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Our last issue explained how the Illinois Mechanics Lien Act provides a powerful collection tool to general contractors, subcontractors and material suppliers who provide labor or materials for the construction of improvements on private projects. The Act allows a contractor or material supplier to force the sale of an owner’s property to pay the contractor’s claim with the sale proceeds. However, the Act also provides the owner with a method to protect his interest in the property.
An owner who has a written contract with the general contractor, documents all change orders in writing, obtains a contractor’s sworn statement and waivers of lien prior to making a payout and has documentation of all payouts, can defend against a contractor’s claim for lien and protect the property.
One scenario where an innocent owner may have problems with mechanics lien claims of a subcontractor or material supplier is the bankruptcy of a general contractor. Consider: The general contractor performs under its contract with the owner by employing subcontractors to perform the work. The general contractor submits a pay request to the owner in the amount of $50,000, $30,000 of which is to be disbursed among the subcontractors. After receiving payment from the owner, but before disbursing funds to the subcontractors, the general contractor declares bankruptcy. The unpaid subcontractors perfect their lien rights and ultimately file suit to foreclose on their mechanics lien claims. Unless the owner has complied with the Mechanics Lien Act, he may be forced to pay the $30,000 due the subcontractors twice in order to avoid the sale of the property to satisfy the lien claims.
The Act affords protection to an owner who complies exactly with the Act’s requirements. First, an owner should have a written contract with the general contractor that clearly defines the scope of work to be per formed and the amount the owner will pay for the work. Any changes in the scope of the contract work or the contract price should be memorialized in a written change order. Second, before making payments to the general contractor, the owner should demand the general contractor’s sworn statement which identifies all of the subcontractors the general contractor employed to perform the contract work, each subcontractor’s total contract price, changes to the contract price, amounts previously paid, amount to be paid under the current draw request, and the balance due. At the time of making payment on a draw request, the owner should obtain lien waivers from the general contractor and subcontractors which correspond to the values on the contractor’s sworn statement.
Under the Act, an owner is only required to pay for the work performed, the amount due under the contract, and change orders. This includes the cost to retain a replacement contractor to complete a defaulting general contractor’s work. In addition, the Act provides that the owner may rely on a contractor’s sworn statement in making payouts. This means that if a subcontractor’s contract price is identified as $50,000 on the contractor’s sworn statement, the owner is only obligated to pay a total of $50,000 on that subcontractor’s claim even if the general contractor had promised funds in addition to $50,000 to that subcontractor. Finally, an owner who complies with the Act and who receives lien waivers from the general contractor and subcontractors protects the property from claims for funds which were previously disbursed.
Every participant in a private construction project should have a fundamental understanding of the mechanics lien process. An owner who complies with the Act’s requirements can protect his property from the auction block. Lawyers of Di Monte & Lizak have been practicing in the area of construction law for over 44 years and regularly counsel parties in the construction industry, including general contractors and subcontractors, home owners and condominium associations, owners and developers, financial institutions and material suppliers.
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