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How the Mechanics Lien Act Works
The Illinois Mechanics Lien Act provides a source of collateral to secure payment for the value of permanent improvements to real property by allowing a lien to be placed upon the improved property and by providing that if the debt for the improvements is not paid, the lien can be foreclosed, meaning that the improved property is sold at a judicial sale, the proceeds from which may be used to satisfy the debt. In addition, properly perfected mechanics liens in Illinois enjoy a super-priority, which means that the amounts owed on mechanics liens for improvements that enhanced the value of the property are paid before other claims against the property are satisfied. In this way, the Lien Act protects the right of those who improve real property to obtain payment.
The Lien Act also contains important notice and other requirements which must be satisfied before a lien claim will be perfected. Some of these requirements are strictly construed and, in part, doing so protects owners from the risk of improper liens and double payment. For example, claims must be filed within a specified time period and owners are required to obtain a sworn statement from the general contractor which identifies all subcontractors and the amounts owed to them. When people follow the lien act, their rights are generally protected. However, the converse is also true - when people fail to follow the Lien Act, they become exposed to increased risk, which include the risk that lien rights will be forfeited or that an owner will incur the responsibility to make a double payment.
For example, consider what would happen if a subcontractor is not paid by the general contractor even though the owner, in fact, paid the general contractor the sums the general contractor owes to the subcontractor? For instance, the general contractor may have used such to satisfy other obligations and then declared bankruptcy, leaving the subcontractor with an unpaid balance due and the owner with a lien on the property. Unfortunately, this is not entirely uncommon. What rights under the Lien Act does the subcontractor have? What obligation to pay the subcontractor on its lien claim does the owner have? The answer to these and other questions may depend upon whether the owner, general contractor and subcontractor followed the Lien Act.
The Lien Act requires that owners withhold from the general contractor amounts that are sufficient to satisfy the lien claims of subcontractors for which the owner is on notice and, as mentioned above, Section 5 of The Lien Act (770 ILCS 60/5) also requires an owner to obtain a sworn statement from the general contractor that lists all parties who are working on the project and the amounts owed to them. An owner who pays the general contractor in good faith reliance on the general contractor's sworn statement (meaning that the owner is not on notice of the subcontractor's lien claim) is protected against a lien claim in this scenario and cannot be compelled to re-pay the sums previously paid to the general contractor for the benefit of its subcontractors. As such, if the owner in this example followed the Lien Act, the subcontractor should not be able to foreclose its lien claim for the unpaid sums, even though the subcontractor did not receive payment from the general contractor (though there may be other remedies). However, as one can imagine, sometimes owners make payments without ever obtaining the required sworn statement. If this occurs, the owner could be liable to pay the subcontractor on its lien claim, even though the owner had, in fact, previously paid the general contractor for the amounts owed to the subcontractor. In general, notice is the guiding principle for the Lien Act, and the central question is whether the owner was properly on notice of the subcontractor's lien claim before making payment to the general contractor. The sworn statement is one mechanism through which owner's receive such notice.
There are, however, other ways that an owner may receive notice of a subcontractor's lien claim. For example, because an owner may not obtain a sworn statement, because a general contractor may fail to list all subcontractors or because a general contractor may do so inaccurately, the Lien Act allows subcontractors to directly notify owners of their lien claim (770 ILCS 60/24). This notice is often called a "90 Day Notice," because, while a subcontractor is permitted to supply a 90 Day Notice at any time after entering into its subcontract, a subcontractor is required to give such a notice, if at all, within 90 days of its last date of work. An owner is required to withhold from payments to the general contractor amounts that are sufficient to cover subcontractor lien claims from which the owner is properly on notice. However, there are times when subcontractors fail to serve a 90 Day Notice. When this happens, one of two things may occur: (1) if the subcontractor is nevertheless listed on a sworn statement from the general contractor to the owner, the subcontractor may still have a lien, but the lien will be limited to the amount shown on the sworn statement, if any; or (2) if there is no sworn statement, the subcontractor may lose its lien claim entirely. There are other requirements for perfecting a valid mechanics lien claim in Illinois, including timely recording a mechanics lien with the recorder of deeds office in the county in which the subject land is located.
Finally, it is important to note that the funds on a construction project may be held in trust pursuant to the Illinois Construction Trust Fund Statute (770 ILCS 60/21.02), and that this trust could substantially impact the rights and obligations of all parties involved. This trust fund statute provides an alternative mechanism through which amounts owed to a subcontractor may be secured and is discussed in more detail on the Construction Trust Fund page linked to this website.
As should be readily apparent, the Lien Act is complicated and technical. For all of these reasons and many others, it is important to consult a licensed attorney relative to the perfection of or defense against a mechanics lien. If you are you the owner of property against which a mechanics lien claim has been recorded, have received a notice of intent to record a mechanics lien by a subcontractor, or are a general contractor, subcontractor, material supplier or design professional who has provided labor, services or materials that improved real property but have not been paid and are considering pursuing a mechanics lien claim to obtain payment, The Howard Law Firm llc can help you. Please call us for a free consultation.