This one of a series of six posts regarding mechanics’ liens:
Part 1. The basics of credit risk and subcontracting.
Part 2. Reallocating risk in construction projects.
Part 5. Personal liability notices.
The last post in our series on mechanics’ liens addresses a situation in which mechanics’ liens are not available. For certain types of projects, the Indiana Mechanic’s Lien Statute permits the owner and principal contactor to enter into an agreement or stipulation that prohibits liens that arise from a particular contract.
There are essentially two categories of projects that are eligible for no-lien agreements. The first category includes “class 2 structures” (as defined at Indiana Code section 22-12-1-5), which encompasses single- and double-unit residential structures and some related projects. The second encompasses construction owned by certain types of utilities, including public utilities, municipal utilities, and rural membership utilities. The details of the projects that are eligible for no-lien agreements can be found at Indiana Code 32-28-3-1(3).
A no-lien agreement that meets the statutory requirements prohibits liens against the owner’s property. However, in order to be valid against subcontractors, mechanics, journeymen, laborers, or other persons furnishing labor,materials, or machinery (i.e., those who are not parties to the no-lien agreement itself), the no-lien agreement must be in writing, must contain a legal description of the property where the construction is to take place, must meet the same requirements for acknowledgement (i.e., notarization) that deeds must meet, and must be recorded in the office of the recorder in the county where the property is located. Moreover, it must be recorded within five days after it is signed.
As a practical matter, there is no need to record the entire construction contract, which may be dozens of pages long with attachments and schedules that include drawings and lengthy, detailed specifications. Instead, the owner and the principal can sign and record an ancillary no-lien agreement, memorandum, or stipulation, separate from (and usually referenced by) the main construction agreement, that meets the statutory requirements for no-lien contracts.
One last note: Although a no-lien agreement prohibits liens, it does not affect the rights of subcontractors and others to hold the owner personally liable by sending a personal liability notice, discussed in part 5 of this series.
[Rev. 11/25/2014. A second last note. My thanks to my friend and colleague, Ted Waggoner of Peterson, Waggoner, & Perkins, LLP, for reminding me that mechanics’ liens are unavailable for public property without the need for a no-lien agreement.]
If you would like to speak with a Smith Rayl attorney about construction contracts, including mechanics’ liens, please contact us for an initial consultation.