“Payment Defense” to Maryland Mechanics’ Lien Claims
By Nicholas Cowie, Esq. – Maryland Mechanics’ Lien Attorney and Real Estate Construction Lawyer
This article discusses the so-called mechanics’ lien “payment defense” and the circumstances under which the defense can defeat a Maryland mechanics’ lien claims asserted by an unpaid subcontractor. In short, Maryland mechanics’ lien law only recognizes a payment defense for single-family dwelling construction projects. Commercial owners cannot assert the payment defense and are subject to a risk of double payment if they pay a general contractor that has failed to pay its subcontractors.
Background: Construction Projects and The Mechanics’ Lien Payment Defense
Property owners involved in construction projects (“owners”) run the risk of having a Maryland mechanics lien imposed on their property whenever the general contractor fails to timely pay its building subcontractors or material suppliers (“subcontractors”). These unpaid subcontractors may seek to have a court impose a lien on the owner’s property where the construction project is located. Once the lien attaches, it can be used to force a sale of the owner’s real property as a source of funds to satisfy the amount the general contractor owes the unpaid subcontractor. See, Mechanics’ Lien Law in Maryland – by Cowie Law Group, a Maryland construction Law firm.
All private property in Maryland is subject to the imposition of a mechanics’ lien. However, as a prerequisite, an unpaid subcontractor must first provide the owner with written notice of its intent to establish and enforce a Maryland mechanics’ lien claim. This notice must include the unpaid amount owed the subcontractor for work performed at the owner’s property. Thereafter, the owner has an opportunity to dispute the subcontractor’s lien claim and prevent it from attaching to the property.
One defense an owner may seek to assert against a subcontractor’s Maryland mechanics’ lien claim is the so-called “payment defense” – a legal doctrine that protects an owner who has already paid its general contractor in full before receiving the subcontractor’s notice of intent to establish and enforce a mechanics’ lien against the owner’s property.
Payment Defense to Maryland Mechanics’ Lien Claims IS NOT Available to Commercial Property Owners on Commercial Construction Projects
Maryland has no “payment defense” available to owners on commercial construction projects. As such, an owners payment of a general contractor is never a defense to a subcontractor’s mechanics’ lien claim on a commercial construction project. Even if the owner has paid the general contractor in full, the unpaid subcontractor will be able to proceed to establish a mechanics’ lien on the owner’s property, in effect, forcing the owner to pay twice for the same work.
On commercial projects, Maryland places the burden on the commercial property owner to make sure subcontractors are paid by the general contractor. The owner has the duty and a right to withhold from the general contractor amounts due it determines to be due an unpaid subcontractor on the project. To protect themselves, commercial property owners can require their general contractors to provide subcontractor lien releases for work or materials provided. These lien releases can be used as a defense against any Maryland mechanics’ lien claim filed by a subcontractor such that owner will not be required to pay twice for a subcontractor’s work identified in the subcontractor’s mechanics’ lien release.
Also an owner has a right to withhold payment owed its general contractor once the owner receives an unpaid subcontractor’s notice of its intent to establish and enforce a mechanics lien claim against the owners property. However the amount withheld from the general contractor cannot exceed the amount claimed in the subcontractor’s notice. If a subcontractor is successful in having a court impose a mechanics’ lien against the property, the owner may pay the subcontractor the lien amount monies withheld from the general contractor.
Payment Defense to Maryland Mechanics’ Lien Claims IS Available to Residential Property Owners on Single Family Dwellings Projects.
The Maryland mechanics’ lien statute does provide a statutory payment defense for homeowners constructing a “single family dwelling” or an addition thereto. A homeowner who has made “full payment” to a general contractor before receiving a subcontractor’s notice has an absolute defense to the mechanic lien claim under § 9-104(a)(2) of the Maryland mechanics’ lien statute. If the homeowner has only made partial payment to the general contractor before receiving the subcontractor’s notice, then the subcontractor’s right to obtain a lien against the property is capped by the amount the homeowner still owes the general contractor. § 9-104(f).
The intent of this legislation is to protect homeowners constructing residential homes, or additions thereto, from subcontractor mechanics’ liens in amounts that exceed what the homeowner still owes its general contractor at the time the owner receives a subcontractor’s notice of intent to establish and enforce a mechanics’ lien. However, once that notice is received, the homeowner must withhold the claimed lien amount from its general contractor pending resolution of the mechanics’ lien claim.
