Illinois lien law--introduction & overview

The Illinois Mechanics' Lien ACt is a statute adopted by the Illinois legislature to provide security for materialmen, subcontractors and contractors who furnish their labor and/or materials to a construction project.The Illinois Mechanics' Lien Act is known as Chapter 770 ILCS 60/1 et seq. In order to preserve and enforce your lien, you must strictly comply with all the statutory requirements of the Illinois Mechanics' Lien Act. A properly perfected mechanics' lien in Illinois attaches against the owner's interest in the realty as well as the proceeds owing from the owner to the contractor. This article will discuss the deadline procedure and legal concepts to help you learn how to perfect your hen rights on private and public construction projects.

While other industrial states, such as California and Florida require pre-hen notices, Illinois does not require pre-lien notices for subcontractors and suppliers. On the other hand, prudence and common sense dictate that in order to safeguard prompt payment, an astute subcontractor and supplier communicate its contractual status to the appropriate project participants, notably the developer/owner, construction escrow agent/lender and, of course, the general contractor/construction manager.

One way to assure proper communication is to document the project information before you ship. The Project Data Sheet ("PDS") organizes project information for the credit manager's review. The PDS includes virtually all the categories of information needed to perfect a lien notice/claim. This particular form is standardized to collect pre-hen information for all 50 states and Canada, including Illinois. Once completed, the PDS can be forwarded to the company's mechanic Hen compliance counsel for analysis and action.

Legal counsel's review in all hen scenarios is essential because underlying the lien action is usually a significant legal issue such as a party's insolvency, a disputed extra, the termination of your contractor's construction contract based on an alleged default or a typical scheduling or sequence of work problem. Your ability to collect based upon a hen is usually dependent on the resolution of these complicated legal issues.

Distinctive Features of Illinois Lien Law

First, the Illinois Mechanics' Lien Act (cited as 770 ILCS 60/1) permits the mechanics' lien to automatically attach to the realty as of the date the general contract agreement is signed with the owner. Many states require the lien claimant to take affirmative steps to create a lien on a construction project. In Illinois, however, the mere existence of the construction contract between you and the owner creates an inchoate or "invisible lien:'Your lien continues in full force and effect as long as you strictly comply with the statutory requirements.

The questions of when the owner's construction agreement is signed and when the mortgage is recorded can become most significant in determining the order of priority if it becomes necessary for a lien claimant to foreclose on the lien.

Secondly, Illinois law requires a reciprocal duty between the owner and the general contractor for the owner to request and the general contractor to furnish a sworn contractor's affidavit listing all persons delivering labor or materials to the project, including their name, address, amount of contract and description of work. In order for a general contractor to maintain its lien rights, it must furnish a sworn contractor's affidavit pursuant to 770 ILCS 60/5 to the owner.The contractor's failure to provide the sworn statement will prevent enforcement by the contractor of its lien, but such an omission will not negate a properly perfected mechanics' lien for the subcontractor.

To assure their statutory compliance with the owner, Illinois law requires an original contractor to include a separately printed statement in each construction contract with the owner stating the following: "THE LAW REQUIRES THAT THE CONTRACTORS SHALL SUBMIT A SWORN STATEMENT OF PERSONS FURNISHING MATERIALS AND LABOR BEFORE ANY PAYMENTS ARE REQUIRED TO BE MADE TO THE CONTRACTOR:' The statutory provisions mandated by 770 ILCS 60/5 require the general contractor to be sure their written contract contains the requisite statutory language and to furnish the owner with the sworn contractor's affidavit listing all parties employed on the project.

Lienability of Equipment Rental

Equipment rentals are not usually lienable in Illinois on private developments. However, labor utilized in the connection with the use and rental of equipment is lienable. For example, a crane operator's time is lienable, while the rental crane being operated is not lienable. Illinois courts have yet to fully decide the lienability of rentals on public projects. It is likely that such an equipment rental claim would be recoverable from either a public lien on construction funds claim or a payment bond claim.

Lienablity of Tenant Improvements

Contractors and suppliers furnishing labor and/or materials to a tenant may have a lien as long as the owner is deemed to have "authorized and permitted" the tenant to install the improvement. Claimant's counsel can review the lease, which in most cases expressly describes the improvement authorized and permitted by the owner. Without a lease, the court's will review the owner's knowledge and owner's participation in the construction process. If the owner is actively engaged in the project, his "consent" to the work will be likely discovered by the court.

