Construction Law: Fact or Fiction?

FACT OR FICTION: A construction bid is an offer, and if it is accepted, a legal contract is formed.

ANSWER: FACT! A contract is a promise, or a set of promises, to which the law attaches a legal obligation. For a contract to be enforceable there must be an offer and an acceptance of the offer. There must also be consideration which is usually money exchanged for services or products, but can be any right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility, given, suffered or undertaken by the other.

FACT OR FICTION: Owners can owe implied warranties to the contractor.

ANSWER: FACT! For example, an owner has in implied obligation to provide the contractor with accurate contract documents for the project. If the owner fails to do so, the contractor may bring an implied warrant of accuracy claim against the Owner. In other words, if the contractor is bound to build according to the plans and specifications the owner prepares or provides, the contractor will not be responsible for the consequences of defects in the plans and specifications. This is commonly known as the Spearin doctrine, based on the case of United States v. Spearin, 248 U.S. 132 (1918).

FACT OR FICTION: Under a standard commercial AIA contract, an Owner may order any changes it chooses, so long as it agrees to pay for them.

ANSWER: FICTION! In general, an Owner may issue a Construction Change Directive without invalidating the Contract. The Owner may order changes in the Work within the general scope of the Contract, including additions, deletions or other revisions. In turn the Contract Sum and Contract Time must be adjusted accordingly. However, the Owner is not free to make simply any wholesale changes it wishes. Its discretion is limited to changes within the general scope of the Contract.

FACT OR FICTION: A mechanics lien statement is invalid if the dollar amount is stated incorrectly.

ANSWER: FICTION! Courts will generally not invalidate a lien if the wrong amount is stated, so long as the error was an honest mistake and not made in bad faith, fraudulently or with intention to overstate the lien. However, note that the law states that in no case shall a lien exist for a greater amount than the sum claimed in the lien statement. If the incorrect amount is less than the contractor is owed, it is likely bound by that amount and will not be able to increase it unless it files an amended mechanics lien statement within the applicable time limitations.

FACT OR FICTION: Asbestos abatement might not be considered an improvement subject to mechanics lien rights.

ANSWER: FACT! An Illinois court recently ruled that asbestos abatement is not an improvement to real property because it is not a permanent addition, only an ordinary repair. Note that other courts in Washington and Kansas have also concluded that environmental remediation services are not an improvement to real property in the mechanics lien context under the laws of those states. While these cases interpreted the laws of other states, they could still impact future Minnesota cases.

FACT OR FICTION: All projects under contract with a public body require the posting of a performance bond.

ANSWER: FICTION! Under Minnesota law there are eight exceptions to the general rule that performance bonds are required on public jobs. These eight exceptions generally give the contractor the option of posting security, such as a bid deposit or a cashiers check, rather than a performance bond. These exceptions apply only to specified small dollar amount contracts or natural resources development projects.

FACT OR FICTION: Unpaid state income taxes on wages, unemployment taxes and sales taxes are covered by and recoverable under a payment bond.

ANSWER: FACT! However, the law addresses only Minnesota taxes and not federal taxes. It is probable that federal income taxes and social security withholding are not covered. On federal projects, a Miller Act bond covers unpaid withholding taxes.

FACT OR FICTION: The interest rate one can collect on unpaid judgments periodically changes.

ANSWER: FACT! The post-judgment interest rate for 2002 dropped dramatically from 6% per annum to 2% per annum. The revisions to Minnesota Statutes Section 549.09 changed the interest rate on judgments from the secondary market yield on one-year US treasury bills (which is no longer available as an index) to the one-year constant maturity treasury yield rounded to the nearest one percent, or 4%, which ever is greater. This effectively reduced the post-judgment interest rate to 2% for 2002. The rate for 2003 was increased to 4% per annum.

FACT OR FICTION: Machinery and equipment suppliers may not claim mechanics liens.

ANSWER: FICTION! Machinery and equipment suppliers are included within the class of persons who are entitled to claim a mechanics lien.

