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1 Mechanic s Liens: Preserve and Perfect Your Lien Rights While Avoiding Fatal Defects James T. Dixon Brouse McDowell LPA 600 Superior Ave., East Suite 1600 Cleveland, Ohio jdixon@brouse.com Click Here for POWER POINT SLIDES

2 Table of Contents I. Mechanic s Liens on Private Projects... 3 A. What is a Mechanic s Lien?... 3 B. Who Has the Right to Lien a Project?... 3 C. How Can Property Owners, Lenders, and Prime Contractors Protect Themselves?... 4 D. How Do Claimants Preserve and Perfect Their Lien Rights?... 8 E. How Can Owners and Contractors Respond to Liens? F. What is Required to Initiate a Foreclosure Lawsuit? G. How Are Lien Claimants Paid in a Foreclosure Action? H. Differences for Residential and Oil and Gas Projects I. Release of Liens II. Mechanic s Liens on Public Projects III. Contract Terms Relating to Liens A. Advance Lien Waivers B. Lien Indemnification C. Bonding Requirements D. Lien Waiver Contingencies (Payment) E. Statutory Protections of The Fairness in Contracting Act IV. Terms of Progress and Final Lien Waivers Ohio Mechanic s Liens Cheat Sheet Exhibit A - ORIGINAL NOTICE OF COMMENCEMENT Exhibit B - Notice of Furnishing Exhibit C - Affidavit To Obtain A Mechanic's Lien Exhibit D - Notice of Furnishing Exhibit E - Affidavit of Lien DISCLAIMER: The following materials and accompanying Access MCLE, LLC audio program are for instructional purposes only. Nothing herein constitutes, is intended to constitute, or should be relied on as, legal advice. The author expressly disclaims any responsibility for any direct or consequential damages related in any way to anything contained in the materials or program, which are provided on an as-is basis and should be independently verified by experienced counsel before being applied to actual matter. By proceeding further you expressly accept and agree to Author s absolute and unqualified disclaimer of liability.

3 I. Mechanic s Liens on Private Projects A. What is a Mechanic s Lien? To paraphrase the definition published by Merriam-Webster, a lien is a charge upon real property that arises by operation of statute in order to satisfy a debt. And, the phrase also relies upon that dictionary s broad definition of the term mechanic, which is generally a manual worker. As the definition indictes, a lien arises by operation of statute. In this case, the statutes are set forth in crtain sections of the Ohio Revised Code ( ORC ). Arising from this is one of the touchstones of the Ohio common law that has developed from these statutory rights. Because liens are a creature of statute, they are considered to be rights provided in derogation of the common law. As such, they are construed strictly when it comes to perfecting the right. See, e.g., Manpower, Inc. v. Phillips, 177 Ohio St. 45 (1962). A liberal rule of construction is provided by ORC , but that only applies to issues that arise once the lien attaches. Furthermore, the lien is not always against the ownership interest in the real property. Complications arise when it is a tenant that is contracting for the work. In that case, the lien only attaches to the improvements and the lessee s leasehold interest, not to the owner s interest in the property (which is also called the fee interest ). ORC ; Construction One, Inc. v. Shore Thing, Inc., Eighth Dist. No , 2003-Ohio-1339, at 22, 24. And, as you will see below, liens on public construction projects are secured not by real property but by public funds. B. Who Has the Right to Lien a Project? Every person who performed work or labor upon or furnishes material in furtherance of any improvement... to real estate through a contract with an owner, part owner or lessee (or their agent), and every person who as a subcontractor, laborer, or material supplier carried forward that work through an agreement with an original contractor or subcontractor, has a lien to secure payment therefor upon the improvement and all the interests... in the land or leasehold. ORC Suppliers obtain lien rights through various provisions relating to materials used on construction projects. A lien can include the value of the materials delivered to the project (even if then moved to another project), the value of rented equipment, and, to an extent, the value of purchased equipment. ORC (A)(1)-(4), (B), (C)(2). The term original contractor is defined to include a construction manager tasked with supervision only. ORC (F). And, ORC (J) defines the term improvement quite broadly. Page 3

4 This diagram illustrates lien entitlement in relation to the lines of contractual privity, which are often refered to as tiers. Private Project Lien Diagram Owner A L L T I E R S Original Contractor Subcontractor* Laborer Materialman* Subcontractor Laborer Materialman Subcontrator Laborer Materialman *Notice of Furnishing required from all subcontractors and suppliers. C. How Can Property Owners, Lenders, and Prime Contractors Protect Themselves? The Ohio statutory framework gives project owners an important tool that they must use to protect themselves from hidden liens. Key to the lien law framework is the idea of notice. In sum, the law gives laborers, suppliers, and subcontractors a lien right, but it also obliges them to provide notice so owners can protect themselves. The only way owners can make certain that they receive notice from all companies performing work on or providing materials to a project is through the Notice of Commencement. If an owner properly uses this tool, it can escape liability for the claims of subcontractors and suppliers that did not properly notify the owner of their contributions to the project. The Notice of Commencement also sets priorities to such an extent Page 4

