Court of Appeals Resolves Mechanic’s Lien Law Questions

On Thursday, August 28, the Court of Appeals issued a ruling regarding mechanic’s liens when a building is developed into units that are then sold to individual owners. The ruling in Sure-Shock v. Diamond Lofts has important consequences for both owners and contractors.  

The case arose when the developer built out and sold commercial and residential units at an old warehouse on Blake Street. An electrical subcontractor did not get paid and filed a mechanic’s lien for amounts owed. Some of the units had sold by the time the foreclosure action started, but the subcontractor named only the developer as a defendant, and not the purchasers of the units that had been sold. After an arbitration and hearing by a district court, both sides appealed.

The first issue addressed by the Court was whether an amended lien, differing from the original lien only in the amount claimed, needed to be served on the owner before filing. The Court of Appeals held it did not, as the purpose of liens is only to give notice of non-payment. If the owner has received the notice of intent to file the lien, giving notice of the amended lien reflecting only a change in the lien amount is not necessary.

Next, the developer claimed the lien was defective because it described the entire Blake Street property but named only the developer as owner. It argued that this violated the lien law. The Court disagreed and found that a ‘blanket lien’ covering all the units was acceptable and that the subcontractor did not have to apportion lien amounts to each unit in its lien statement. However, the Court held that only the units still owned by the developer were subject to the lien foreclosure because the owners of the other units were not parties to the lawsuit.

On the issue of damages, the subcontractor apparently could not apportion the work to each unit. Thus the court apportioned the lien amount based on the square footage of each unit because the amount of electrical work performed in each unit was relative to the size of the unit, and awarded only an amount equivalent to the units still owned by the developer. The net result was that the subcontractor was entitled to a lien foreclosure in the amount of 33% of its claimed lien amount. The Court rejected the claim the subcontractor was entitled to the full amount because it encumbered and sought foreclosure of only the developer units. It also rejected the argument that the subcontractor should recover 33% of the contract amount instead of just the lien amount [amount still owed], holding that there was no legal authority for that position.   

While there were some positive holdings for contractors in that ruling, the most important point that the case makes is that contractors should try and keep the most accurate record of their work as possible to provide sufficient evidence for the court to make an apportionment based on a factor other than the square footage of the units.  In that way, cost/benefit decisions can be made as to what parties to join in the litigation, how to maximize the costs of litigation, and how to provide the court with a more accurate proof of damages.