Mechanic’s Lien News–How to Treat the Construction Lender

 In Mechanic’s Lien Law Updates and News

When recording a mechanic’s lien, a question arises as to whether you should also serve the construction lender. Here are some general pointers.

First, we have to define who is a construction lender. It is only a lending institution that specifically funds the construction process. So for example, if you are Mr. and Mrs. Smith and are doing a remodel and are using your own funds or a personal loan secured by real estate, it is not within the definition of the construction lender. The lender does not care how you use the funds and does not earmark them for the construction project. You are simply using some of the equity in your home for the improvements.

It is entirely different for mechanic’s lien purposes with a traditional construction lender. In that instance, there are strict guidelines as to lien waivers, progress draws, schedule of values, and monitoring procedures. Many times as a contractor, you know if there is such a lender, for the simple reason there could be a sign posted at the property such as: “Construction loan by Bank of America”.

Do you serve them with a preliminary notice or the mechanic’s lien itself? Absolutely, and there is no problem doing so. Even if it is not statutorily required in your state.

The reason is simple: when such a notice is received, that type of lender will typically insist upon progress and finally waivers as a condition precedent to making payments to the general contractor or homeowner. And if a lien is recorded, they will prevent the last disbursement of funds until such lien waivers are received. In other words, they will not allow the closing of the property if such a lean has been recorded. This only helps your chances of being paid.

Even better, if there are still undispursed funds, receipt of such a notice will prevent future payments unless your lien rights are protected. In many states once the owner pays all funds to a general contractor, there is no longer an obligation to pay the subcontractors. In other words, it prevents double payment. But if you serve your notice or mechanic’s lien before the final disbursement of funds, that lender will usually hold back those funds to make sure you are paid.