5 that, in practice, lenders prepare and record the Notice of Commencement. The Notice of Commencement also helps subcontractors and suppliers by providing essential project information needed for their lien documents. If the owner, part owner or lessee fails to record the Notice of Commencement, the lender or original contractor may prepare and record the Notice of Commencement on behalf of the owner, part owner or lessee. ORC (N)(1). A contractor can only record the Notice of Commencement if the owner fails to record it within the latter of ten days after work starts or three days after the original contractor demands it. The owner, part owner or lessee also will be liable for all expenses incurred by the lender or original contractor in obtaining the information and in preparing and recording the Notice of Commencement. ORC (N)(2). If a lender or original contractor prepares and records the Notice of Commencement, then the Notice of Commencement must reflect this fact on its face. ORC (N)(4). The lender or original contractor will not be liable to the owner for any errors in the Notice of Commencement unless it was required by contract to file the Notice of Commencement on behalf of the owner, part owner or lessee. ORC (N)(3). The Notice of Commencement must be recorded for all projects with the exception of: (a) home construction contracts, (b) projects relating the oil and gas wells, or (c) projects where utility companies are owners, part owners or lessees. ORC (O), (C)(1), and (Q). 1. Required Contents of the Notice of Commencement Section (B) provides that the Notice of Commencement must contain all of the following information: (1) a complete legal description of the property subject to the improvement, which would be sufficient for purposes of conveyance; (2) a description of the improvement sufficient to allow lien claimants to identify the project; (3) the name, address, and capacity of the person or entity contracting for the improvement; (4) the name and address(es) of the fee owner(s) if the contracting party is a lessee or a land contract vendee; (5) the name and address of the owner s or lessee s designee for the project; (6) the names and address(es) of all original contractor(s); (7) the date the owner, part owner or lessee first executed a contract with each original contractor; (8) the name and address of all lenders providing financing for the improvements; (9) the names and addresses of all sureties on any bond guaranteeing payment of the original contractor s obligations under the contract for the improvements; and (10) the following statement: To Lien Claimants and Subsequent Purchasers: Take notice that labor or work is about to begin on or materials are about to be furnished for an improvement to the real property described in this instrument. A person having a mechanics' lien may preserve the lien by providing a notice of furnishing to the above-named designee and the above-named designee's original contractor, if any, and by timely recording an affidavit pursuant to section of the Revised Code. Page 5

6 A copy of this notice may be obtained upon making a written request by certified mail to the above-named owner, part owner, lessee, designee, or the person with whom you have contracted. ORC (B)(10). In addition, the Notice of Commencement must contain the name and address of the person preparing it and the owners, part owner or lessee (or their agent) must verify it in affidavit form. ORC (B)(11)-(12). A sample Notice of Commencement for a Private Project is provided as Exhibit A. 2. Errors in and Amendments to the Notice of Commencement An owner, part owner or lessee that includes incorrect information in the Notice of Commencement is liable to lien claimants for any resulting loss of lien rights or the actual expenses of preserving those rights, including attorney s fees, if the loss directly resulted from the claimant s reliance on the incorrect information. ORC (C). If a lien has incorrect information due to an error in the Notice of Commencement, then the lien claimant has the right to amend its lien. Id. If the error results in a material deviation from the statute s requirements, then the lien claimant will be relieved from the requirement of serving a Notice of Furnishing. See Clinton Electrical & Plumbing Supply, Inc. v. Airline Professionals Ass n, Twelfth Dist. No. CA , 2006-Ohio-1274, 8 (addressing a Notice of Commencement listing the owner as APA Teamsters Local 1224 when the actual owners was Airline Professionals Association, Teamsters Local 1224 ). Owners, part owners and lessees may amend a previously recorded Notice of Commencement in order to correct or add information. In addition, the owner, part owner or lessee has a duty to amend the Notice of Commencement to reflect the names of new original contactors, lenders or sureties not named in the original Notice of Commencement. ORC (A)(2). The amendment relates back to the recording date of the original Notice of Commencement. Id. Only one Notice of Commencement must be filed for each project. ORC (A)(2). If more than one Notice of Commencement is filed for the same project, then the latter Notice of Commencement is deemed to be an amendment to the original. Id. The effective date of an amendment to the original Notice of Commencement relates back to the original filing. Id. 3. Time and Manner of Recording the Notice of Commencement The Notice must be recorded by the office of the County Recorder in the county where the property subject to the improvement is situated, prior to performance of any labor or work or the furnishing of any material for the improvement. ORC (A)(1). Page 6

