If you default on payment to a contractor for work performed, there are things he can do to compel payment, one of which is to place a lien against your property. The particulars (time limitations, notification requirements, etc.) are governed by statute and vary from state to state, but one constant is that a lien is an encumbrance that must be satisfied or excused before one has clear title to real or personal property. If the work is performed for a condominium or homeowners association, the attachment usually extends to individual units.
A lien initiated by a contractor is a concept most people understand. What may not be as widely understood is that subcontractors or material suppliers could also obtain liens against your property if the primary contractor doesn’t pay them, even if you paid the contractor in full. There are a few ways to protect yourself against this and they should be in place when the contract is ratified.
A payment bond (often obtained along with a performance bond) is primarily a guarantee that the contractor’s subs and suppliers will be paid. We routinely recommend payment and performance bonds for major construction projects.
Another way to help reduce the potential for attachment by subcontractors and suppliers is to require lien releases from those parties before final payment is made to the contractor. Those terms would have to be established in the contract and the practice is normally associated with retainage. Some amount (typically ten percent of the contract amount) is withheld until all work has been completed, and closeout documents (warranties, special instructions, etc.) have been issued, along with lien releases from all involved parties. Ten percent may not cover all eventualities, but it would help.
We are not attorneys and the information presented here should not be construed as legal advice. The one bit of legal advice we do offer is, “consult your attorney before entering into any construction contract”.