much question or litigation. This means we do not have guidance from any court cases but probably also means that this part of the lien is less likely to be a problem. It is important to accurately describe the labor and materials supplied. The contractor should not describe labor and materials that it did not yet supply. This would arguably be “overburdening.” It is also important to be descriptive and describe all labor and materials supplied, especially if other contractors were supplying similar labor and materials. For example, “all labor and materials necessary for masonry portions of residential dwelling, including cinder block, brick, mortar, and incidental materials” is probably a sufficient description.

Tracing Materials from Off-Site Suppliers

Lumber yards, HVAC equipment manufacturers, electrical supply houses, and similar material suppliers who do not actually deliver materials to the project still have mechanic’s lien rights so long as the materials can be “traced.” The supplier must be able to establish with reasonable certainty the amount of materials supplied to each project.79 If the supplier cannot show where materials were used, the supplier may not have mechanic’s lien rights. If the supplier cannot show the materials were used in a qualified “structure,” the supplier also may not have mechanic’s lien rights.80

For this reason suppliers should require information from all material purchasers at the “point of sale” concerning the location where materials will be used. Computer programs used by suppliers for creating invoices or sales tickets should require this information before the sale can be completed. This will usually enable the supplier to establish the location of materials with reasonable certainty to support a mechanic’s lien.

Suppliers who actually deliver to the project will usually have signed delivery tickets or other evidence of the “situs” of the materials. Even suppliers that deliver materials should require “lot” information at the point of sale. This will help solve problems that occur when a construction project actually involves multiple units or properties.81

Site Improvements and Landscaping

Section 43-2 of the Code of Virginia states that all shrubbery, earth, sod, sand, gravel, brick, stone, pipe, equipment supplied, surveying services and similar items “required for the improvement of the grounds upon which such building or structure is situated shall be deemed to be materials furnished for the improvement of such building or structure…”82 Claimants supplying any of these items, therefore, will have lien rights, as long as the materials were used in a qualified “structure.

Section 43-2 also states that a well, excavation, sidewalk, driveway, retaining wall, water or drainage system and the like “shall be deemed a structure.” Claimants supplying any of these items, therefore, will have lien rights, whether a complete building is ever completed or not.83

Site Development Improvements, Roads and Utilities

The General Assembly created special provisions for contractors supplying “site development improvements” to serve an entire subdivision. These provisions assist a road builder, for example, who is building an access road to serve all of the lots in a subdivision. These site development provisions help to solve unsolvable problems, but contractors must be careful to make sure they comply with the special provisions.84

Rental Equipment

The Code makes it clear that there are mechanic’s lien rights for equipment. The “reasonable rental or use value” of equipment required for the improvement of the grounds are deemed to be materials furnished.85 This language makes it clear that equipment renters have mechanic’s lien rights, as long as the equipment is used in a qualified “structure. Owners of equipment would have the same rights for the “use value” of the equipment, whether or not there was actually a rental.

Structure

The exact description used for this item does not seem to cause much controversy. Typical descriptions include “single family residential dwelling” or “two story masonry and steel office building.”

It does seem necessary to have a qualified “structure” for lien rights to exist. Virginia Code Virginia Code Section 43-3(a) states that all persons supplying labor or materials for the construction of “any building or structure permanently annexed to the freehold shall have a lien . . . upon such building or structure and so much land therewith as shall be necessary for the convenient use and enjoyment…” of the building or structure. In other words, the lien is on the “structure.” If there is no structure, there may not be any lien.

Not all improvements to real estate will be a “structure” to which lien rights will attach. Years ago, contractors more often had trouble showing they supplied labor or materials to any type of structure. For example, an excavator may expend considerable time and energy digging a hole, but is this a “structure?” What about landscapers and equipment suppliers?

Many of these problems were solved by a special Virginia Code Section 43-2, which reads as follows:

Structures, materials, etc., deemed permanently annexed to freehold. …a well, excavation, sidewalk, driveway, pavement, parking lot, retaining wall, curb and/or gutter, breakwater (either salt or fresh water), water system, drainage structure, filtering system (including septic or waste disposal systems) or swimming pool shall be deemed a structure permanently annexed to the freehold, and all shrubbery, earth, sod, sand, gravel, brick, stone, tile, pipe or other materials, together with the reasonable rental or use value of equipment and any surveying, grading, clearing or earth moving required for the improvement of the grounds upon which such building or structure is situated shall be deemed to be materials furnished for the improvement of such building or structure and permanently annexed to the freehold. (emphasis added).