7 4. Effect of Failure to Record a Notice of Commencement A failure to record the Notice of Commencement has several adverse consequences for the owner, part owner or lessee. First, it suspends the requirement that all subcontractors and suppliers must serve a Notice of Furnishing, thereby increasing the risk of hidden liens. ORC (I). Second, it affects the determination of priorities of mechanic s liens on the project. ORC Third, it renders the owner, part owner or lessee potentially liable to lien claimants for actual costs and expenses incurred in gathering the information necessary to perfect a mechanic's lien claim on the project. ORC (K). Fourth, the owner, part owner or lessee is liable for the costs and expenses incurred by the original contractor or lender who exercise their statutory right to file a Notice of Commencement. ORC (N)(2). Fifth, the owner, part owner or lessee is liable to the original contractor for all expenses relating to a mechanic s lien claim that otherwise could have been avoided through proper payment if the Notice of Commencement had been filed. ORC (M)(1). 5. Posting the Notice of Commencement The owner, part owner, lessee or designee must post and maintain a copy of the Notice of Commencement in a conspicuous place on the project throughout the entire period of physical construction or improvement. ORC (G)(1). This does not apply to an improvement that is the subject of a home purchase contract. ORC (G)(2). If the owner fails to post the Notice of Commencement, then the original contractor has the right to make a written demand for posting. ORC (M)(1). The owner s failure to comply with the demand within ten days creates liability for all damages, costs and expenses relating to the filing of mechanic's liens which otherwise could have been avoided through proper payment. Id. An owner, part owner or lessee that fails to post the Notice of Commencement also is liable to any subcontractors, material suppliers or laborers for all actual expenses incurred by the lien claimant to gather the information otherwise provided by the Notice of Commencement. ORC (K). 6. Service of the Notice of Commencement The owner, part owner or lessee must serve a copy of the Notice of Commencement on all original contractors for the project. ORC (H). The owner, part owner or lessee also must serve a copy of the Notice of Commencement on all subcontractors and suppliers that serve a written demand for a copy of the Notice within ten days of receipt of the demand. The subcontractor s or supplier s request should be made by certified mail, return receipt requested. If anyone required to serve a Notice of Furnishing makes a request in writing on the owner or the owner s designee for a copy of the Notice of Commencement, the owner or owner s designee shall serve a copy of the Notice of Commencement within ten days. ORC (D). If the owner or owner s designee fails to serve the Notice of Commencement within ten days, the time within which the person must serve the Notice of Furnishing is extended until twenty-one days after the Notice of Commencement actually is served. ORC (J). Thus, even if there is no Notice of Commencement on a project when a person starts Page 7

8 to perform work, he should serve a written request for the Notice of Commencement to the owner or owner s designee. Then, the person will not have to continually search to see if the Notice of Commencement is subsequently filed in order to preserve lien rights for work performed after the Notice of Commencement is recorded. If the written request for the Notice of Commencement is directed to the contractor, it does not toll the time for serving the Notice of Furnishing, but the contractor is liable for all costs incurred to obtain the information contained in the Notice of Commencement. ORC (L). D. How Do Claimants Preserve and Perfect Their Lien Rights? 1. Obtain the Notice of Commencement All project participants who have the right to obtain a lien must obtain a copy of the Notice of Commencement if they are going to properly perfect their rights. This is because, as will be shown, the Notice of Commencement provides information that must be included in the Notice of Furnishing. A first-tier subcontractor or supplier may serve a written request for a copy of the Notice of Commencement to the original contractor, to the owner, part owner, lessee, or to the designee of the owner, part owner, or lessee. Lower-tier subcontractors and suppliers may serve a written request on the subcontractor with whom they are in privity of contract. ORC (E)-(F). If the original contractor or subcontractor fails to respond to the request in a timely manner, then it is liable to the requesting party for the actual expenses incurred as a result of having to obtain the information contained in the Notice of Commencement. ORC (L). If anyone required to serve a Notice of Furnishing makes a request in writing on the owner or the owner s designee for a copy of the Notice of Commencement, the owner or owner s designee shall serve a copy of the Notice of Commencement within 10 days. ORC (D). If the owner or owner s designee fails to serve the Notice of Commencement within 10 days, the time within which the person must serve the Notice of Furnishing is extended until 21 days after the Notice of Commencement actually is served. ORC (J). If the written request for the Notice of Commencement is directed to the contractor, it does not toll the time for serving the Notice of Furnishing, but the contractor is liable for all costs incurred to obtain the information contained in the Notice of Commencement. ORC (L). 2. Prepare the Notice of Furnishing a. Who Must Do So? If there is a Notice of Commencement, everyone except for the original contractor and laborers must serve a Notice of Furnishing if someone has recorded a Notice of Commencement. Page 8

