Monday, February 28, 2011

Tennessee Mechanics Liens Subject to Notice of NonPayment

The last major changes to the Tennessee mechanics lien law took place in 1990. In that year, the Legislature enacted major modifications to the existing Tennessee mechanics’ lien law, with numerous miscellaneous changes made since 1990. The
1990 modifications are encapsulated within the following two major categories:

1. The Tennessee lien law provided more protection against mechanics liens to residential property than commercial property.
2. The “Notice of Nonpayment,” which is applicable to commercial property only.

Residential Requirements
The Tennessee legislature has eliminated all mechanics lien rights for residential real property for lower tier contractors. By statute, residential real property is defined as a building consisting of one dwelling unit in which the owner of the real property intends to reside, or resides as the owner’s principal place of residence, including improvements to or on the parcel of property where the residential building is located. By statute, residential property also includes buildings consisting of two, three, or four dwelling units where the owner of the real property intends to reside or resides in one of the units as the owner’s principal place of residence.

The residential real property lien exclusion applies only to lower tier contractors. It does not apply to any contractor contracting directly with the owner or who is in privity with the owner. Therefore, residential real property lien rights still exist when the owner contracts directly with the contractor. As a practical matter, many trade contractors who would normally be involved as a subcontractor now refuse to perform any work unless such trade contractor contracts directly with the owner in order to preserve its lien rights.

The lien rights of a contractor contracting directly with the owner continue for one year after the date the improvement is complete or is abandoned and until the final decision of any lawsuit properly brought within that period of time for its enforcement. Any action to enforce the lien rights of a contractor contracting directly with the owner on a residential property project must be initiated within such one year period from date of completion of the improvement.

The time for the filing of a lien by one contracting directly with the owner may be accelerated by the filing of a Notice of Completion designating the date of completion by the owner or owner’s representative in the office of the Register of Deeds in the county where the real property is located. This has the practical effect of decreasing the time in which a lien may be filed. The Notice of Completion must contain:
1) the legal name of the owner or owners of
the real property;
2) the name of the prime contractor/contractors;
3) the location and description of the real property; and
4) the date of completion of the improvement. The Notice of Completion date designated therein shall not be less than ten days after the date of the recording of the Notice of Completion. Thus, the lien claimant must file its lien within such 10-day period. In the case of commercial real property, the expiration date for lien claimants to file their Notice of Lien shall be at least thirty days after the date of the recording of the Notice of Completion in the Register’s Office.

Commercial Projects
Every remote contractor or supplier not in privity with the owner with the respect to any improvement other than residential property must serve a Notice of Nonpayment within ninety days of the last day of each month within which labor or materials was provided and for which the remote contractor or material supplier was unpaid and intends to claim a lien. The Notice of Nonpayment must contain:
1) the name of the remote contractor and the address to which the owner and/or the prime contractor in contractual privity with the remote contractor may send communications to such remote contractor;
2) a general description of the work, labor and materials, etc. provided;
3) the amount owed as of date of the Notice;
4) a statement of the last date that the remote contractor or supplier performed work and/or provided labor, materials, services, etc., in connection with the improvement; and
5) a description sufficient to identify real property against which a lien may be claimed.

Any remote contractor or supplier who fails to provide the Notice of Nonpayment shall have no right to claim a lien under the mechanics’ lien law except for any retainage which may be held by the owner or prime contractor. This provision brings Tennessee in line with numerous other States that require pre-lien or preliminary notices prior to the filing of a lien. The basic purpose is to notify the owner/prime contractor of any potential lien claims. Without this provision, an owner is likely to be unaware of potential lien claims prior to the filing of such lien claims. In most instances, notice to the owner/prime contractor of potential lien claims will force resolution of such claims without suit.

After compliance with the Notice of Nonpayment provisions, a Notice of Lien may be filed within ninety days after completion of the work or within ninety days after substantial completion of the project. An action to enforce the lien must be brought within ninety days after completion of the project.

The Tennessee lien law requires that whenever any contract for the improvement of real property provides that a certain amount or percentage of the contract price is retained (retainage), the retained amount shall be deposited in a separate interest bearing escrow account with a third party for the use and benefit of the contractor to whom such funds are owed. The funds held in escrow are subject only to the rights of the person withholding such retainage in the event of default by the contractor to whom such funds are owed. This provision of the lien law is applicable to all contracts or subcontracts for the improvement of real property when the contract price stated in the contract or subcontract is $500,000.00 or greater. This provision of the law is mandatory and may not be waived by contract.

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