A glance at any urban skyline in Florida will confirm that construction is still big business. Look again, and you might also see that it’s chaotic and messy, characterized by one-off projects owned by short-lived one-asset entities, and built by a transient alliance of hundreds of vendors and thousands of workers. As a result, the money that is the life blood of a project travels a long and difficult path from the inevitable lender to a worker’s weekly paycheck or a supplier’s invoice. It doesn’t always make it, and its failure to do so underlies the reason for Florida’s construction lien law.
Construction liens are a subset of a larger group of security interests encumbering property that are granted by property owners to those claiming a debt. These include voluntary liens imposed by contract, such as a mortgage. Involuntary security interests against real or personal property are also available under Florida law, including the familiar retaining and charging liens, as well as a variety of others, including liens for labor on logs and timber, on raising crops, in ginning cotton, or for furnishing locomotives, material for vessels, or pest control. Liens are also available to the issuers of securities, to real estate brokers, to furnishers of aircraft fuel, tax collectors, and condominium associations.
Of these, construction liens are certainly among the most common. They are also among the most Byzantine, and the complexity of their governing statute, Part I of Chapter 713, is testament to the difficulty of balancing common law contract principles with the realities of the construction marketplace. One symptom of this complexity is the sheer length of Florida’s lien law — it contains 47 sections and 29,925 words, about the same as the amount of words George Orwell used to write Animal Farm. We will see below why a statute governing a single form of security could grow to be as long as a novel.
Construction Liens and the Common Law
Large-project construction teams are usually headed by a general contractor, 20 who contracts with structural, roofing, electrical, plumbing, HVAC, and other subcontractors. These entities are linked together by a series of contracts, starting with the direct contract, and followed by a series of “downstream” contracts: subcontracts between the contractor and its subcontractors, and then contracts or purchase orders with sub-subcontractors and suppliers.
Billing is usually monthly and is based upon the project’s percentage of completion or upon actual costs incurred during the current period.
Each vendor sends its invoice to its upstream customer, who then bills the next upstream level, and so on, up to the general contractor who invoices the project’s owner. In many cases, an owner must then submit the invoice to a lender to obtain funding, adding yet another layer to the payment cycle. When the owner does issue payment, the reverse process takes place, with each vendor paying its downstream counterpart and collecting payment receipts at each step of the process.
With projects often costing over $100 million, it is easy to see how this cumbersome process can fall apart. Owners or lenders may dispute the amount of the invoice or be slow to pay, lenders may require more paperwork, or subcontractors may simply fail to pay their suppliers.
So what’s a subcontractor or supplier to do if some of that money gets lost along the way? How does one who supplies, say, lighting fixtures to a subcontractor collect payment for the products that it furnished?
Under common law contract principles, only the parties to a contract can enforce that contract, leaving unpaid third-tier vendors with no recourse against the owner whose property was improved by their efforts. The construction industry, uniquely fragmented and mired in a tangle of short-term interrelationships, might well collapse if a laborer or supplier knew that their only remedy lay against their employer or direct customer.
Enter the construction lien. Formerly known as a mechanic’s lien, the construction lien provides a vehicle by which an entity can enforce its subcontract or purchase order directly against an owner, even though that owner is not in privity with the vendor.
A Word on Privity
Although the term “privity” is not defined in the lien law, it is nevertheless used two dozen times. Privity is generally considered to exist only between contracting parties, but the strictness of that relationship has been softening for quite some time. As early as 1658, a non-signatory was able to maintain an action to enforce the terms of a contract, and by 1916, Cardozo’s decision in MacPherson v. Buick Motor Co. , 212 N.Y. 382 (N.Y. App. 1916), had eliminated the privity requirement for negligence actions.
These prior expansions of privity have granted outsiders the right to enforce a contract against the parties to the contract. The lien law, on the other hand, uniquely grants a party to a contract the right to enforce it against an outsider, that is, it allows a party to assert contract claims against an entity with no actual or direct connection to the contract. No other Florida statute has so expanded the reach of privity. Under the lien law, privity leapfrogs from the lower-tier vendors past the intermediate contracts directly into the owner’s lap. This statutory scheme is a far cry from the common law.