This section states that a well, excavation, sidewalk, driveway, retaining wall, water or drainage system, and the like “shall be deemed a structure.” If any of these items are supplied to a property, therefore, it will create rights to a mechanic’s lien, whether or not another building is ever completed.

Section 43-2 goes on to say that all shrubbery, earth, sod, sand, gravel, brick, stone, pipe, equipment supplied, surveying services and similar items “required for the improvement of the grounds upon which such building or structure is situated shall be deemed to be materials furnished for the improvement of such building or structure…”86

There is very little case law on this code section, but the subtle difference in wording underlined above would indicate that a well, excavation, sidewalk, etc., is a “structure” and results in lien rights, whether any other building is constructed or not. 87 Shrubbery, earth, sod, sand, etc., however, would not result in lien rights unless there is eventually a “structure” completed in connection with these items.

This code section does make it clear that equipment use provides lien rights for their “reasonable rental or use value.” This section also establishes that surveyors have lien rights. However, there is still uncertainty about other engineers and architects.88 Lien rights are even more uncertain if plans are never used to construct a “structure.”

The Virginia Supreme Court has ruled that lien rights still exist if materials are removed from a structure once installed. The court stated that removal of the materials was “irrelevant” and that the “legislature could not have intended that the supplier’s mechanic’s lien may be avoided by simply removing from the building the materials furnished and incorporated in it.” This case may still require that the materials be delivered, accepted, and installed, adding value to the structure.89

Notice of Intention to Claim the Benefit of a Lien

Many attorneys for owners or title insurance companies will argue that a memorandum of mechanic’s lien is defective unless it contains an explicit statement declaring that the claimant intends to claim the benefit of a mechanic’s lien. This argument has its weaknesses,90 but contractors should include such an explicit statement on their memoranda of mechanic’s lien even though it is not contained in the form provided by the General Assembly described above.

Intervening Contractors

It is not clear whether it is necessary to name the general contractor or any other intervening contractors in the payment chain from the claimant to the owners. The form of mechanic’s lien supplied in the Virginia Code provides a blank to fill in the name of such intervening contractors. The form in the Virginia Code is a “safe harbor” form that states explicitly that the “memorandum, affidavit and notice required . . . shall be sufficient if substantially in form and effect as follows.”91 This is different than saying the memorandum “must be in the following form.”

Other sections of the code state definitively what the lien must show and does not mention general or other intermediate contractors.92 There is no law stating that identifying them is a necessary or indispensable portion of the lien, although a claimant does need to give notice of a mechanic’s lien to these entities in order to stop the flow of money.93 The exact legal name of the owner will be revealed by a thorough title search.94 Intermediate contractors, however, will not appear in the land records.

Problems can arise when multiple related entities are involved in the construction project. A contractor may deal with Big Developer, Inc. who acts like the owner of the project. The legal owner of the property, however, may be Big Project Limited Partnership. Technically, Big Project L.P. has hired Big Developer, Inc. as general contractor.

Sub-subcontractors may have difficulty determining the names of intervening contractors between themselves and the owner. It is important, however, to identify each intervening entity and provide notice of the mechanic’s lien. The Virginia Supreme Court may eventually decide that a sub-subcontractor cannot be required to give notice to or to name intervening contractors of which it could not be aware. However, until this decision is reached, sub-subcontractors should not take a chance and should try to name all intervening contractors on the lien.

The existence of multiple entities and artificial tiers also raises the possibility of a defense of payment, discussed below. If the owner and general contractor are related, it is possible that the owner will prepay the general contract. There is a greater possibility of collusion.

Interest

The lien should state the “date from which interest on above amount is claimed.” This should be the date on which payment was due and be determined by looking at the contract with the debtor. The contract may say “due upon completion” or may say “30 days after invoice.” In either event, you should compute the precise day the debt was due. If you do not have a written contract or if the contract is silent on the due date, then the debt would be due on the date the contract was complete.

The Virginia Supreme Court has reaffirmed that a mechanic’s lien carries interest. This can be very important and can involve a lot of money, since mechanic’s lien litigation can end long after work is completed. The mechanic’s lien carries interest at the legal rate, currently 6%, unless there is a contract agreement for a different rate.95

The Virginia Supreme Court also ruled that a mechanic’s lien carried interest at 18% per annum, where the contract stated that past due invoices would carry interest at that rate.96 This case was decided by the Supreme Court years after the labor and materials had been provided. The large amount of interest recovered went a long way towards compensating the supplier for losses. For this reason, all contractors want a contract term calling for a high rate of interest. In this case, the mechanic’s lien supplier had a contract directly with the owner of the property. Although it is arguable whether a subcontractor can get interest above the legal rate, it is still advisable for a subcontractor to put a high interest rate in its contract.

