If you are the owner of a property that is the site of a construction project, one way to limit your exposure to the individuals and companies working on the project is to make “proper” payments during the course of construction. The proper payments defense limits an owner’s liability for liens to the contract price. In practice, this defense means that if the owner fulfills its obligations under construction lien law, its liability for liens will not exceed the contract price.
Keep in mind that a lienor has ninety days from the date of its last work in which to record a claim of lien, there are three steps an owner should take in order to position itself to assert the proper payments defense.
What are the Steps for a Proper Payment
Step One: before making payment to the contractor, determine that potential lienors have been paid to the extent that you have made payments to the contractor. There are several ways that you can determine the payment status of potential lienors. One is to secure a release of lien from all persons who served notices to owner (remember that a person has forty five days from its first work in which to serve a notice to owner). Another is to secure releases of lien from the contractor. Also, before making partial payments, you should obtain a contractor’s affidavit indicating that potential lienors have been paid. Be aware that, if you pay a lienor who served you with a notice to owner without obtaining a release from that lienor, such payment is not a proper payment as to that lienor.
Step Two: before making the final payment, you should obtain a contractor’s affidavit which states that all potential lienors have been paid (or which lists those that are unpaid). If you make a final payment without the benefit of a contractor’s final affidavit, there is a serious risk that you will have to pay subcontractors who were not, in fact, paid by the contractor.
Step Three: you should not make any payments to the contractor after the expiration of a notice of commencement. Any payments made to the contractor after the notice of commencement has expired are not “proper” for the purpose of claiming the proper payments defense.
What is not a Proper Payment
Any payment that is not made in compliance with these three steps is not a “proper payment”, and will not reduce the owner’s exposure for liens. Merely claiming that you made all payments you thought were due is not enough. You should obtain the necessary releases and contractor affidavits as you make payments through the course of a construction project so that you will have the proper documentation to claim a proper payments defense if the need arises. As an owner, it is important to make sure that the payments you are making on the project are made “properly” in order to reap the benefit of the proper payment defense. By doing so, you will reduce any possible exposure to those liens in excess of the contract price.