Key Maryland Mechanics’ Lien Legal Provisions:
- Md. Code Ann., Real Prop. § 9-104(a): Requires subcontractors to provide written notice of intent to file a mechanics’ lien claim within 120 days after last furnishing labor or materials.
- Md. Code Ann., Real Prop. § 9-104(a)(2): Requires, in the case of a single-family dwelling, that the 120-day notice be received by the owner before full payment has been made to the general contractor.
- Md. Code Ann., Real Prop. § 9-105: Subcontractors must file suit (a/k/a “petition to establish mechanic’s lien”) within 180 days after last performing work.
Key Maryland Mechanics’ Lien Case Law:
- Diener v. Cubbage, 259 Md. 555, 270 A.2d 471 (1970). Maryland courts rejected the commercial owner’s argument that double payment barred the subcontractor’s lien.
- Ridge Heating, Air Conditioning and Plumbing, Inc. v. Brennen, 783 A.2d 691, 366 Md. 336 (2001) and Winkler Construction Co. v. Jerome, 355 Md. 231, 734 A.2d 212 (1999). Discussing payment defense applicable to single-family dwellings
Key Points for Maryland Mechanics’ Lien Law:
- Strict compliance with statutory notice deadlines is required (notice of intent to file petition to establish mechanic lien must be given within 120 days of last work and lawsuit filed within 180 days).
- Subcontractors do not need to have a direct contractual relationship with the owner.
- Commercial Owners are not protected by statute from liens by simply proving payment to the general contractor (i.e., no statutory payment defense on commercial projects).
- Maryland courts have held that equitable (non-statutory) defenses like double payment are not recognized when a lien claimant complies with the Maryland mechanics’ lien statute.
- However, Maryland does have a statutory payment defense applicable to single family dwellings to prevent double payment for homeowners.
Risk Management Tips from Mechanics’ Lien Attorneys
In summary, Maryland mechanics’ lien law only recognizes a payment defense for single-family dwelling construction projects, thereby reducing the risk of double payment for homeowners building their own home or adding an addition. Commercial owners, on the other hand, cannot avail themselves of the payment defense, and are subject to a risk of double payment if they pay a general contractor that has failed to pay its subcontractors. Thus, the burden is on the owner in a commercial project to ensure subcontractors have been paid.
Owners:
Because of this framework, property owners should work with an experienced Maryland mechanics lien attorney to implement lien risk management strategies, such as general contractor retainage connected to receipt of subcontractor lien releases (a/k/a “lien waivers”) and other construction escrow procedures. Owners can require a contractor to obtain signed mechanic’s lien releases from all subcontractors on a project for work performed and materials provided, acknowledging that they have been paid in full or for a specified portion of the work. The general contractor can be contractually obligated to provide subcontractor lien releases to the owner upon completion of the subcontractor’s work or a portion thereof, and, in either case, this will provide some assurance that payment was made and protect owners from subcontractor mechanic’s lien claims.
Subcontractors:
Likewise, subcontractors who have not received payment from the general contractor, should consult with an experienced Maryland mechanics’ lien attorney to discuss strategies for ensuring payment, especially on financially challenged projects. One of the best strategies to ensure payment is for the subcontractor to assert a valid mechanics lien claim against the owner’s property. In the case of a single-family dwelling construction project, subcontractors who have not been timely paid must consider serving notice of intent to file mechanics lien on the owner as soon as possible so that notice is received before the owner pays the general contractor in full.
MARYLAND MECHANICS’ LIEN ATTORNEYS
&
REAL ESTATE CONSTRUCTION LAWYERS
Washington, D.C. and Maryland
Cowie Law Group, P.C. Law is a construction law firm, practicing construction and real estate law throughout the State of Maryland and Washington, D.C. We assist clients in developing and redeveloping real property, and we handle construction industry performance and payment disputes, including Maryland mechanics’ lien claims and Washington, D.C. mechanic’s lien claims for owners, general contractors, design, professionals, subcontractors, and material suppliers. Law Partner George A. Bealefeld III is the Author of the Lexis Maryland Mechanics’ Lien Law Practical Guidance® Practice Note.
