Effective April 11, 2014, the Governor signed into law legislation that substantially revises and expands construction lien law in Mississippi. This article discusses some of the most important features of that legislation.
The new law grants a “special lien” upon the real estate or other property for which labor, services, materials, tools, appliances, machinery or equipment was provided by prime contractors, first and second tier subcontractors, materialmen (including equipment suppliers), registered architects and land surveyors and professional engineers. This lien may attach to the owner’s real property if the labor, materials, etc. were furnished at the request of the owner, design professional, prime contractor or first tier subcontractor. The lien is limited to the amount due the lien claimant under a written or oral contract and includes interest on the principal amount due. No such lien, however, exists for a prime contractor or first or second tier subcontractor not properly licensed by the State Board of Contractors or for a party who contracts with such unlicensed entity. At the owner’s request, proof of proper licensing must be provided.
This legislation requires compliance with filing procedures; failure to comply results in the lien being unenforceable. First, assuming there has been substantial compliance by the claimant with its contract obligations, the claim of lien must be filed with the chancery clerk in the county where the property is located within 90 days after the claimant last performed labor or services or provided materials or equipment. The lien must include a statement that the claim of lien expires and is void within 180 days of its filing if no “payment action” is filed within that time. (A “payment action” is defined as “a lawsuit, proof of claim in a bankruptcy case, or a binding arbitration.”) The lien must also notify the owner of the property on which the lien is filed of the owner’s right to contest the lien. A section of the law provides language for the lien filing, including the date for its potential expiration and the owner’s right to contest it.
Second, not later than 2 business days after the lien is filed, the claimant must send a copy of the lien to the owner by registered or certified mail or by overnight delivery through the postal service or commercial delivery company with directions for delivery on the next business date following the date it is received by the courier service. If the owner is an entity on file with the Secretary of State’s office, a copy of the lien should be sent to that entity’s address or to that entity’s registered agent’s address. If the owner’s address can’t be found, a copy should be sent to the prime contractor as agent for the owner. If the lien claimant is not the prime contractor, a copy of the lien must also be sent to the prime contractor or its registered agent in the same manner prescribed for sending notice to the owner.
Third, a “payment action” must, within 180 days from the date of filing the claim of lien, be commenced in county, circuit or chancery court against the party with whom the claimant contracted. When the payment action is commenced, a lis pendens notice must be filed with a copy sent to the owner and prime contractor. The lien statutes do not affect the parties’ right to arbitration but arbitration must be commenced within 180 days of filing a claim of lien. Commencement of a “payment action” is not required if the owner has not paid the prime contractor and the claimant cannot secure a final judgment against the party with whom it contracted because (a) that party has been adjudicated a bankrupt, (b) is dead or (c) there is an enforceable “pay-if-paid” clause making payment not yet due the claimant.
If the debtor-party has been adjudicated a bankrupt, is dead, or there exists an enforceable pay-if-paid clause, the lien claimant may proceed in an action against the owner of the property, if such action is filed within the same 180 day period and the claimant files a lis pendens notice with a copy to the owner and prime contractor. Any judgment entered in such action attaches only against the real property and imposes no personal liability on the owner of the property. Certain rights and defenses such as specified due diligence steps are unaffected by an action against the owner.
A claim of lien may be amended by filing an amendment in the prescribed form and the amendment relates back to the original date of filing. Notice of the amendment must be given in the same manner as an original claim of lien.
The lien is subordinate to tax liens, superior to all other liens, deeds of trust, mortgages and encumbrances filed after the notice of lien, but subordinate to those filed prior to the notice of lien. Foreclosure of any prior deeds of trust or other liens extinguishes subordinate construction liens but such subordinate liens have rights in any excess proceeds received by the foreclosing lienholder.
The law recognizes a category of “construction mortgages,” i.e., deeds of trust, mortgages, assignments of leases and rents, fixture filings and other security agreements affecting real property to the extent they secure a loan to acquire, or finance the repair or construction of an improvement to, real property. If a construction mortgage is filed prior to the notice of claim of lien, it is superior to the latter if the construction mortgagor either obtains a sworn statement from the owner that no work has been performed on, or no materials or equipment have been delivered to the real property or a sworn statement from the prime contractor, or owner, if no prime contractor regarding payment for work, materials, equipment or services provided. Priority for such construction mortgages extends to loan advances made both before and after the filing of a notice of claim of lien.
Assuming compliance with filing requirements, in any proceeding against the owner to enforce the lien, the party with a direct contractual relationship with the lien claimant need not be joined as a necessary party but may be made a party. At any time prior to judgment, any other interested parties may intervene to oppose establishing the lien or to assert any claim they may have against the lien claimant. If the lien claimant prevails, judgment shall be entered for the amount of the claim, plus interest and cost. In its discretion, the court may award reasonable costs, interest and attorneys’ fees to the prevailing party in any such action against the owner to enforce a lien against the property.
All liens created by the new law “shall have an equal priority” and be paid first out of the proceeds of the sale of the property or money collected from the owner and, if such proceeds are insufficient to satisfy the liens in full, the proceeds and money shall be distributed pro rata or as otherwise ordered by the court. The aggregate amount of liens shall not exceed the contract price between the owner and prime contractor. Moreover, if payments have been made in reliance upon lien waivers issued by lien claimants or sworn statements of the prime contractor that the agreed price or reasonable value of the labor, services or materials have been paid or waived in writing by the claimant, the total amount of all liens in favor of subcontractors and material suppliers not in privity of contract with the owner shall not exceed the unpaid balance of the contract amount between the owner and prime contractor at the time the first notice of lien is filed.
