Know the lien rights for engineering services
Payment disputes, unfortunately, remain a problem for many consulting firms. Typically, contractors, subcontractors, and suppliers are at the center of such claims, but it is not uncommon for engineers to also be affected. Market conditions require design professionals to protect their payment rights for work performed on behalf of owners, contractors, or other parties involved in the project. If the development boom of the past decade has taught the construction industry anything, it’s that the single-purpose asset entities, such as the typical owner limited liability company (LLC), is not a safe place to store monies owed for engineering services performed on the project.
While there are certainly contractual rights to payment, the design team often finds that bankrupt LLCs offer little recovery for unpaid services. Bonds may exist, particularly on public works projects, but not all private work requires or recommends using bonds to reduce the overall, upfront project costs. Another potential avenue for recovery is through mechanics’ or materialmen’s liens. While engineers are not mechanics or materialmen, many states’ lien laws allow them to file liens against the real property on which the project is located to recover payment for services rendered. But beware: each state’s definition of who is entitled to lien rights and what services are covered varies. Further, the notice and filing requirements to maintain and perfect lien rights also vary by jurisdiction. Design professionals must be aware of, and aggressively pursue, the specific legal requirements, especially if they work in multiple states.
Lien laws were designed to protect anyone providing goods or services in connection with the improvement to real property. If the real property is benefitted by those goods or services then, as the laws allow, that property should serve as a form of payment protection. Thus, lien laws do not award a money damage; that is, a financial recovery against the real property owner. Rather, they allow the lien claimant to bind the real property to collect for the work performed.
Engineers should pay close attention to the role they serve on the project and the parties with whom they contract. In many cases, the project’s owner retains the design team. In others, the design contracts are with the general contractor or a joint-venture entity. Under any scenario, it is critical to identify the owner of the real property. While the real property owner and project owner are typically the same, the availability of lien rights may hinge on whether the contracting party is actually the real property owner. Because liens are in rem (against the real property and not the specific owner), some states’ lien laws provide lien rights only to parties in direct contractual privity with the real property owner.
Those entitled to assert liens and the scope of goods and services subject to liens also vary by state. Every state’s law encompasses those who perform work or supply materials for the improvement of the property. As stated above, a claimant’s right to assert a lien depends on the party with whom they have contracted and the level of “remoteness” to the real property owner. For example, suppliers to suppliers (i.e., a “second-tier” supplier) are rarely afforded lien rights. And even those who may be entitled to file a lien must further prove that the goods or services provided satisfy the state’s legal definition of “lienable services.”
It is nearly universal that goods delivered and permanently installed within the project are subject to lien, but some states do not protect those performing labor or providing services away from the actual project site, even if for the project’s benefit. Planning, design, and contract administration often fall into this latter category. The majority of a project’s design work may occur in the engineer’s office rather than at the job site and would, thus, be excluded from protection. For this reason, many state laws specifically identify that the engineer is entitled to assert a lien. Some states, like California, entitle design professionals to assert a mechanic’s lien but only after construction begins. Prior services, such as planning and design work, are protected under an entirely separate design professional lien. The engineer’s decision to enter into an agreement for a project should include a determination as to whether all, or any portion, of his work is protected by lien rights.
Even if their services are lienable, design professionals must ensure the required procedure is followed to assert and perfect lien rights. Many state laws establish a specific procedure that must be followed, including the use of certain statutory forms. Remember, lien laws are strictly construed against the claimant and the procedures are usually extremely technical. Some states require specific language to appear on the face of lien documents and even go so far as to require specific text fonts. Documents must be filed within a certain number of days of either first providing services or last providing services, or both, and must be sent to certain parties. Failure to abide by each step of the process often can void the lien. This is an owner’s real property at stake, and the ensuing litigation over lien validity often involves compliance with these highly technical procedures.
Lien rights are wholly independent from bond rights, contractual rights, or common-law claims that may otherwise exist. They are simply an additional avenue of recovery that may be available. Often, lien filings receive quicker responses given that a real property owner runs the risk of having his property foreclosed on to satisfy the debt. However, filing invalid liens for the sole purpose of getting a quicker response exposes the claimant to potential liability for slander of title.
If a firm has not been paid for services provided on a project and believes it may be entitled to lien the owner’s real property, it should consult with an attorney to ensure the proper legal procedure is followed to maintain and perfect that lien.
Zack Rippeon is a construction attorney in the Atlanta office of Burr & Forman LLP, and uses his many years as a commercial construction project manager to provide efficient and practical legal resolutions to clients in all areas of the construction industry.