9 ORC , (G)(exempting laborers) On the table above, those who must provide a Notice of Furnishing are identified in boxes with a double-lined frame. b. Required Contents Pursuant to section , the Notice of Furnishing must include: (a) the name and address of the owner, part owner or lessee or the named designee; (b) the name and address of the original contractor; (c) the name and address of the person or entity with whom the person supplying the Notice of Furnishing is in direct privity of contract; (d) a legal description sufficient to reasonably identify the property subject to the improvement; (e) the name and address of the person or entity supplying the Notice of Furnishing; (f) the name, capacity and address of the person executing the Notice on behalf of the lien claimant; (g) the date the Notice is executed; and (h) a verbatim, conspicuous recitation of the following statutory warning: WARNING TO OWNER: THIS NOTICE IS REQUIRED BY THE OHIO MECHANICS' LIEN LAW. IF YOU HAVE ANY QUESTIONS ABOUT YOUR RIGHTS AND DUTIES UNDER THESE STATUTES YOU SHOULD SEEK LEGAL ASSISTANCE TO PROTECT YOU FROM THE POSSIBILITY OF PAYING TWICE FOR THE IMPROVEMENTS TO YOUR PROPERTY. The Notice of Furnishing need not be in the form of a sworn affidavit, but it must substantially comply with the statutory form set forth in Section Exhibit B is a Notice of Furnishing taken from the statute. c. Time for Service of the Notice of Furnishing If a Notice of Commencement is filed prior to commencement of construction on the project, then the subcontractors and suppliers must serve their individual Notice of Furnishing within twenty-one (21) days after performing their first labor or work or furnishing of materials (or within the 21-days after the Notice of Commencement is served on them by the owner or owner s designee, if not served within 10 days of written request to owner or owner s designee, as discussed above) in order to preserve their lien rights for the entire value of their work and material. ORC (A). If a subcontractor or supplier serves a Notice of Furnishing more than twenty-one (21) days after they first begin work or furnish materials, the Notice of Furnishing will relate back twenty-one (21) days from the date of service. The late Notice of Furnishing will preserve the lien claim only for the value of work and materials provided during the relation back period and later. ORC (D)(2). If the Notice of Commencement is filed after construction commences, then subcontractors and suppliers can preserve their entire lien claim by serving their Notice of Furnishing within twenty-one (21) days after the Notice of Commencement is filed with the county recorder. ORC (I) and (A). Even if the subcontractors or suppliers fail to serve an Notice of Furnishing after the Notice of Commencement is recorded, the subcontractors and suppliers still have the right to a lien for work performed or materials Page 9

10 furnished before the Notice of Commencement was recorded (even without any service of a Notice of Furnishing). ORC (I). d. Manner of Service of the Notice of Furnishing What we call first tier subcontractors, meaning those subcontractors or suppliers that have a contract with an original contractor, are only required to serve their Notice of Furnishing on the owner, part owner or lessee, or its designee if there is one. ORC (A). Subcontractors or suppliers involved at any tier other than the first tier (i.e. their contract is with a subcontractor) must also serve their Notice of Furnishing on the original contractor. Id. ORC provides the methods of service for any document required to be served under Chapter 1311, including: (1) by the sheriff of the county in which the person to be served resides or maintains his or its principal place of business; (2) by certified or registered mail, overnight delivery, hand delivery, or any other method that includes written evidence of receipt ; and (3) by service on the Secretary of State, if the person to be served is a corporation. ORC (A). Service by certified mail is complete upon the date of mailing. ORC (B). If service is sent to an address listed in the Notice of Commencement, but is returned unclaimed or refused, service is complete when first attempted. Id. In addition, a notice is considered served (and service is complete on the date the notice is received) regardless of whether it was sent by the methods specified in Section (A) if the person acknowledges receipt or it can be proved by a preponderance of the evidence that the person actually received the notice. ORC (C). The notice is presumed to have been received three days after mailing, unless written acknowledgement provides proof to the contrary. Id. 3. Prepare, Record and Serve the Affidavit of Lien To perfect a lien on most private commercial projects, anyone in direct contractual privity with the owner, part owner or lessee generally only needs to record an Affidavit for Mechanic s Lien within 75 days of his last work on the project, and serve the owner s designee (or the owner, part owner or lessee, if no designee) with the lien within 30 days after it is recorded. ORC (B)(3) & The lien is valid for 6 years. ORC (C). a. Required Contents The Affidavit For Mechanic's Lien must contain the following information: (a) The amount due, over and above legal set-offs; 1 (b) a full legal description of the improved property subject to the lien; (c) the name and address of the person or entity with whom the lien claimant was in direct privity of contract; (d) the name of the owner, part owner or lessee, if known; (e) the name and address of the lien claimant; and (f) the first and last dates the lien claimant performed any labor or work or furnished materials to the project. The information must be verified 1 The affidavit need not state the amount of the set-off itself. Warne v. Bamfield, Fifth Dist. No CA-33, 2006-Ohio-850, at 19. Page 10

