In the current economic climate, collection of assessments may not be the only financial issue facing associations. In recent months, we have seen an increase in the filing of mechanics liens against associations.
The most common scenario we see, does not result from the association not paying a contractor. Rather, the association pays its contractor, but that contractor then fails to pay a subcontractor. Should this happen, the subcontractor becomes legally entitled to record a mechanics lien against that property where the work was done.
In that situation, the association ends up being dragged into the dispute between the contractor and its subcontractor. If the community is a condominium community, regardless where work was performed, the lien can be recorded against the units. This may cause problems at closings on units for sale as liens are an encumbrance on title. Ultimately, the association may have to post a bond or pay subcontractors directly for the lien to be released.
So, what can an association to do protect itself from the start? The following are some proactive steps an association can take:
- Require signed lien waivers from the contractor and any subcontractors after each payment is made and do not make any additional payments until such releases are received.
- Include a broad indemnification clause in the contract requiring the contractor to indemnify the association in the event a mechanics lien is filed by a subcontractor.
- Require the contractor to post a payment bond and record that payment bond in the county where the association is located.
- Include a setoff provision in the contract that allows the association to withhold sums due to the contractor if there is a mechanics lien filed or other indication that the association may be exposed to the risk of a mechanics lien.
- Include an attorney fee provision in the contract that will allow the association to recover its attorney fees in the event the association has to take action to prevent, remove, or defend against mechanics liens filed by subcontractors and prevails such action.