Read more about avoiding contractor fraud in our Contractor Guide

A lien is a legal claim of one person upon the property of another person to secure the payment of a debt. If a contractor has completed work and you have not paid the bill, he can place a lien on your property. Subcontractors also have the right to place a lien on a property. If you have paid a contractor but the contractor doesn’t pay his subcontractors, the subcontractors can place the lien. A lien is very serious and there can be several undesirable consequences if one is placed on your property. Banks will not lend money to refinance a house if there is a lien. If you’re trying to sell the property, buyers generally won’t buy a property with lien attached. A lien can adversely affect your credit rating. Additionally, if the mortgage company finds out there is a lien, they can declare default on your loan and take the property back.

Probably the most disconcerting thing about having construction performed on your property is state law allowing workers and suppliers to lien your property for non-payment. Even seasoned professionals occasionally have liens filed on their properties. Some liens are legitimate and some are not. They are never easy to accept and in particular when you have already paid for the work or materials. Contractors that “misallocate funds” collected for payments can be criminally prosecuted. Unfortunately, putting the contractor in jail does not always mean you get your money back. Hiring a reputable contractor with a track record and several years of experience can help you avoid having to deal with liens altogether.

Below is an explanation of how liens operate and how to best avoid having them placed on your property.

In the state of Louisiana, a ‘Notice of Contract’ – a statement of the type of work to be done, costs, etc – must be filed with the local Clerk of The Court by the contractor before he starts work on a residential project. The legal description of the property, which is found in the title or a survey, is included in the notice and must be as accurate as possible. The legal description is the lot number and square number, if one is assigned, and the subdivision name – the address alone is not a legal description. Also in the notice should be the type of work, the date, the parties to the contract and the amount the contract is for or an estimate of how the final amount may be determined. This legal notice essentially lets the public know that work is to begin on your property.

Once the job is complete or almost completed, the contractor will file what is known as an ‘Acceptance’ which gives the contractor legal recourse to place a lien on the property if the homeowner doesn’t pay for the job. Anyone that works on your property has the right to file a lien for non-payment including the workers that work for the contractor you hired and paid. When the work is complete, the owner and the contractor should sign a “Substantial Complete” form and file it with the Clerk of Court. This document lets the public know the work is complete and begins a 30 day period for anyone to file liens that was not paid. The Substantial Complete form should reference the contract or notice, be dated, have the legal description, and contain the signatures of all the owners and the contractor. After 30 days from the date the Clerk of Court filed the Substantial Complete, no liens may be filed for the work performed or material delivered under the contract.

The General Contractor has 60 days from the Substantial Complete to file a lien for non-payment. Actually, the contract or notice acts as a lien. The contractor and the owner should file an 'Acceptance of the Contract by the General Contractor and the Owner' after all funds are paid to the contractor. This Acceptance can be filed anytime after the contract is complete and all payments have been satisfied.

The General Contractor has 60 days from the Substantial Complete to file a lien for non-payment. Actually, the contract or notice acts as a lien. The contractor and the owner should file an ‘Acceptance of the Contract by the General Contractor and the Owner’ after all funds are paid to the contractor. This Acceptance can be filed anytime after the contract is complete and all payments have been satisfied.

Every contract between an owner and a contractor should contain language making the contractor responsible for liens filed on the property for non-payment for work the contractor has authorized. This why typically the Acceptance is not filed till after 30 days after the Substantial Complete is filed. Most Substantial Complete forms do have provisions for “punch list items” (corrections that need to be made to the house) which, as long as they are minor against the scope of the work, will not delay the Substantial Complete from being filed. If the owner or contractor does not file the contract or notice, the lien period is extended to 60 days and becomes difficult to establish when the 60 days should begin, so file the contract.

The window of time for ‘unknown liens’ to be filed is during the construction period and 30 days after construction is complete. Typically, construction lenders will want their mortgage to be filed before the contract or notice is filed so that any possible liens will be “behind their mortgage” and will not “prime their mortgage”. This is why most lenders on new construction want a “no work” document from a Louisiana Licensed Surveyor to establish no possibility of a lien coming before their mortgage.