11 before a notary by the lien claimant or the claimant s agent. ORC (A). Exhibit C is a sample. The description of the property contained in the Affidavit must be in a form sufficient to describe the real property for purposes of conveyance, or contained in the instrument by which the owner, part owner or lessee took title.... ORC (B)(1) and (D). One Affidavit may be filed for unpaid wages on behalf of a group of laborers provided, however, that the claim of each individual laborer is itemized in the Affidavit. ORC (F). 2 b. Time for Recording and Service On commercial projects, the Affidavit for Mechanic s Lien must be recorded with the county recorder within 75 days of the lien claimant s last work on the project and served on the owner s designee (or the owner, part owner or lessee, if no designee) within 30 days after it is recorded. ORC (B)(3), If the Affidavit cannot be served as provided in , the lien claimant shall serve it by posting a copy in a conspicuous place on the premises of the improved property within 10 days after the expiration of the 30 days typically allowed for service. Id. On residential projects, the time for recording the lien is reduced to 60 days. ORC (B)(1). For oil and gas projects, the lien must be recorded within 120 days. ORC (B)(2). The work must be within the original contract scope of work (including punch-list work). Warranty work or additional work or materials provided under a separate contract will not extend the time for recording the lien on either commercial or residential projects. See Swim Rite Pool Co. v. Strausbaugh, Sixth Dist. No. S , 2006-Ohio-3612, at 21 (purchase of pool cover and reel was separate contract from installation and mechanic s lien was filed beyond 60-day limit and was invalid). Whether work performed or materials furnished are necessary to properly complete the contract scope of work (or an improper attempt to extend the time for filing the affidavit) is a question of fact. Id. at 13; Gilson v. Windows and Doors Showcase, LLC, Sixth Dist. Nos. F & F-05-24, 2006-Ohio-2921, at (later delivery of screens was pursuant to original contract that they would be stored for $20 charge and delivered at end of project, so lien was timely filed within 60 days of delivery of screens). c. A Note on the Computation of Time Under ORC 1.14, the time within which an act is required to be done excludes the first day and includes the last day. When the last day falls on Sunday or a legal holiday, the action may be done on the next succeeding day that is not Sunday or a legal holiday. Note that 1.14 does not provide an extension of time when the last day falls on a Saturday. Thus when the last 2 Wages is defined to include basic hourly rate of pay and all other contractually owed benefits. ORC (K). Page 11

12 day for filing or service of a lien falls on a Saturday, it should be filed or served on the preceding Friday. ORC 5.30 provides that, Every Saturday afternoon is a legal holiday, beginning at twelve noon and ending at twelve midnight. Thus, an argument can be made that, when the last day falls on a Saturday, which is by definition a legal holiday, a lien claimant is entitled to file on the next succeeding day that is not a Sunday or legal holiday. d. Amending the Affidavit The lien claimant has the right to amend the Affidavit to correct errors within 6 years from the date of filing it with the county recorder, but only if the error resulted from incorporating incorrect information from the Notice of Commencement. See ORC (C). Of course, a lien claimant always can file an amended lien if it is still within the statutory period for recording of the original Affidavit. E. How Can Owners and Contractors Respond to Liens? An owner, part owner or lessee has a right to make direct payment to any subcontractor or supplier that serves a Notice of Furnishing and may pay the claim of any laborer. ORC (B)(1). If the owner, part owner, or lessee pays the claimant, then there is a statutory right to a set-off or credit against the original contractor or subcontractor who employed the lien claimant. Id. The set-off or credit is in an amount equal to what was actually paid to the claimant. Id. An original contractor or subcontractor has a right to make direct payment to any subcontractor or supplier that serves a Notice of Furnishing and may pay the claim of any laborer. ORC (B)(2). If the original contractor or subcontractor pays the claimant, then there is a statutory right to a set-off or credit against the subcontractor who employed the lien claimant for the amount equal to what was actually paid to the claimant. Id. F. What is Required to Initiate a Foreclosure Lawsuit? ORC provides that any person holding a mechanic s lien pay proceed by petition against the owner and all other persons interested, either as lienholders or otherwise, in the land and obtain such judgment for the rent or sale thereof as justice and equity require. The court may allow reasonable attorney s fees to the prevailing party to be paid out of the fund realized for lien claimants. ORC Mechanic s liens are effective for 6 years from the date of recording the Affidavit for Mechanic's Lien with the county recorder. ORC (C). If an action is brought to enforce the lien within that time, then the lien continues in full force and effect until final adjudication. Id. If no action is taken to enforce the lien within the 6 year period, then the lien will be rendered void and title to the property will be cleared of the encumbrance. Page 12

13 G. How Are Lien Claimants Paid in a Foreclosure Action? 1. General Rules of Priority Three are three basic rules of priority for mechanic s liens. The first rule applies if no Notice of Commencement is recorded or if the lien claimant provided all of its work or materials before the recording of the Notice of Commencement. Under these circumstances, the lien claim will relate back to the date the first visible work or labor is performed or materials are furnished by the original contractor, subcontractor, supplier or laborer at the site of the improvement. ORC (A)(1). The second rule applies if the Notice of Commencement is filed prior to commencement of visible construction or if the lien claimant provides all of its work or materials after the filing of the Notice of Commencement. In these situations, the lien claim will relate back to the date of recording of the Notice of Commencement. ORC (A)(2). The third rule applies if a lien claimant provided work or materials both before and after the recording of the Notice of Commencement. In such circumstances, the lien has two effective dates. The work performed before recording the Notice of Commencement is effective as of the first visible work, the work performed after the Notice of Commencement is recorded is effective as of the recording of the Notice of Commencement. ORC (B)(1). In general, mechanic s liens on a project that have the same effective date (e.g., date of first visible work or date Notice of Commencement is recorded) have no priority among themselves. The mechanic's lien claimants share pro-rata in any revenue generated from the sale of the property to the extent that there is not enough proceeds to satisfy all lien claims in full. 2. Super Priority for Laborers If visible work commences prior to the recording of the Notice of Commencement and any liens are recorded with an effective date relating back to the first visible work, then the effective date for any laborer s lien is the date of first visible work. ORC (B)(3). Moreover, laborers liens have priority over all other mechanic s liens relating to the same improvement, regardless of whether the work was performed before or after the recording of the Notice of Commencement. ORC (D)(2). Laborer s liens for work performed both before and after the Notice of Commencement is recorded have priority as of the first visible work. ORC (B)(2). The lien claims of laborers, supplier and subcontractors to an original contactor or subcontractor are superior to any lien (already taken or to be taken) by such original contactor or subcontractor indebted to them for such labor, work or material. ORC (A). Page 13