FACT OR FICTION: A property owner may stall a mechanics lien foreclosure action by demanding an accounting.

ANSWER: FACT! Within fifteen days after completion of the contract for an improvement, the owner may require any person having a lien to furnish an itemized and verified account of the lien claim, the amount of the lien and the claimants name and address. No action or proceeding to enforce the lien may be commenced until ten days after this requested statement is furnished.

FACT OR FICTION: Contract clauses providing that the general contractor is not required to pay the subcontractor unless the owner pays the general contractor are unenforceable in Minnesota.

ANSWER: FICTION! A contingent payment clause shifts the risk of nonpayment by the owner from the general contractor to the subcontractors and suppliers. However, the clause must clearly and unequivocally provide that receipt of payment from the owner is a condition of the contractors obligation to pay the subcontractor. For example, a clause that simply provides that the general contractor shall pay the subcontractor within seven days after receipt of payment from the Owner does not eliminate the general contractors duty to pay. Instead, it only sets forth the timing for payments. Only if the clause unequivocally states that the general contractors duty to pay the subcontractor is conditioned upon the owners payment will the clause be enforceable to eliminate the general contractors duty to pay.

FACT OR FICTION: A cardinal change by the owner can relieve the contractor of further contract performance.

ANSWER: FACT! A changes clause normally limits the owners rights to make changes and states that they must be within the general scope of work contemplated under the contract. A change that substantially exceeds the contracts scope is known as a cardinal change and can amount to a material breach of contract. This can relieve the contractor of its obligations under the contract. There is no precise rule to determine when a cardinal change has occurred, and the facts of each case should be carefully reviewed.

FACT OR FICTION: Utilities or fixtures such as phone lines, pipelines, and railways are subject to mechanics liens.

ANSWER: FACT! Under Minn. Stat. § 514.04, a mechanics lien may be claimed for unpaid labor or materials contributed for the construction, alteration, or repair of any railways or subways, or telegraph, telephone or electric light or pipe lines.

FACT OR FICTION: A debtor may not direct where a payment is to be applied.

ANSWER: FICTION! The debtor has authority to direct where a payment is to be applied, even if the creditor does not wish to apply it in that fashion. Once this direction is given, it is binding on the creditor.

FACT OR FICTION: Failure to serve a mortgage holder within your one-year lien period will prevent you from claiming priority over the mortgage.

ANSWER: FACT! Any entities that you wish to hold responsible for your lien rights must be served with your foreclosure action within one year from your last date of work.

FACT OR FICTION: If a mechanics lien statement is filed with the inappropriate county office, i.e., the county recorders office instead of the registrar of titles office, the lien will not be enforceable.

ANSWER: FACT! Careful attention must be paid to the type of property being liened. If the property is abstract, the lien must be filed with the county recorder. If the property is Torrens, the lien must be filed with the county registrar of titles. If the property is part abstract and part Torrens, the lien must be filed with both offices.

FACT OR FICTION: A contractor may sue an insurance company directly to recover payment on an insurance job.

ANSWER: FICTION! Under Minnesota law, a direct action against an insurer may not be brought by one who is not an insured under the policy. The contractor may only pursue the property owner (or whomever the contract was with), who must in turn pursue his or her own insurance company to recoup the funds.

FACT OR FICTION: If a property owner files for bankruptcy, the time period to commence foreclosure action is extended.

ANSWER: FACT! If the property owner files for bankruptcy, the bankruptcy code generally provides that the period for commencing or continuing a court action will be extended until the later of (1) the end of the statute of limitation for the lien, or (2) 30-days after the bankruptcy has terminated, whichever is later. However, an owners bankruptcy does not extend the time to serve and file the mechanics lien itself.

FACT OR FICTION: Taking a promissory note to secure payment from an owner may invalidate your lien rights.

ANSWER: FACT! Generally, a contractor may accept a promissory note to secure an owners payment obligation without waiving his lien rights. However, if the note provides for payment in full on a date beyond one year from the contractors last date of work, the acceptance of the promissory note may constitute a waiver of the contractors lien rights.