If a claimant desires to claim interest at a rate above the legal rate, it is advisable to give notice of this, by stating on the recorded memorandum the rate at which interest is claimed.

Affidavit

A memorandum of mechanic’s lien must be accompanied by an affidavit in the form shown above.97 Someone with personal knowledge of the facts of the case should sign an affidavit. An affidavit for a corporation should be signed by its president, vice president, general manager, cashier, treasurer or director.98 An affidavit for a partnership should be executed by a general partner. The affidavit should reflect the title of the person signing it and must be notarized.

The affidavit should also state that the person signing is “an authorized agent” of the mechanic’s lien claimant.99 This rule comes from an older Virginia Supreme Court case that ruled a lien invalid because it did not explicitly state that the signature was by an agent.100 An affidavit for a corporate subcontractor, therefore, should read something like this:

State of Virginia;

County of Fairfax:

I, ……………………., notary for the aforementioned state and county, do certify that John K. Smith, Vice President and Agent for Claimant, this day made oath before that General Contractor, Inc. is justly indebted to Claimant in the sum of $100,000 for the consideration stated in the foregoing memorandum, and that the same is payable as therein stated.

Given under my hand this day ……… of ………………, 20…...

………………………………

NOTARY PUBLIC

My Commission Expires:………………………

AMOUNT OF CLAIM AND ALLOCATION

The amount of the claim would seem straightforward but can be deadly.

Overburdening

No parcel of property should be liened for more than the value of the labor and materials that went into it. Overburdening can occur on a single property project. If a contractor liens for more than the labor and materials supplied, this is overburdening.

In a recent Virginia Supreme Court case, a general contractor was owed $310,000 on a project. The vast majority of the labor and materials provided was used for the actual property liened. A small amount was actually in the public street for required off-site improvements. The contractor liened the property for all labor and materials supplied, including the small amount off-site. The Virginia Supreme Court ruled the entire lien invalid, although this lien claimant perhaps could have reduced the lien amount claimed before the final trial court judgment.101

The tough lesson of this case is that the contractor must be aware of the legal property lines and must be able to determine the value of labor and materials supplied on each side of the property line. This case actually involved two pieces of property, the owner’s property and the public right of way, but is a good example of overburdening.102 The amount claimed must be linked to the description of property. If a contractor supplies labor and materials to multiple parcels of land, the amount claimed must be properly allocated to each parcel.103 If labor and materials are misallocated on a multiple property project, one parcel will be underliened and the other will be overburdened.104

Forfeiture of Lien

If you try to claim more than you are entitled, you can lose your entire lien. Section 43-23.1 of the Code of Virginia states that a contractor will forfeit any right to a lien if a memorandum of lien includes work not performed or materials not furnished “with intent to mislead.” The most obvious problem would be labor and materials not furnished. If the contract is not complete, it would be very risky to claim the entire contract balance.105

Recent Virginia Supreme Court cases do give some assurance that contractors will not forfeit their lien if they fail to prove entitlement to the full amount claimed on a memorandum of lien if there is no intent to mislead.106 A recent case refused to automatically dismiss a mechanic’s lien and allowed a subcontractor the present evidence that improper amounts included in the lien were an “error.”107 The “savings” statute, Virginia Code Section 43-15, states that “no inaccuracy…shall invalidate the lien if…the memorandum conforms substantially to the requirements…and is not willfully false.”108

One earlier case implied that it would not be fatal to “merely claim a larger sum than its proof would perhaps support. That kind of over-inclusiveness is a traditional problem faced by a landowner and one that a trial court resolves when determining how much of a claimed lien should be allowed.”109 It is clear, however, that claimants can lose their entire lien in some instances if impermissible amounts are included in a lien.

150-Day Rule

The 150-day rule is a specific condition in the code that a claimant must fulfill “in order to perfect the lien given by” the code. Violating this limitation will invalidate liens,110 although a claimant should have the opportunity to show that any lien amounts outside the 150 day window were an “inaccuracy” that was not “willfully false.”111

Delay Claims

A contractor who includes delay claims, acceleration claims, or other “soft” claims in their lien are also running the risk that their lien will be considered overburdening and invalid. While there is no Virginia Supreme Court case providing us guidance on this question, it would be very risky to include these items in a lien, since they are not labor or materials incorporated into the property. Delays may cost money but they do not add value to the property. They may be valid contract claims against the contract debtor, but they may not provide grounds for a mechanic’s lien. Contractors can consider filing a separate lien for such soft claims or other questionable items. If this questionable lien is ruled invalid, the contractor may still have an effective lien for its hard claims.