14 3. Priority for Mortgages The rules of priority set forth above clearly require construction lenders and other mortgagees to record their interests in the property subject to the improvement (1) prior to the recording of the Notice of Commencement and (2) prior to the commencement of any visible work on the project if they want their mortgage interest to prime all mechanic s liens on the project. A construction mortgage or any other mortgage interest that is recorded after the Notice of Commencement generally will be subordinate to all mechanic's liens arising out of the construction project. 3 H. Differences for Residential and Oil and Gas Projects 1. Residential Distinctions Most of the requirements to perfect a lien on commercial projects apply to residential projects (one- or two-family dwelling or residential unit of a condominium that is used or intended to be used as a personal residence by the owner, part owner or lessee), with two notable exceptions. First, owners of existing residential property contracting for improvements to it are not required to record a Notice of Commencement. ORC (O). Second, the Affidavit for Mechanic s Lien must be recorded within 60 days of the last work on the project by the person claiming the lien. ORC (B)(1). In addition, as discussed in more detail below, residential owners can defeat any lien rights of contactors, subcontractors, suppliers or laborers by paying the original contractor in full, if the payment was made before the owner received a copy of the mechanic s lien. ORC (B)(1). A contactor, subcontractor, supplier, laborer or lower-tier subcontractor may claim a lien for work or labor performed or material furnished under a home construction, improvement or purchase contract, but the lien claim is limited to the remaining amount the owner owes the original contractor at the time the lien is filed. ORC (B)(2). The amount due is the unpaid balance under the home construction or home purchase contact, minus the cost to complete the contract according to its terms and conditions, including any warranty or repair work. ORC (B)(2). If the residential owner already paid the original contractor in full before a mechanic s lien is filed, then the owner may avoid the lien completely by filing an affidavit with the county recorder that states that the original contractor had been paid in full. ORC (B)(1). Before making any payments to an original contactor on a residential project, lenders are required to obtain an affidavit from the original contractor that the original contractor has paid in full for all labor and work performed and for all materials furnished by the original contractor, 3 There is an exception to this general rule for construction mortgages that strictly comply with the requirements of ORC Page 14

15 all subcontractors, suppliers, and laborers prior to the date of closing of the purchase or during and prior to the payment period, except unpaid claims specifically set forth by the original contactor and identified as to claimant and amount, and that no other claims exist. ORC (B)(4). In the event of a payment dispute between the original contractor and a subcontractor, supplier or laborer, the lender is required to pay to the original contractor the amount withheld when the time for filing a lien by the subcontractor, supplier or laborer has expired without a lien being recorded (or when the claim has been paid, bonded or released). ORC (B)(8). 2. Oil and Gas Distinctions Typically, the same parties who are entitled to a commercial or residential lien may also assert a lien on an oil and gas project. ORC (A). Activities include digging, drilling, boring, operating, completing or repairing a well or injection well, or altering, repairing, or constructing any oil derrick, oil tank, or leasehold production pipeline. Id. A Notice of Commencement is not required. ORC (C)(1). Nor is a Notice of Furnishing. ORC (C)(2). Claimants have 120 days to record their lien. ORC (B)(2). Owners can request an affidavit from the contractor that identifies subcontractors and suppliers. If the contractor fails to comply, it will lose its lien rights. The owner can then insist upon receipt of a lien waiver or pay direct otherwise and exercise a right of set-off. ORC (C)(5). The subcontractor or supplier may serve the owner with a notice in writing that includes certain information. Doing so gives the owner the right to pay direct. ORC (C)(6)(c). The lien can attach to the oil or gas lease or the mineral estate, the oil and gas produced, the proceeds from their sale, or the materials located on the project and used in connection with the work. ORC (B). I. Release of Liens ORC provides damages for neglect or refusal to release a mechanic's lien within 30 days after it is satisfied. If the lienholder fails to release the lien, he is liable to the owner, part owner or lessee for all resulting damages, not exceeding the amount of the lien and costs. II. Mechanic s Liens on Public Projects A. Scope of this Section The principal remedy available to a claimant on a public project is a mechanic s lien, referred to by some as an attested account claim. This latter reference is historic and nature, and Page 15