Deadline Summary For General Contractors Enforcement of Its Mechanics' Lien Rights

Once a general or original contractor signs the statutory contract, complies and delivers the sworn statement, the contractor is then eligible to claim its mechanics' lien in accordance with the following:

1) A lien claim must be verified, contain a brief statement of the contract, state the balance due and sufficiently describe the real estate, including the date for the contract and the completion date in the lien.

2) A claim for mechanics' lien must be recorded in the Recorder of Deeds office in the county where the project is located within four months of completion of the work in order to establish priorities over third parties. However, if ownership is not changed and no changes in title have occurred, a lien claim can be recorded up to two years after completion of the claimants work.

3) A complaint to foreclose a mechanics' lien must be filed within two years after completion of the claimant's last date of work.The lawsuit must be filed in the circuit court of the county where the projest is located.

Owner's Potential Liability to Subcontractors/Suppliers for More Than the Contract Price

In order to compel an owner to pay more than the original contract price, the subcontractors must prove that certain payments were made by the owner to the original contractor which were unfair. The following are examples of when an owner can be compelled by a subcontractor to pay more than the original contract price.

The first such situation occurs if the owner and the original contractor fix an unreasonably low price for the general contract for the purpose of defrauding subcontractors, such as in the case of Edward Hines Lumber Co v Dell Core. In this case, the trial court found that the trustee-owner and Dell fixed an unreasonably low price as a builder's fee in their original contract. The general partner and principal shareholder admitted on cross examination that a fair builder's fee would have been at least 10 percent of the construction cost, or $549,911, rather than the unsecured note for $200,950 payable in 40 years with an approximate present value of $9>500 at the time of trial. Accordingly as provided by $21, the courts decreed the difference a part of the original contract and subject to a lien.

Second, if an owner permits a subcontractor to perform the contract or deliver material without written protest after the owner receives a notice of the subcontractor's claim, pursuant to 770 ILCS 60/5, 60/22, 60/24, the owner will then be subject to a lien in favor of the subcontractor even if the original contract price is exceeded.

The third example is when an owner pays a general contractor without first obtaining a sworn contractor's statement from the original contractor pursuant to 55 of the Act.

Finally because the lien claim of the subcontractor can only be to the extent of the original contractor's lien, an owner may deduct the cost of defective performance by the original contractor, and the owner is entitled to a credit against the original contract price, thereby reducing the balance of funds available for the subcontractor. The text of 21 of the Mechanics' Lien Act also states:

"In case of default or abandonment by the contractor, the subcontractor or party furnishing materials shall have and enforce his lien to the same extent and the same manner that the contractor may under conditions that arise as provided in Section 4 of this Act and shall have and may exercise the same rights as there and provided for the contractor."

Section 21 also appears to provide a credit for the owner against the original contract price for the cost of completion upon the abandonment by the original contractor. However, if the owner had notice of the subcontractor's claim, yet permitted the subcontractor to continue performing on the project, a subcontractor may establish its lien in full.

Removal of Lien-Private Construction Owner's Demand Upon Lien Claimant to Sue

An owner can make a demand on any lien claimant, including subcontractors and suppliers, to file suit on a lien claim or forfeit the lien. The purpose of this demand to sue is to obtain prompt hearing on the claimant's entitlements to enforce its lien claim. The following is the procedure to be followed pursuant to Illinois Revised Statutes, chapter 82, 34:

1 . Demand to enforce lien is made by owner, lienor, any person interested in the real estate, or agent or attorney

2. Demand must be in writing.

3. Service may be personal on the person claiming the lien (or on his or her agent or attorney) or by registered or certified mail, return receipt requested.

4. Demand must require either suit to be filed, or answer filed in pending suit, within 30 days.

5. Lien is forfeited if lienor fails to comply within the 30 days written demand above.

To complete the forfeiture of a lien, suit must be filed, per sec 34 of the Act, with allegations based upon failure of lien claimant to comply with written demand above.Where the lien was filed and thereafter paid, the lienor must, on written demand, furnish a release. If the lienor fails to do so within 10 days, the lienor is liable to the owner in the sum of $100 recoverable in a civil action. Where the lienor fails to file suit to enforce same after demand and thereafter fails to furnish a release after demand, the lienor is liable to the owner in the sum of $25 recoverable in a civil action.