FACT OR FICTION: Minnesota Law allows property owners and subcontractors to sue the general contractors owners personally in certain cases.

ANSWER: FACT! Minnesota Statutes section 514.02 allows for legal action against the general contractors owners, officers and directors personally if the general contractor receives payment from the property owner and fails to pay the funds to subcontractors.

FACT OR FICTION: Non-permanent items, or trade fixtures, are always subject to mechanics lien rights.

ANSWER: FICTION! Items that do not constitute a permanent improvement to the property are many times not lienable. Examples: Labor or materials to deliver and hook up a special freezer for a grocery store that may be moved to a new location if the store moves; Labor or materials to install mobile computers or other office equipment; Bar stools or tables for a restaurant that may be unbolted and moved; A special boiler or other heating or cooling equipment used for a specific purpose by a tenants business.

FACT OR FICTION: A subcontractor pre-lien notice is always legally effective as long as it is served upon the owner within 45 days from the first date that labor or materials were provided.

ANSWER: FICTION! The law does allow subcontractors and suppliers 45 days from the first date they furnished labor or materials to serve the pre-lien notice. However, if the property owner pays the general contractor for the subcontractors or suppliers work or products before receiving the pre-lien notice, the subcontractor or supplier in question no longer has lien rights. Example: On December 15 the cabinetmaker begins work on the cabinets for a new house. On December 20, Property owner gives the general contractor a check specifically referencing and paying for the cabinets. When the cabinetmaker does not receive payment after 30 days, he mails a pre-lien notice to the property owner on January 15, well within his 45 day window. However, if the property owner can prove the December 20 payment was for the cabinets, the cabinetmakers pre-lien notice is too late and no lien rights exist. The property owner must receive the pre-lien notice before paying the general contractor for the specific labor or materials in question.

FACT OR FICTION: A mechanics lien is valid for one year from the date it is filed with the county recorder or registrar of titles.

ANSWER: FICTION! A mechanics lien is valid for one year from the last date of workon the job as stated in the mechanics lien statement.

FACT OR FICTION: A mechanics lien can be renewed when it is about to expire.

ANSWER: FICTION! A mechanics lien expires one year after the last date of work, and cannot be extended, renewed or revived. You must commence a district court foreclosure action within the one-year period or else the lien lapses.

FACT OR FICTION: Corporations may not appear in district court without an attorney.

ANSWER: FACT! Since a corporation is considered to be separate legal entities, it may not appear in district court pro sei.e. on its own behalf. An attorney must represent a corporation in district court.

FACT OR FICTION: In some cases, you may be required to provide pre-lien notice to the purchaser of the property in addition to the current property owner.

ANSWER: FACT! Courts have recently ruled that if a subcontractor or material supplier knows who is buying the house, pre-lien notice must be given to that purchaser in addition to the property owner. Of course, sometimes these are the same entities, in which case only one pre-lien notice would be needed.

FACT OR FICTION: It is legal to charge 18% per annum interest to all customers on unpaid balances.

ANSWER: FICTION! In most cases, the maximum interest that may be charged on past-due accounts is 8% per annum if you have a written contract.

FACT OR FICTION: As a subcontractor, if I serve my pre-lien within 45 days of my first date of work, my lien rights will always be protected.

ANSWER: FICTION! While in most cases this is true, the longer you wait to serve a pre-lien, the more you risk losing your lien rights. If the homeowner pays the general contractor for your services before receiving your pre-lien notice, your lien rights are extinguished. For this reason, it is always smart to send your pre-lien immediately after you begin work.

FACT OR FICTION: As a subcontractor on residential property, if I do not preserve my lien rights, I can still sue the property owner if I am not paid.

ANSWER: FICTION! Unless your contract was directly with the property owner, your only recourse against the property is generally a mechanics lien. If you do not preserve those lien rights, you may then only pursue the general contractor for your money.

FACT OR FICTION: Engineers, land surveyors and architects may enforce mechanics liens for non-payment.