16 comes from the pre-1991 version of the statute that required claimants to itemize their claim in the form of an account. This section focuses on the procedure for enforcing mechanic s lien rights on a public project from the claimant s perspective, with discussion of other parties responsibilities to the extent that they impact that procedure. Public-project lien statutes are interpreted separately from private project lien statutes. In re William Cargile Contractor, Inc. (Bankr. S.D. Ohio 1993), 151 B.R A claimant may also have a claim against a payment bond, but that remedy is discussed elsewhere in these materials. B. What is a Lien? In the context of public projects, the term lien is somewhat of a misnomer. While the statutes governing public project liens are in a section of the code discussing mechanic s liens, the right created by those statutes is not a lien right. Traditionally, lien rights relate to real property, and describe a right to property that is not voluntarily granted by the project owner. For examples, think of tax liens, judgment liens, and private-project mechanic s liens. On a public project, the lien granted is against the public funds held in the treasury of the public authority for the purpose of compensating the principal contractor. Ohio Revised Code ( ORC ) The realty owned by the public authority cannot be made subject to a lien. While this seems like less security, keep in mind that public authorities are required to have sufficient funds to pay the value of the contract, and are required to specifically earmark those funds for that project. Thus, so long as the fund has not been fully disbursed, the code provides for security in a fund that will be in place. However, contractors should be aware that if the public authority has already disbursed all of the funds before the Affidavit of Lien is filed, there is no claim. L.E. Myers Co., High Voltage Systems Div. v. Jordano Elec. Co. (1998) 47 Ohio App.3d 132, 547 N.E.2d 1014, motion to certify overruled, motion overruled 38 Ohio St. 3d 717, 533 N.E.2d 787. Thus, potential claimants whose work concludes near the end of a project should move quickly to protect their rights. The law s general purpose is to protect those whose claims accumulate daily and who have no other means to protect themselves. Lee Turzillo Contracting Co. v. Cincinnati Metropolitan Housing Authority (1967) 10 Ohio St. 2d 5, 225 N.E. 2d 255. C. What is a Public Project? Under ORC , a public improvement is: [A]ny construction, reconstruction, improvement, enlargement, alteration, demolition, or repair of a building, highway, drainage system, water system, road, street, alley, sewer, ditch, sewage disposal plant, water works, and any other structure or work of any nature by a public authority. And, under the same statute, a public authority is: Page 16

17 [T]he state, and a county, township, municipal corporation, school district, or other political subdivision of the state, and any public agency, authority, board, commission, instrumentality, or special district of or in the state or a county, township, municipal corporation, school district, or other political subdivision of the state, and any officer or agent thereof. Even with these straightforward definitions, it is not always easy to tell when a project is public or private. For example, when the City of Cincinnati wanted to redevelop housing in its Over-the-Rhine district, it transferred ownership of eight parcels to a developer, who in turn agreed to improve the homes on the land through a loan from the City. The City retained contractual oversight, imposed its quality standards, and had the right to a share of the potential profits. When a subcontractor was not paid, it pursued a public-project lien claim under ORC Ohio s Tenth District Court of Appeals determined that even though the City did not own the property, it was a public project because the developer was working as the City s agent under the definition cited above. City of Cincinnati v. Scheer & Scheer Dev., 2006 Ohio 1221, P27, 2006 Ohio App. LEXIS 1142 (Ohio App. 10 Dist., 2006). D. Who is Vested with Public Project Lien Rights? The Code vests the following parties with public project lien rights: Any subcontractor, supplier, or laborer who is performing or has performed labor or work or is furnishing or has furnished material for any public improvement provided for in a contract between the public authority and a principal contractor, and under a contract between the subcontractor, supplier, or laborer and a principal contractor or subcontractor.... ORC A principal contractor is any person who undertakes to construct, alter, erect, improve, repair, demolish, remove, dig, or drill any part of any public improvement under a contract with a public authority. ORC (F) (emphasis added). Thus, a subcontractor, supplier or laborer has lien rights if it has provided its services on a public improvement through a contract with the principal contractor or one of the project s subcontractors. Thus, the code provides lien rights for every tier of subcontractor, laborer or supplier. However, the principal contractor does not have the right to a lien on a public project. Material suppliers are only entitled to a lien on a public project if the materials they supplied were intended to be used in the course of the public improvement at issue, were incorporated into the public improvement or consumed to construct that improvement, were fabricated specifically for that improvement and are not readily resalable, were used for the improvement or the operation of machinery for the improvement, or were tools or equipment used on the improvement. ORC Page 17