The legislature recognized a void in the common law and invented a fictitious third-party privity between the owner and the project participants to create the lien law. The lien law limits its application to the improvement of specific real property by third parties who have timely notified the property’s owner of their existence and whose claim is made in accordance with Ch. 713.
Moreover, privity under the lien law does not simply mean that the parties are on opposite sides of a contract or simply privy to one another’s existence. Privity carries with it the implication of “special knowledge showing active consent or concurrence” and “an express or implied assumption by the owner of a contractual obligation to pay for the labor or materials furnished.” That is, Ch. 713’s privity of contract implies that an owner has voluntarily assumed primary liability for payment of the supplier or laborer.
Strict and Not So Strict Construction
Whether one believes that the lien law derogates the common law doctrine of privity or that the legislature simply created non-privity lien rights out of thin air, the practical consequences are the same — strict construction of Ch. 713. Florida’s Supreme Court observed as early as 1926 that “[t]he lien is strictly statutory, and…the claimant must allege and prove a strict compliance with every requirement of the statute,” and in 1992 noted that “[m]echanics’ liens are purely creatures of the statute [and], [a]s a statutory creature, the mechanics’ lien law must be strictly construed.” that time, the legislature had already added 713.37 to the lien law. This relatively late addition expressly states that the lien law “shall not be subject to a rule of liberal construction in favor of any person to whom it applies,” thereby putting an end to the growing application of equitable principles that culminated in the holding of Crane Co. v. Fine , 221 So. 2d 145 (Fla. 1969).
Although 713.37 cautions against liberal construction, courts nevertheless apply a hierarchy of strictness when evaluating the validity of a lien asserted against an owner’s property. As more fully discussed below, lien claims must identify the lienor and its customer, the improved property and its owner, the type of work provided, the value provided to date and the amount unpaid, and the first and last dates of furnishing. Each of these nine items is construed with a varying degree of strictness, allowing the greatest latitude where the errors have the least adverse effect on the lienee owner. Gross misstatements in the amount claimed or a misidentification of the encumbered property are generally fatal to a lien, but no cases have been found that discharge a lien for inadequately describing the type of work performed, for misstating the value of services furnished to date, or for errors in the name of the lienor’s direct customer.
Operation of the Lien Law
In principle, the lien law’s operation is quite straightforward: establish privity with owner; perform the contract and get paid; if unpaid, record and enforce lien against owner’s property. This principle is effectuated by a collection of procedures and documents that try to balance the interests of vendors in getting paid and of property owners in not paying twice. To curb potential abuses, the legislature attached numerous conditions to its gift of non-party privity. The result: an entire scheme has been created to provide safeguards at every step in the process.
The scheme starts with 29 definitions, essential to mitigating the vagueness that must be avoided when creating statutory rights. Most importantly, a lienor is defined as a person who is a contractor, subcontractor, sub-subcontractor, laborer, or a materialman entitled to record a claim of lien against an owner’s property and who contracts with the owner, a contractor, a subcontractor, or a sub-subcontractor. While this list covers most of a project’s population, it does not extend downstream to a manufacturer who sells via a distributor or an alarm contractor who contracts with a low-voltage contractor who has a contract with an electrical subcontractor. Such situations do arise, and it is prudent to verify a lienor’s position in the chain of contracts when faced with a claim of lien.
In addition to being constrained by its 713.01 definitions, the lien law is also document driven, and the statute identifies and defines almost two dozen separate documents. Arguably the most important of these are the notice to owner, which creates privity with the owner, and the claim of lien, which establishes a lienor’s claim against the owner’s property. There are numerous others as well, and they fall into three general categories: before construction, during construction, and when things go wrong. The following is a brief look at the most common of these forms and their role in the scheme of the lien law scheme.
• Notice of Commencement (NOC) — The first step in a project is the recording of an NOC, a document that announces that the owner will be improving that certain property. The document includes the property’s legal description and owner’s name, the name of the general contractor, a general description of the improvement, and the name and address of the surety and lender, if any. An owner must record a NOC for any work for which a permit is required. A certified copy must be posted at the project and it is the primary source of information for parties serving notices to owner. An NOC is valid for one year by default, or for whatever period the owner decides, and may be renewed or amended as required.