ANSWER: FACT! Engineers and land surveyors gained the protection of mechanics liens through statutory amendments in 1973 and 1974. Architects may enforce mechanics liens if their contributions ultimately play some role in the improvements to the real estate in question. The fact that an architects contribution is not actually visible on site does not defeat its lien.

FACT OR FICTION: Contract clauses requiring arbitration in another state might be unenforceable.

ANSWER: FACT! Minnesota Statutes section 337.10 provides that if the construction project took place in Minnesota, a party may not be required to settle a dispute over the project through arbitration in another state.

FACT OR FICTION: A pre-lien is never required on a commercial job.

ANSWER: FICTION! Although the exact specifications are very detailed, the general rule is that a commercial job consisting of less than 5000 square feet still requires a pre-lien. However, the exact facts of the situation should be reviewed with an attorney, or alternatively the pre-lien should always be given in deference to caution.

FACT OR FICTION: A performance bond is intended to ensure that the contractor will meet its contractual obligations.

ANSWER: FACT! A performance bond assures the owner or lender, or both, that the project will be completed in accordance with the requirements of the construction contract. It provides the owner/lender with a financially responsible party to stand behind the contractor if it does not perform any aspect of the work properly. A performance bond is to be distinguished from a contractor’s general liability insurance policy.

FACT OR FICTION: A property owner and a contractor may agree to extend the time for the contractor to file a mechanics lien.

ANSWER: FICTION! The contractor must file and serve a mechanics lien statement within 120 days from its last date of work on the property. Parties may not extend the lien filing time by agreement. Further, the parties may not extend the one-year foreclosure deadline, even if both sides agree to it.

FACT OR FICTION: Only the property owner may make a claim against a payment bond.

ANSWER: FICTION! Originally, a bond company was obligated only to the owner, and only if the owner suffered actual loss and satisfied debts owed to unpaid subcontractors. However, courts have become increasingly lenient in allowing unpaid claimants to proceed directly against the bond company. Minnesota law provides for a procedure similar to a mechanics lien foreclosure in pursuing a bond claim.

FACT OR FICTION: If I do not have any lien rights, there is no way to collect my money.

ANSWER: FICTION! While a mechanics lien is a great collection tool, it is not a contractors exclusive remedy. You may always sue the entity that hired you for breach of contract, regardless of any lien rights. Lien rights are simply a way to also attempt to hold the property owner responsible for your bill.

FACT OR FICTION: Not all types of work are lienable.

ANSWER: FACT! Minnesota law requires that the work actually constitute an improvement to the real estate and not simply ordinary repairs. An improvement is defined as a permanent addition or betterment of real property that enhances its capital value and that involves the expenditure of labor or money and is designed to make the property more useful or valuable, as distinguished from ordinary repairs. In other words, installing a new dishwasher is lienable, but simply repairing an old one might not be.

FACT OR FICTION: A mechanics lien may be filed against common areas or common property in a condominium or townhouse association.

ANSWER: FICTION! The Minnesota Common Interest Ownership Act (MCIOA) provides that if a contractor is not paid for work performed on common areas, it must file its mechanics lien against all of the units. MCIOA also provides that the Association is authorized to accept service of the lien on behalf of all the owners. Note that this law applies to all condominiums, but applies only to townhouses built after June 1, 1994.

FACT OR FICTION: Minnesota Law provides for criminal penalties for General Contractors that fail to pay subcontractors.

ANSWER: FACT! Minnesota Statutes section 514.02 states that if the Owner pays the Contractor and the Contractor knowingly fails to pay a subcontractor or material supplier, the Contractor shall be guilty of theft of the proceeds of such payment and upon conviction shall be fined not more than $3,000 or imprisoned not more than one year, or both.

FACT OR FICTION: Owners must report a warranty request for new residential construction to the Contractor within six months after discovering the problem.

ANSWER: FACT! Even though Minnesota Law provides for a one-year warranty for faulty workmanship, the Owner must report the item to the Contractor in writing within six months after the Owner discovers or should have discovered it.

FACT OR FICTION: A mechanics lien statement may be served on the Owner by regular mail within 120 days of the last date of labor or materials.