18 Public Project Lien Diagram Public Authority Principal Contractor A L L T I E R S Subcontractor Laborer Materialman Subcontractor* Laborer Materialman* Subcontrator Laborer Materialman *Notice of Furnishing Required from Second or Lower Tier Subcontractors and Suppliers E. How Does a Claimant Perfect its Lien Rights? 1. Gather Initial Data: The Notice of Commencement and Bond Information Before commencing work, the claimant should obtain a copy of the Notice of Commencement. The Notice of Commencement is to be prepared by the public authority and must contain information that is essential to the lien claimant, including identification of the project, the public entity and its representative, the principal contractor, the principal contractor s surety, and the date of the prime contract. ORC If information in the Notice of Commencement is inaccurate or the entity does not provide a copy, the claimant s rights will not be prejudiced. ORC (C), (D). The public entity is required to prepare this document prior to commencement and make this document available to the public upon request. ORC (A). Unlike the owner of a Page 18

19 private project, a public authority is not required to record or post the Notice of Commencement. Principal contractors and their subcontractors are also required to provide the identity of the public authority and the principal contractor when they enter into contracts, and if they fail to do so they are liable for the resulting damages. ORC (C)-(E). The claimant should also obtain a copy of the payment bond for all contractors above it in the contractual lines of privity. A best practice is to collect all of this information on a project data sheet for later use. Also, one person at the company should be responsible for recording the deadlines discussed below that arise in relation to the first day of work and the last day of work. Make sure these very important dates and deadlines are given a prime location on your project data sheet and on your calendars. Even with this information in hand, a potential claimant should take additional steps to protect its interests. Payment bond and mechanic s lien claims are remedial in nature they protect the subcontractor and supplier only after there has been a problem with payment. The best course of action is to fully investigate the company with whom you will be contracting to guard against the risk of insolvency and to fully review the contract to be sure that your interests are protected. 2. Prepare and Serve the Notice of Furnishing For those claimants who are in the designated class, service of a Notice of Furnishing is mandatory. ORC (A)(1). Furthermore, the statutory requirements will be strictly enforced. Lee Turzillo, 10 Ohio St. 2d 5. Unless a subcontractor or supplier has a contract directly with the principal contractor, that subcontractor or supplier is required to prepare and serve a Notice of Furnishing within twenty-one (21) days of the first day it provided labor or materials. ORC (A)(1). Note that a laborer is not subject to this requirement. ORC (F). If the Notice of Furnishing is served after more than twenty-one (21) days from the first work, it is not invalid; instead, the claim is limited to the value of work the claimant provided in the preceding twenty-one days. ORC (A)(2). Section (B) provides that the Notice of Furnishing substantially follow the form set out in that provision, which is set forth in Exhibit D to these materials. The Notice of Furnishing is to be served on the principal contractor whose contract with the public authority is the contract under which the subcontractor or supplier is performing labor or work or furnishing materials. ORC (A)(1). Since proof of such service is so important, the claimant should serve the Notice of Furnishing by certified mail. The Notice of Furnishing should be served on the principal contractor at the addresses listed in the Notice of Commencement or in the pertinent subcontract. Be sure to save the green card the post office gives you upon sending the notice and the green card you receive in the mail proving that recipient received the notice. Page 19

20 Make absolutely sure that your certified letter is post-marked on or before the twentyfirst day. If you are close to the deadline, take it to the post office in person and ask them to stamp it in front of you. If the Notice of Furnishing does not provide the information required by the statute, is not served on the proper party, or is not served within twenty-one days of any work, the notice will be invalid and the claimant will lose its lien rights. While the claimant will still have contractual rights against the contractor with whom it has an agreement, these rights are not secured by a source of payment. If the contractor is not paying, the risk that the contractor will be uncollectible is distinct. 3. Prepare and Serve the Affidavit of Lien and Affidavit of Service of the Notice of Furnishing. To perfect its lien rights, a claimant must properly prepare and serve an Affidavit of Lien. If that party is also required to prepare and serve a Notice of Furnishing, the Affidavit of Lien must include an Affidavit of Service of the Notice of Furnishing. ORC A properly composed Affidavit of Lien must be served within 120 days of the date the claimant last provided work, materials, or labor to the project. ORC This deadline is mandatory. The Affidavit of Lien must contain the amount due and unpaid, the last date the claimant provided work, materials, or labor to the project, a statement of all credits or offsets, and the address of the claimant. ORC A sample Affidavit of Lien is attached as Exhibit E. It is written to include an Affidavit of Service. Laborers may use an agent to prepare an Affidavit of Lien, and that lien may include a claim from a number of laborers so long as the affidavit is itemized. ORC The Affidavit of Lien and, if required, the Affidavit of Service, must be served upon the representative of the public authority at the address set forth in the Notice of Commencement. ORC Again, since proof of service of the Affidavit of Lien and Affidavit of Service are conditions precedent to enforcement, these documents should be served via certified mail, with care taken to ensure that the date of mailing is compliant and that the evidence of mailing and receipt are preserved for trial, which can be months or years later. Claimants who worked under a first-tier subcontractor, must, within twenty (20) days of service on the owner, provide that subcontractor with a copy of the lien affidavit. ORC Otherwise, the lien is invalid. Id. To keep things simple, the second-tier claimant should just serve the first-tier subcontractor at the same time and in the same manner as the public authority. 4. Record the Affidavit of Lien Page 20