Various news outlets recently have been reporting on yet another story involving President-elect Donald Trump (big surprise there). Luckily this story was not a political one, was not unverified, and touches on an important issue concerning mechanic’s liens in construction law.
The basic story is that at least three contractors have filed mechanic’s liens against the Trump International Hotel totaling at $5 million dollars in unpaid labor and materials (see, for instance, https://www.washingtonpost.com/news/digger/wp/2017/01/06/third-lien-on-trump-hotel-brings-alleged-unpaid-bills-to-over-5-million/?utm_term=.d84c520f3c01). Two companies claim the lion’s share of that total. Washington-based plumbing and heating firm, Joseph J. Magnolia Inc., says it’s due $2.98 million. A Maryland company, AES Electrical Inc., claims it’s owed $2.075 million. A third contractor, A&D Construction of Virginia LLC, says the hotel owes $79,700 for trim work including crown and base moldings.
This is not the first time a Trump organization has been entangled in legal proceedings in relation to unpaid labor or overdue contract payments. Previous claims included: landscapers at Riverside South Park in Manhattan, who sued in 2001 seeking $111,000; contractors at Trump Park Avenue sued in 2003 seeking $206,000; and a painter in Chicago in 2010 sued a Trump entity developing a high-rise, claiming to be owed more than $4 million. For a decent summary of these disputes, without going into the quagmire of opinions as to whether the complaints are valid, see http://www.usatoday.com/story/news/politics/elections/2016/06/09/donald-trump-unpaid-bills-republican-president-laswuits/85297274/.
But for our purposes, the existence of the claims is less important than what Mr. Trump said about them. In an interview with Reuters, Trump claimed that he at times uses payment as a negotiating tool with contractors (see http://www.reuters.com/article/us-usa-election-trump-bills-specialrepor-idUSKCN0T214Q20151113). This is not a practice unique to President-elect Trump or his businesses.
For the reasons that follow, such tactics often are not the best choice. However, it is important to note that, in relation to the D.C. hotel project, the total amount of the liens is a small fraction of the total project. This means that, as far as we know, contractors representing the vast majority of the improvement work have NOT filed liens alleging that they remain unpaid for work performed. It doesn’t mean they were paid either, just that they haven’t alleged nonpayment through the mechanic’s lien process. That being said, here are a few reasons delaying payments for such work could backfire if it results in the claimant filing a mechanic’s lien:
1. Sunk Costs
Often, when a dispute gets to the level of having to file a mechanic’s lien, the claiming party has already had at least a moderate increase in costs over the project budget. The contractor may have engaged in substantial efforts to correct any purported deficiencies in the work product; they may also have incurred financial consequences in terms of lost opportunities or having to front payroll or material costs for significant periods of time. These sunk costs can reduce the likelihood that contractors will settle for less than the original value of the contract.
2. Recovery of Expenses to File the Lien
This factor can vary wildly by jurisdiction. While some mechanic’s lien statutes may have fairly minimal requirements, others have very onerous ones. However, most jurisdictions’ mechanic’s liens are procedurally complex and maintain strict penalties for noncompliance with those procedural requirements. Given those facts, contractors often hire professionals, usually attorneys, to assist in the lien and foreclosure processes. Many, if not most, mechanic’s lien statutes allow for a contractor to recover these expenses, which may increase their demands and raise their standards for acceptable settlement outcomes.
3. The Lien Itself
A mechanic’s lien, like any other, creates a cloud on the property title. Depending on circumstances, this may be either a major or minor factor for a potential buyer if one is trying to sell or otherwise transfer the property at issue. Even if the owner can overcome that issue with a willing buyer, it still increases associated transaction costs.
4. Timing Concerns
This is another factor that varies by jurisdiction, but generally mechanic’s liens run on strict timing requirements. Forcing a party to choose between waiving a legal claim and pressing forward usually means that they will assert their rights and press the claim. Adhering to the timing requirements for a mechanic’s lien process will constrain time otherwise available for negotiating a resolution.
5. Potential PR Issues
Put simply, having a mechanic’s lien on your property looks bad. Like any business with repeated interactions, contractors and laborers talk to each other. Getting a bad reputation for non-payment can cause quality contractors to think twice about entering a project with you, or, perhaps even worse, alter their strategies and minimum negotiating positions before entering the project agreement.
These general reasons also do not touch on what may often be negative consequences in other, more particular circumstances. For instance, the D.C. Hotel lease contains a clause which requires Trump Old Post Office LLC (the entity owning the lease) notify the General Services Administration (who runs the lease on the government end) in writing within 10 days of any mechanic’s lien being filed. Within 30 days of the filing, Trump’s firm is required to have any liens “discharged” unless it contests the claims being made.
Mechanic’s liens are powerful statutory tools. While not always the most appropriate strategy, for general contractors or owners it is generally advisable to avoid letting disputes reach that stage. Further, good counsel prior to and during the project always helps to reduce the chance of such a conflict arising in the first place.
For unpaid contractors, make certain you immediately consult with experienced counsel if you do not receive payment on a project in a timely fashion. The timeline to assert a mechanic’s lien is generally short and missing a deadline is usually fatal to that claim. Similarly, an ounce of prevention is usually worthwhile for you too. Additional issues such as pre-lien notice requirements could prevent you from raising such claims even before you finish your project.
