Construction Professionals and Liens – Why Do They Exist?
Every contract carries a certain degree of risk for a contractor. In most cases, contractors cannot bill their clients in advance since the work has not yet been completed.
To mitigate this risk, construction professionals can secure their payment through a lien. If the client does not pay, the contractor can assert their lien within four months of completing the work. This claim is always directed at the property owner, regardless of whether the owner or a general contractor issued the contract.
Within four months of finishing their work, the contractor can have their lien entered into the land register. This lien allows the contractor to auction off the property in case of non-payment in order to recover the amount secured by the lien.
When Does a Construction Professional Have a Lien?
For a construction lien to be valid, the following conditions must be met:
- A Work Contract: The contractor’s right to create a lien arises from the conclusion of a work contract between the contractor and the client (either the property owner or a general contractor).
- Work Performed on the Property: The lien applies to the property on which the work was performed, covering both the labor and any supplied materials.
- Four-Month Deadline: The lien expires if not asserted within four months of completing the work.
- Independence from the Client: The contractor’s right to establish a lien exists regardless of whether the property owner, a contractor, or another person authorized to act on the property owes the payment.
- Exemptions for Material Suppliers: Suppliers of standard, mass-produced construction materials generally do not have lien rights, except for custom-made or hard-to-reuse materials.
- Invalid Entries: A lien entry is invalid and must be removed if the property owner provides adequate financial security.
The Land Register Entry
The construction lien is a type of indirect statutory lien. 'Statutory' means that this type of lien can arise against the property owner’s will. However, being an indirect lien, it only comes into effect once it has been entered into the land register.
A construction professional has an indirect statutory lien. This means they may establish the lien against the owner’s will, but they must apply for an entry in the land register for it to take effect.
How Property Owners Can Protect Themselves Against Construction Liens
Property owners can take the following measures to protect themselves from construction liens:
- Performance Guarantees: A performance guarantee ensures that the guarantor (a bank or insurance company) pays if the guarantee is called upon.
- Direct Payments to Contractors: To ensure that subcontractors are paid, property owners should pay them directly. This avoids the risk of non-payment in cases where the general contractor becomes insolvent or does not pass on the payment. A direct payment agreement can be arranged for this purpose.
- Proof of Payment to Subcontractors: Transfer funds to the general contractor or contractor only after they can provide proof that subcontractors have been paid.
Important for Buyers
When purchasing a property, always check the land register to ensure there are no claims or liens on the property. A contractor’s lien claim can extend to you as the new owner of the property.