• Notice to Owner (NTO) — The NTO creates privity between the owner and subcontractors and suppliers, and is required of all non-privity lienors. Notwithstanding its importance in establishing lien rights, it is often overlooked, and numerous “notice service” companies have sprung up that specialize in preparing and serving NTOs in compliance with the statute. Although the lien law only requires substantial compliance with the information on the NTO, it demands strict compliance with the timing requirements. An NTO must be received by an owner no more than 45 days after commencing to furnish labor, materials, or services to the project.
• Waiver and Release of Lien — The amount a lienor can claim is strictly limited to the value of the services provided under the lienor’s contract minus the amount already paid. As the project moves along and the owner pays for the work in place, the basis upon which liens may be claimed diminishes accordingly. For example, an unpaid lienor who has provided $100,000 worth of services has a lien for $100,000; after having been paid $80,000, the potential claim is reduced to $20,000. In order to document this reduction, each payee may be required to execute a waiver and release of lien, essentially a receipt acknowledging payment which expressly releases the lienor’s right to claim a lien for services furnished through a certain date. Given the importance of these lien waivers in reducing an owner’s risk of double payment, it is surprising that they are neither mandatory nor notarized. The lien law states that a lienor is not obligated to execute a lien waiver that is not in the statutory form, but this admonition is circumvented by incorporating a more draconian form into a lienor’s contract and making its execution a condition thereof. Among the common additions to the statutory lien waiver is language releasing all claims through a date certain, thereby eliminating a subcontractor’s pending claims for additional work performed but not yet formalized into a change order, for delays, or for disputed prior partial payments. Section 713.20 gives credence to this practice by stating that a lien waiver that differs from the statutory form is enforceable according to its terms.
In a similar vein, owners may use the device of the sworn statement of account to reduce their potential lien liability. Under 713.16(2), an owner may serve a demand for such a statement upon any lienor, after which the lienor has 30 days to provide a written statement under oath of the work it has completed and the amount it is due. Failure by the lienor to respond within the 30 days deprives it of its lien rights.
When Things Go Wrong
• Claim of Lien — To seek remedies against the owner of the property being improved, an unpaid lienor must record a claim of lien in the local county’s official records within 90 days of final furnishing. The claim must identify the lienor, the improved property, its owner, the lienor’s direct customer, the type of work provided, the value of goods or services to date, and the amount unpaid. The lienor must also identify the first and last days on which it performed work and the date on which it served its notice to owner. Each of these elements is ripe for manipulation, and much litigation has gone into clarifying and defining them.
The lien law’s strictest application is reserved for time limitations, and it has taken some time to narrow the definitions of first and final furnishing. First furnishing must have occurred no earlier than 45 days prior to service of an NTO, and final furnishing no more than 90 days prior to lien recording. Because an owner’s property may only be encumbered for the value of improvements thereto, the final furnishing date is defined as the last day on which a lienor actually contributed to such improvement. Punch list and warranty or repair work do not count, but a visit to a project to ascertain the amount of work remaining under contract does. Determining exactly when that occurred can be difficult. Unlike, say, the airline industry, in which the origins of a turbine blade can be traced back to the mine from which its raw materials came, record-keeping in the construction industry is outdated and poorly enforced, and it is often impossible to determine exactly what a subcontractor did during its last weeks on the job. However, a claim of lien is an affidavit, which raises the required standard for controverting evidence, and a mere recitation of inconsistent gate records, daily reports, or other documents may be insufficient to overcome the presumption of validity attached to it. Nevertheless, any litigator would do well to thoroughly investigate a lienor’s records if a lien is recorded during the last days of the 90 day period.
Exaggerated lien amounts may also subject a lien claim to discharge, but this is another area where the strict construction doctrine has been softened somewhat. A lien is deemed fraudulent if a lienor has willfully exaggerated the amount claimed or if the lienor has included a claim for work not performed, but a minor error or a “good-faith dispute as to the amount due” is not always considered a willful exaggeration. A good faith belief that the lienor is entitled to the amount claimed may be sufficient to defeat allegations that the lien is overstated and, therefore, fraudulent — but not always. The trial court in Politano v. GPA Const. Group , 9 So. 3d 15 (Fla. 3d DCA 2008), reduced a lien because it included nonlienable items, but then relied on “the demeanor of the [lienor]” to conclude that he “did not willfully exaggerate the lien,” a rationale not disputed by the Third District on appeal.
