Participating owners: enforcing a mechanic's lien for materials against a non-contracting party. (Legal Corner).

In the past several years, the construction industry has enjoyed an unprecedented level of success. A significant portion of this success is attributable to the extension of credit from "materialmen," or suppliers of material goods. The industry depends on credit because construction contracts seldom provide advance payment to contractors; instead, contractors rely on scheduled or quarterly payments. Accordingly, a contractor usually does not have the capital to finance improvements without an extension of credit.

As with any credit extension, there is the risk of nonpayment. The mechanic's lien has become the primary mechanism to minimize risk. Mechanic's lien statutes may provide materialmen security for the underlying debt by securing an interest in the land and the structure subject to improvement. However, a mechanic's lien may be unenforceable against a property owner if the materials are supplied on contract with a leaseholder making improvements to a leasehold estate. If the leaseholder defaults on payment, or files for bankruptcy protection, then the material supplier may be without a remedy, while the property owner receives a benefit without besting a burden.

Mechanic's Liens and Material Goods

Mechanic's liens are creatures of state law, or in some instances, a constitutional remedy. Although each state has its own statute and requirements to enforce mechanic's liens, these statutes share common attributes. Mechanic's lien statutes only protect certain classes of professionals or tradesmen that contract with the owner or leaseholder.

In a majority of states, mechanic's liens are enforced through foreclosure proceedings. A claim on a mechanic's lien is an action in properly to recover materials furnished, not a personal action in contract for repair or improvement (i.e., breach of contract or restitution). The material supplier should appreciate the difference between contracting with a property owner directly, or alternatively, with a leaseholder.

It is important to consult the specific state law to determine the treatment of materials. State law dictates whether materials qualify for a mechanic's lien. Generally, materials qualify for a mechanic's lien if incorporated into an improvement with knowledge of their intended use on a specific site. Alternatively, some states expressly designate certain materials for qualification. The determination of whether non-incorporated materials qualify (e.g., rental equipment, utilities, maintenance, etc.) varies state to state.

Improvements to Leasehold Estates