ANSWER: FICTION! The mechanics lien statement must be served by either certified mail or by personal service. Service by regular mail is ineffective. However, service is effective on the date the lien is mailed by certified mail, not the date that the Owner signs for it.

FACT OR FICTION: An Owner who unreasonably refuses to permit the Contractor to complete the project excuses the Contractor from further performance and breaches the contract.

ANSWER: FACT! In the 1998 unpublished case of Nelson v. Vogt, the Minnesota Court of Appeals ruled that because the Owner refused the Contractor access to the property to cure or remedy alleged defects, the Owner breached the contract. The Court also confirmed the rule that under the doctrine of substantial performance, a Contractor who substantially performs the contract is entitled to recover the contract price despite the presence of minor defects. However, the sum necessary to cure the minor defects should be deducted from the final payment.

FACT OR FICTION: If a Contractor contracts with a residential owner and pays for the materials by cash, check or credit card when it picks them up, a pre-lien notice is not required.

ANSWER: FICTION! In Variety Homes, Inc. v. McGovern, the Minnesota Court of Appeals recently ruled that a contractor who used no subcontractors and only purchased materials from Knox Lumber and Hirschfields by cash, check or credit card still needed to give a pre-lien notice. The Court noted that if the Contractors check had bounced, Knox or Hirschfields could still have possibly liened the property. Neither the lumberyard nor the paint store ever delivered any materials to the job site, and the Contractor paid for all of the materials on the spot when it picked them up. This case demonstrates the importance of providing a pre-lien notice on allresidential jobs.

FACT OR FICTION: Only a small amount of attorneys fees is ever recoverable in a mechanics lien foreclosure action.

ANSWER: FICTION! In Valley Rich Co., Inc. v. Holmes Park Village Apartments, a Minnesota court recently awarded a contractor $13,200.00 in attorneys fees on a $4,411.97 mechanics lien claim. The Court of Appeals later reduced the award to $8,947.50, on the grounds that $4,252.50 of the contractors attorneys fees were for a previous legal proceeding that failed. However, this case illustrates that courts will award attorneys fees and costs on a valid lien claim, even if they greatly exceed the mechanics lien amount.

FACT OR FICTION: An unpaid subcontractor or material supplier on a commercial job may recover legal fees and 18% interest, even if it has no written contract.

ANSWER: FACT! Minnesota law states that if the commercial general contractor fails to pay a sub or supplier within ten days after the general receives payment for subs or suppliers undisputed services or materials, the sub or supplier may charge the general contractor 18% per annum and recover legal fees and costs if the sub or supplier prevails in a collection lawsuit. This rule does not apply to residential projects.

FACT OR FICTION: A mechanics lien is valid for ten years.

ANSWER: FICTION! A mechanics lien is valid for one year from the last date of work or materials. However, a personal judgment is enforceable for ten years.

FACT OR FICTION: It mechanics lien may be filed against personal property.

ANSWER: FICTION! A mechanics lien may be filed only for labor, materials, skill or machinery provided to real estate. However, if personal property has become a fixture to the real estate, it can be subject to a mechanics lien.

FACT OR FICTION: A mechanics lien may be filed against public property.

ANSWER: FICTION! Traditionally, public property is not subject to mechanics liens. However, this rule is generally limited to public property that is actually used for public or governmental purposes.

FACT OR FICTION: If a mechanics lien cannot be filed against a public property, then the contractor has no rights against the property.

ANSWER: FICTION! Public jobs are generally bonded, and a contractor may pursue a claim against the bond if the appropriate steps have been taken. The steps to pursue a bond claim are very similar to those involved with the mechanics lien claim.

FACT OR FICTION: In some cases, you should still give pre-lien notice when working on commercial properties.

ANSWER: FACT! Commercial properties under 5,000 square feet still require pre-lien notice. Also, if you are working for a tenant, or someone else who does not own the property, always give pre-lien notice to the actual owner of the property. If you do not, the owner might later claim it did not authorize the work and attempt to defeat your lien claim.