Likewise, if payments have been made in reliance upon lien waivers issued by lien claimants or sworn statements by the contractor that the agreed price or reasonable value of the labor, services or materials have been paid or waived in writing by the claimant, the total amount of liens in favor of design professionals not in privity of contract with the owner shall not exceed the unpaid balance of the contract price between the owner and design professional in privity with the owner at the time the first notice of lien is filed.
Upon written request of the owner, the prime contractor is required to provide a list of all first and second tier subcontractors, material and equipment suppliers. Upon written request by the prime contractor, all first and second tier subcontractors are required to provide the prime contractor the same information. Any party willfully refusing to provide the requested information within a reasonable time forfeits its lien right. Any prime contractor or first or second tier subcontractor who fails to pay any materialman, equipment supplier or subcontractor having direct privity with it, in accordance with the terms of any written agreement, shall forfeit its right to a lien.
Any person having a right to a lien but not in privity with the prime contractor, or if no prime, with the owner, who provides labor, services, materials or equipment to improve the property shall give written notice to the prime contractor or, if no such prime, to the owner, within 30 days of first providing labor, services, materials or equipment. The notice is required to be by email (with a confirmed receipt), registered or certified mail or by the postal service or other overnight courier service and must include the name, address and telephone number of the potential lienor, the name and address at whose instance the party furnished such goods or services, the name and location of the subject project and a description of the goods or services and, if known, the contract price or anticipated value of such goods or services. Any person not in privity with the prime contractor who fails to provide the required 30 day notice forfeits its right to a lien, but this requirement for the 30 day notice to the prime contractor does not apply to single-family residential construction.
If a waiver and release is executed, for example by a subcontractor, and the owner pays the prime contractor who fails without good cause to pay the subcontractor the amount set out in the waiver and release, the prime contractor will be liable to the unpaid subcontractor for 3 times the amount in the waiver and release. “Good cause” includes any defense available pursuant to the terms of the contract between the parties. This treble damage provision, however, does not apply to single family residential construction.
Special rules apply for single family residential construction. If an owner pays the prime contractor or design professional in privity with the owner, such payment shall be an absolute defense to any claim of lien to the extent of the payment and to the extent the owner has not received a pre-lien notice at least 10 days before a claim of lien is filed.
Special rules also relate to improvements to real property made under a contract with the property’s lessee. If the improvement is not in violation of the lease, the lien attaches to the improvement and to the unexpired term of the lease, and the lienor has the right to avoid forfeiture of the lease by paying rent to the lessor and may, under some circumstances, remove the building or improvement, if it can be done without injuring the real property.
The lien created by the new legislation shall be dissolved and unenforceable if either the owner, the purchaser from the owner or the construction lender can show that payment by either of them was made in reliance upon a lien waiver signed by a claimant or was made in reliance upon a sworn statement by the prime contractor that the agreed price or reasonable value of the labor, services, materials or equipment has been paid or was waived in writing by the lien claimant. If the prime contractor’s sworn statement is willfully and falsely made, any party injured by it has a cause of action against the prime contractor for 3 times their actual damages that result from the false statement.
The law provides a method for bonding off a lien. Before or after foreclosure proceedings are begun, the owner or prime contractor may discharge the lien by posting a bond in the amount of 110% of the amount claimed by the lien. The party filing the bond is required to give the lien claimant statutory notice of the bond within 7 days, including providing the claimant a copy of the bond.
Any waiver of a right to claim a lien or file a claim against a bond is unenforceable and void if the waiver is in advance of furnishing labor, services or material. When, however, a claimant is requested to execute a waiver and release in exchange for a progress or final payment, the form shall substantially follow the terms set out in the statute.
If a lien claimant fails to commence a lien action within 180 days from the date of filing the claim of lien, the lien becomes unenforceable. The lien could also expire “within 90 days after a notice of contest is filed” if no notice of commencement is timely filed in response to a notice of contest. When the lien is fully satisfied, the lien holder is required to file a cancellation with the chancery clerk and failure to file the cancellation within 15 days after written demand to do so subjects the lien holder to liability of no less than $500 per day plus attorneys’ fees and costs to any party injured thereby.
An owner (or its agent or attorney) or prime contractor (or its agent or attorney) may shorten the 180 days for commencement of a payment action by recording in the chancery clerk’s office the notice substantially set out in the statute, along with proof of delivery to the lienor and by sending a copy of the notice of contest to the lien claimant via the statutory method of delivery, within seven days of filing the same. Thereafter, the lien shall be extinguished by law upon the earlier of 90 days after filing the notice of contest or 180 days from the date of the lien if no payment action is filed in that period.
The new law prescribes the method for computing time and the method for judgments establishing the lien and ordering the property sold for satisfaction of the judgment by special writs of execution. A penalty for falsely and knowingly filing a claim of lien maybe assessed at 3 times the amount of the claim, to be recovered by every party injured thereby, if an action is brought within 180 days of the filing of the claim of lien. In addition, a person injured by the wrongful filing of a claim of lien may, on 7 days’ notice, ask a court to expunge the lien.
Significantly, when a prime contractor gives a payment bond with the same protection for subcontractors and material suppliers as required for public work the payment bond stands as substitution for the lien rights of first and second tier subcontractors and material suppliers.