Ten years earlier, the same district court had held in Delta Painting, Inc. v. Baumann , 710 So. 2d 663 (Fla. 3d DCA 1998), that a lienor’s intent and good faith must be based on competent substantial evidence and that, once bad faith has been determined by such evidence, “a finding of a fraudulent lien by a trial court is not a discretionary matter.” More recently, the Fifth District has pointed out that such a good-faith dispute or minor mistake does not require a finding that the lien is not fraudulent. Some claimants make it easy for the court to find that a lien is fraudulent. In Viyella Co. v. Gomes, 657 So. 2d 83 (Fla. 3d DCA 1995), the contractor admitted that he hadn’t really performed much of the work claimed for and, notwithstanding its $107,000 lien, Delta Painting had performed no work at all. Delta Painting also included overhead and profit as separate line items, the recovery of which the district court held to be “not within the purview of the lien law.”
The increasingly prevalent pay-if-paid clauses wreak havoc with a lienor’s rights. When payment by the owner is a condition precedent to a contractor’s payment obligation to a downstream lienor, the lienor is not “unpaid” if the contractor has not been paid. In the meantime, the 90-day window closes and the lienor is left with the option of filing a fraudulent lien (timely, but for funds not yet due) or an invalid lien (untimely). Most lienors would presumably opt for the former.
• Perfecting a Claim of Lien — The claim of lien is sworn to and notarized, and must be recorded in the official records where the improved property is located. A copy must be served on the owner before recording or within 15 days thereafter. All liens recorded while an NOC is in effect are of equal priority, and attachment to the property is retroactive to the date of recording the NOC. If there was no NOC, however, or if it has expired, a lien attaches at the time of recording. An action to enforce the lien must be commenced within one year of the date of recording, or the lien will simply expire. 102 This period may be shortened to 20 days by filing a complaint to show cause why the lien should not be enforced by action or vacated, 103 or to 60 days by recording a notice of contest of lien. 104 A lien remains in effect once an action to enforce it has commenced, and it is enforceable against creditors and subsequent purchasers if a lis pendens has also been recorded.
• Failure to Perfect a Claim of Lien — The lien law may not purport to be the exclusive remedy for a nonprivity lienor, such as a subcontractor against an owner, but it is the only remedy with explicit statutory sanction. Nevertheless, all may not be lost if a subcontractor has failed to perfect a claim of lien. Certain courts have permitted non-privity lienors to bring actions directly against an owner under quasi-contract principles, a reasonable accommodation that only applies if the owner has failed to make payment to the contractor.
• Satisfaction of a Claim of Lien — A claim of lien may be removed from a property by extinguishment, by recording a satisfaction in the clerk’s office after settlement of the debt, or by discharge based on court order. 108 A lien may also be removed by transferring it to an alternate form of security, such as cash or a surety bond, in an amount equal to the lien, plus three years’ interest at the statutory rate and attorneys’ fees equal to 25 percent of the lien amount, 109 and any such transfer is to be announced by recording a notice of bond.
Florida’s lien law levels the playing field for project participants and is an essential vehicle for the recovery of debts owed to those whose efforts have improved an owner’s property. It assures lower-tier vendors the same access to payment as the general contractor and, if properly administered by owner and contractor, helps assure that all of these vendors receive their due compensation. Suppliers, many of whom have multi-state operations and supply hundreds of subcontractors, are particular beneficiaries of the lien law as their participation in a project is minimal and the notice of commencement is their only reliable source of information regarding the identity of the end-user of their products. Owners likewise benefit from the lien law because it is only through the notices to owner that an owner knows to whom debts may be owed, and it is only through releases and waivers of lien that the owner can be assured that none of the money got sidetracked on its long journey down to the sub-subcontractors and suppliers.
This article was written by Leonard W. Klingen and first published in the Florida Bar Journal in the January 2019 issue.
Leonard W. Klinge a Board certified construction law attorney and partner at The Barthet Firm in Miami, where he focuses on complex construction claims and related litigation. www.barthet.com 305.347.5290