Significant Changes to Mechanics Lien Statute

The recently enacted amendments to Massachusetts General Laws Chapter 254 comprise the most significant overhaul of the Massachusetts Mechanics Lien statute since its enactment in 1915. Contractors and subcontractors are the primary beneficiaries of the amendments, which broaden the scope of labor and materials subject to lien protection, simplify the processes for recording liens and settling disputes, and generally increase the likelihood of prompt payment to contractors. Developers and lenders must revise their current procedures for processing contractor payments in order to comply with the new law. Construction lenders will be particularly affected by the new provision of the statute which requires that the lender continue to make loan advances after the recording of a Notice of Contract by a general contractor (though not if filed by a subcontractor).

The effective date of the amendments is November 7, 1996; however, because the amendments are effective for construction projects for which a first mortgage or Notice of Contract is recorded on or after February 7, 1997, the real effects of the changes will not be apparent until February 7, 1997.

This newsletter highlights a few of the significant changes in the law and identifies ways in which lenders' and developers' practices will need to be modified.

Expansion of Scope of Statute

The revised Mechanics Lien Statute extends mechanics lien protection to a broader range of persons providing labor and materials. In particular, the statute now grants statutory rights to:

• parties involved in the erection, alteration, repair or removal of a building, structure or other improvement to real property;
• parties furnishing material or rental equipment, appliances or equipment;
• and parties providing construction management and general contractor services

Under the revised statute, a mechanics lien can attach to a less-than-fee property interest of a contracting party (e.g., a leasehold interest), unlike the prior version of the statute which required the contracting party to be the "owner of land" on which the lien was to attach. In addition, it is no longer necessary that the lien relate to work on a building or structure, thus granting lien rights to site work contractors such as landscapers, parking lot surfacers and utility contractors.

Differences Impacting General Contractors' Lien Protection

To perfect a mechanics lien under the pre-1996 statute, a contractor was required to record a Notice of Contract with the Registry of Deeds for the county (or district) in which the subject property was located on or before the completion date stated in the construction contract. To address the difficulties associated with identifying a precise completion date (frequently a moving target), the deadline for recording the Notice of Contract under the amended statute is now measured from the more practical date of a project's "substantial completion."

Specifically, a Notice of Contract must be filed before the earliest to occur of:

• 60 days after the recording of a Notice of Substantial Completion in the new statutory form executed by the project owner and the general contractor;
• 90 days after the recording of a Notice of Termination (if the contract is terminated before completion) in the new statutory form, executed by the project owner; or
• 90 days after the last of the labor and materials has been furnished by the general contractor (or anyone claiming through the general contractor).

To enforce its lien rights, the contractor must also file a Statement of Account, commence a civil action and record a copy of the complaint for such action before specified deadlines stated in the revised statute.

Differences Impacting Subcontractors' Lien Protection

The revised statute also creates new procedures which subcontractors must follow to perfect their mechanics liens. In addition to following the procedures applicable to contractors to perfect their liens, a subcontractor must also (a) include a brief accounting of its claim in the recorded Notice of Contract, and (b) serve a copy of the Notice of Contract on the project owner by certified mail. If the subcontractor does not have a direct contractual relationship with the general contractor, it must also provide the general contractor with a Notice of Identification in the new statutory form within 30 days of commencement of the subcontractor's work on the project to put the general contractor on notice to provide the subcontractor with a copy of the Notice of Substantial Completion.

Differences Impacting Construction Lenders

Under the pre-1996 statute, construction lenders commonly refused to advance construction loan advances upon the recording of a Notice of Contract because lenders lost their priority position to the amount of unpaid requisitions for work done through that date for all loan advances made after the date of recording of the Notice of Contract. This applied to both Section 2 liens (general contractors) and Section 4 liens (subcontractors). The revised statute prohibits a lender from refusing to advance construction proceeds solely because a general contractor has filed a Notice of Contract, provided that the general contractor submits a statutory form of Partial Payment Waiver and Subordination Form to the lender with each partial payment requisition. By submitting the Waiver Form, the general contractor subordinates its mechanics lien to the lender's mortgage interests for all amounts previously received by the contractor, thus addressing many of the lender's priority concerns; however, the contractor is not required to subordinate its priority to any earned but unpaid retainage to which the contractor is entitled. The revised statute also penalizes lenders for slow payment of requisitions: if the lender fails to disburse funds within 25 days after the last day of the payment period subject to the waiver, then the contractor will have a prior lien over subsequently disbursed loan funds for all work performed after the last day of the payment period stated in the waiver. As a result, construction lenders must re-work the construction loan requisition provisions of their loan documents and the requisition processing procedures in order to address these changes in the law. Lenders may also require more stringent bonding requirements if the project can support the cost of such bonds.

Change in Scope of Personal Labor Lien

Under the pre-1996 statute, a contractor or subcontractor providing services without a written contract could claim a mechanics lien for up to 18 days work during the 40 days preceding the recording of a Statement of Account with the Registry of Deeds. Under the revised statute, the lienholder can make a claim for up to 30 days work during the 90 days preceding recording. Lenders must revise their forms of Mechanics Lien Affidavits to reflect this change in the law.

Conclusion

Discussion regarding the overhaul of Chapter 254 has taken place over much of the past decade. Given the ambiguities of the lien law prior to the 1996 amendments, most of which worked against the construction industry, it was probably inevitable that significant changes benefitting that industry would occur. Under the former statute, contractors, fearful of disrupting the construction process or upsetting developers and their lenders, would often wait to pursue their statutory mechanics lien rights until all other means of resolving payment issues proved unsuccessful, frequently resulting in strained relationships and forfeited liens. Under the revised statute, contractors should be able to resolve their differences with developers in a much less confrontational manner, and get paid much earlier on in the process. Thus, lenders and developers, as well as contractors and subcontractors, will benefit from the greater certainty which the revised statute brings to the process of resolving contract payment disputes.

Published by The Banking, Finance and Real Estate Section of Peabody & Arnold's Business Law Group

This publication is intended for general information purposes only; it does not constitute legal advice. For legal issues that arise, the reader should consult legal counsel. This document may be considered "advertising" under Massachusetts Supreme Judicial Court Rule 3:07.