• Always insist the contract state the contractor is responsible for liens on work he authorized. This will make it his responsibility to pay the bills as well as deal with “unknown liens”, such as a subcontractor’s worker claiming he has not been paid.
• The owner of the property should pay for all materials delivered directly to the property or at least have evidence of payment. Material delivered to the contractor or subcontractor and then brought to the sight cannot cause a lien on the property since it was not delivered to the property.
• If an owner is uncomfortable with the contractor or the contractor has been in business only for a short time, it is a good idea to hold 10% of the total contract until the 30 day period has ended from the Substantial Complete and a clear Lien and Privilege Certificate is delivered. A Lien and Privilege Certificate has only the contract the owner and the contractor filed on it and no liens for non-payment is considered clear. It is important to note that this hold back of 10% is strictly for the delivery of a Clear Lien and Privilege Certificate and not punch list items or warranty items. If a contractor suspects that it is possible for the hold back to be retained for other purposes, he may raise his price 10% to account for the risk. Many times contractors have been denied their rightful payments using the hold back method and the industry is wary of them. Remember, the contract or notice is a lien and can be perfected with a lawsuit for non-payment which in the worst case scenario may cause the property to be seized and sold for the debt.

A contractor may offer either a ‘lien bond’ or a title policy covering liens for the 30 day period in order to collect the 10% hold back earlier. The lien bond only covers the 30 day lien period and costs 1 to 2 % of the contract. A title policy covering you for liens for the 30 day period can be obtained from a closing attorney. This usually requires a good relationship with the contractor so the writer of the policy is comfortable that all bills have been paid.

A ‘Performance Bond’ will protect the owner to assure the work is performed and all the bills are paid. These are typically used in commercial construction due their difficulty to obtain by residential contractors and their costs. Residential contractors who are “bondable” are highly experienced and well capitalized. Insurance companies that issue Performance Bonds will require a CPA audited financial statements and 10% in net assets and 20% in gross assets of the price of the construction project. Also, insurance companies will not give Performance Bonds to contractors that build speculative houses. There are very few “affordable” residential contractors that will meet these requirements and since the Performance Bond itself costs 5 to 10% of the total price, expect to pay significantly more for the project and have a much smaller pool of available contractors.

Finally, a “lien waiver” can be signed by each contractor and supplier on the construction project. (see an example of one here). This certifies that a general contractor has paid all of his subcontractors so that no liens may be filed against your property. However, it is possible to have unknown liens filed, especially if you are not using a general contractor that you have a contract with stating he is solely responsible for liens on work he authorizes but instead are relying on solely on a subcontractor to dole out work. In the latter case, lien waivers are good for implied accountability and are still a good idea, but do not count on them preventing you from paying an unknown lien.

Sometimes an unscrupulous contractor will file a bad lien against a property owner. A contractor might not finish the job but will invoice for all the work or the work is defective but the contractor tries to make the property owner pay for it anyway. Of course you as a homeowner do not want to pay for defective or incomplete work. To try to get you to pay, the contractor will place a lien on your property. Unfortunately, filing a lien is easy for a contractor. He can simply pay a fee to the Clerk of the Court and it is filed. The Clerk is not obligated to investigate whether the lien is a valid one.

To fight this kind of lien you must first invoke 'Provision of Law', which means you send the lien claimant (the contractor) a letter via certified mail giving him 10 days notice to voluntarily remove the lien. If at end of the 10 day period the lien isn't removed, you can file a 'Summary Proceeding' (a lawsuit), which will give you a court hearing usually within 90-120 days. It is recommended that you hire an attorney to help you file the necessary paperwork. If the court finds in your favor, three things can happen: 1) the court cancels lien; 2) the court awards judgment against the contractor for legal fees; and 3) the court awards the homeowner damages for suffering caused by the bad lien.