No Lien Contacts Are Against Public Policy and Are Unenforceable in Illinois

Since January 1,1992 construction agreements containing No-Lien Contracts are against public policy and are unenforceable in Illinois. The Mechanics' Lien Act was amended to advance the state's legitimate interest in furthering the purposes of the Illinois Mechanics' Lien Act to protect contractors, subcontractors, and materialmen by allowing liens as a means of compelling payment and prohibiting a waiver of mechanics' lien rights with any construction contract or subcontract either expressed or implied in Illinois.

Ability to Collect Interest And Attorney's Fees Under The Illinois Mechanics' Lien Act 770 ILCS 60-1

Interest is recoverable at the rate of 10 percent per annum from the date the same as due you. Pursuant to 770 ILCS 60/17, "If the court specifically finds that the owner who contracted to have the improvements made failed to pay lien claimant the full contract price, including extras, without just cause or right, the court may tax that owner but not any other party reasonable attorney's fees of the lien claimant who had perfected and proven his/her claim? To otherwise collect attorney fees, you must make reference to your agreement with your customer.

Defenses Available to Owner

1) An original contractor's failure to provide a sworn statement pursuant to Section 5 of the Mechanics' Lien Act is in absolute defense against the original contractor. Subcontractors would probably maintain their Lien rights even though the original contractor's lien rights were void under these circumstances.

2) The claimant's furnishing of non-lienable materials and services.

3) The claimant's failure to comply with the requisite deadlines to serve a subcontractor's notice of lien within 90 days of completion for commercial and new construction residential projects or within 60 days of the claimant's first date of work for owner occupied single family projects. The claimant's failure to record a mechanics' lien with the recorder's office within four months after work is completed and/or the claimant's failure to file law suit within two years the claimants last date of work nullifies any lien action.

4)A defect in the preparation of notice or lien claim by omitting the correct identity of the parties, contractors or property description such as an inadequate legal description.Additionally omitting service on a proper party such as a lender could result in the voiding of a claimant's mechanics' lien.

5) Furnishing a waiver of lien in advance of payment could result in a forfeiture of a lien by a lien claimant who inadvertently gave a waiver before payment.

Deadlines for the Enforcement of the Subcontractor's Lien

To establish a lien for materials, it is necessary to prove that the materials were delivered to the job site for the purpose of being used in construction. If, however, it can be shown that the materials were actually used in the structure, proof of delivery is not required. The contract between a subcontractor or material supplier and a general contractor often consists of many separate implied contracts. This is the situation when a general contractor places several different orders to a material supplier at several different times. In this situation, the material supplier may treat the aggregate of the orders as one contract, and therefore, the supplier may not be required to serve separate notices for each delivery to protect its lien rights. In some circumstances, the supplier may be required to serve the successive notices if each delivery is an"independent order". In Swansea Concrete Prods. Inc. v Distler, where the general contractor was terminated, the owner's direct contact with the performing subcontractors converted the status of the subcontractors into that of original contractors, negating the notice requirement. The requirement of sending a notice may be substituted for an equitable recovery, especially when owner's take away control of the unfurnished work from the contractor and deals directly with the subcontractors.

The statutory prerequisites for a subcontractor's lien are found in 770 ILCS 60/24. These elements are essentially the same as those for a registered general contractor with the exception that an additional notice requirement is imposed upon the subcontractor. The subcontractor is required to furnish a notice to the contractor, owner and lender by certified or registered mail, limited to addressee only

1.The existence of a valid contract between the general contractor and the owner, owner's authorized agent or a person "knowingly pemmitted" by the owner to construct the improvement.

2.The claimant must furnish lienable services or materials to the project that are deliverable to and/or incorporated into the improvement.

3. The existence of a valid contract between the subcontractor and the general contractor.

4. Substantial performance of the subcontractor's contract, or legal excuse for nonperformance.

Subcontractor/Supplier's 90-Day (From Last Date of Delivery or Work) Notice Requirements/ Commercial Projects and New Unoccupied Residential Construction Because a subcontractor, by definition, is one who has a contract with someone other than the owner, it is only fair to serve the owner with a notice of lien prior to the filing of a lien claim that will possibly cloud the owner's title to his land. Thus, a subcontractor including a material supplier, must cause a written notice of his or her claim and the amount due or to become due thereunder to be personally served on the owner, the owner's agent, architect or the superintendent having charge of the building or improvements and to the lending agency, if known no more than 90 days after completion of work or delivery of materials by the claimant.