Allocation

Allocation concerns getting the correct property liened for the correct dollar amount. A lien is “overinclusive” or “overbroad” if it liens property to which the contractor supplied no labor or materials. A lien is “overburdening” if it liens a property for more than the value of the labor and materials supplied to that property. These are obviously related concepts.

Allocation issues involve multiple pieces of property. A townhouse building, for example, includes multiple townhouse units. Each townhouse unit is a separate parcel of real estate.112 Can a single lien be filed for all labor and materials supplied on the townhouse building? What about “site improvements” like a storm drainage structure that will serve 50 lots in a subdivision? How is the value of provided labor and materials allocated? Condominiums present a problem even more complex. The entire condominium is on a single parcel of real

Estate, but each condominium unit is separately owned. These problems required special help from the Virginia General Assembly in the form of special code provisions.

Overinclusiveness

A contractor cannot lien property to which it supplied no labor and materials.113 If a contractor does, the lien is invalid as overinclusive or overbroad. There is no lien on any of the property. Obviously, for this problem to occur there must be more than one piece of real estate. The simplest case would involve two adjoining lots in a town with the same owner. The owner contracts to build a house, but that house is actually sited entirely on one of the lots. If a lien is filed identifying both lots in the description of property, the lien is overbroad and probably invalid.

Parcels of real estate are defined in the land records. Again, there is no substitute for a complete title search that runs right up to date of lien filing. If labor and materials are supplied to more than one parcel of land, it is necessary to allocate labor and materials to each parcel. The “description of property” in the mechanic’s lien must be correctly linked to the “amount claimed” and “type of materials or services furnished” for each individual parcel of land.

Blanket Liens

When is it possible to file a single “blanket lien” on multiple parcels? Not very often. If it is possible to allocate the amount of the claim between multiple parcels, it is better to do so. If it is impossible to allocate, however, a blanket lien remains a possibility.

An 1890 Virginia Supreme Court case had declared that a general contractor may file a single lien when it has a single contract to construct dwellings on two separate lots.115 Third party interests would be persons having an interest in the real estate, other than the general contractor and the owner. This would include lenders, purchasers from the contracting owner, judgment lien holders, etc. Since most modern real estate development projects will have a construction lender, this alone may eliminate the possibility of blanket liens. It is also clear that the general contractor must have a single contract in order to file a blanket lien. If a general contractor has separate contracts to construct improvements on two different parcels of real estate, there is no doubt that separate mechanic’s liens must be filed.116

The problem with a blanket lien becomes most apparent when it is necessary to release one of the multiple properties from the mechanic’s lien.117 When a contractor files a blanket lien, the contractor is, in a sense, declaring that it is impossible to allocate the value of the labor and materials provided to each property. In order to release one of the properties, however, the contractor must determine the value of the labor and materials in that property, because the mechanic’s lien amount must be reduced by this amount. Otherwise, the remaining property is overburdened, because it bears the lien for the labor and materials supplied to another property. The contractor has potential problems in filing a blanket lien and then has additional problems in trying to release one lot. If a mechanic’s lien is filed as a blanket lien, it probably should be released only in its entirety. If a contractor must file a blanket lien on multiple parcels, it may consider requiring a complete settlement before any lots are released.

If it is at all possible to allocate the value of labor and materials, the lien should be filed separately. Unit prices or draw schedules in the contract may provide a basis for allocation. A means guide estimate is probably a reasonable basis for allocation. Contractors should be aware of this potential problem when negotiating a contract for improvements on multiple parcels. It may be advisable to attach an agreed value to each of the improvements to be constructed.

Open Account Suppliers

Open account suppliers have a special concern. A recent Virginia Supreme Court case suggests that each transaction on an open account will be considered a separate contract.118 This may mean that an open account supplier will never be able to file a blanket lien if materials are used on more than one parcel of land. This is also a special concern for open account suppliers, because they often ship materials in “bulk” to a multi-unit project.

A common example involves subdivisions such as townhouse developments. A general contractor may acquire lumber from multiple sources. The lumber supplier may ship in bulk “F.O.B. project.” A lumber supplier wishing to lien may have to be aware of which townhouse units include the lumber it supplied and in what amounts