Subcontractor's Special Notices/Owneroccupied Single Family Residences Within 60 Days of First Shipment or Work Pursuant to 770 ILCS 60/21, "It shall be the duty of each contractor who has furnished or is furnishing materials or labor for an existing owner occupied single family residence in order to preserve his lien to notify the occupant either personally or by certified mail, return-receipt requested, addressed to the occupant or his agent within 60 days from his first furnishing materials or labor, that he supplied either materials or labor.The notice shall contain the name and address of the subcontractor or material man, the date he started work or to deliver materials, the type of work done and to be done or the type of materials delivered or to be delivered, and the name of the contractor requesting work."

The notice shall contain the following warning: "NOTICE TO OWNER"THE SUBCONTRACTOR PROVIDING THIS NOTICE HAS PERFORMED WORK FOR OR DELIVERED MATERIAL TO YOUR HOME IMPROVEMENT CONTRACTOR. THESE SERVICES OR MATERIALS ARE BEING USED IN THE IMPROVEMENTS TOYOUR RESIDENCE AND ENTITLE THE SUBCONTRACTOR TO FILE A LIEN AGAINST YOUR RESIDENCE IF THE SERVICES OR MATERIALS ARE NOT PAID FOR BY YOUR HOME IMPROVEMENT CONTRACTOR.A LIEN WAIVER WILL BE PROVIDED TO YOUR CONTRACTOR WHEN THE SUBCONTRACTOR IS PAID, AND YOU ARE URGED TO REQUEST THIS WAIVER FROM YOUR CONTRACTOR WHEN PAYING FOR YOUR HOME IMPROVEMENTS." Such warning shall be in at least 10-point bold-faced type for purpose of this section, notice by certified mail is considered served at the time of its mailing. If the 60-day notice is not sent to the lien claimant, recovery is limited to available unpaid funds in the owners possession, if any, as long as the 90-day notice is timely given as stated above.

Miscellaneous Notices

Pursuant to 770 ILCS 60/22, "The subcontractor shall as often as requested in writing by the owner, contractor or agent shall either make out and give to the owner, contractor or agent a statement of the persons furnishing material and labor giving names and how much if anything is due or to become due to each of them in which statement shall be under oath if required. Failure to provide such statement within five days after demand shall cause a forfeit to the owner or contractor of the sum of $50 for every offense, shall have no right of action against either the owner, contractor until he shall furnish a statement and the lien of such said contract should be subject to the liens of all other creditors.

Subdivision Improvements: Protection of a Subcontractor's Rights in Quasi-public Improvements: A Gap in Illinois Mechanics' Lien law

Despite the two broad classes of liens available to subcontractors (liens against the property on private projects and liens against public funds on public projects), there remains a significant gap in the protection afforded subcontractors by the Illinois Mechanics' Lien Act.It arises in the situation involving quasi-public improvements. These are improvements in the nature of public improvements which are proposed, financed and built by a private developer as a part of a comprehensive development plan (for example, a residential subdivision) but then transferred to a public entity An example of such a quasi-public improvement would be the underground sewers and pipes, lights, streets and sidewalks in a residential subdivision. The land containing these subdivision improvements is transferred from the developer to the municipality by a process called dedication.This transfer of ownership can be either statutory or by common law. In Illinois, the transfer can take either form, but most often is gov erned by statute. The problem arises as a result of the half public, half private nature of such improvements. They are financed by a private own-er/developer and, therefore, no money, bonds or warrants are usually required to insure payment, as they are from a public entity by law Moreover, the title to the land which contains the improvements is transferred to the public entity by the developer.Thus, the property once transferred to the municipality itself is not subject to a lien by unsatisfied subcontractors. In the usual situation, no public funding in the form of monies, bonds, or warrants which can be liened to satisfy the subcontractor's claims. The subcontractor who contributes to improvements such as these is left with virtually no effective remedy other than breach of contract against the developer. Illinois, unlike other states such as Texas and Florida, does not allow a lien remedy for subdivision improvements in publicly dedicated right of ways.