A claim against property by a contractor or supplier for unpaid work, which can jump ahead of a mortgage depending on state law and timing.
The longer version
A mechanic's lien is a statutory claim against real property by someone who improved it and was not paid: a contractor, subcontractor, supplier or design professional. It attaches to the property itself, so an owner can end up with a lien for a debt its own general contractor failed to pay.
For a lender the issue is priority. Lien laws are set state by state, and in some states a mechanic's lien relates back to the date work first began on the project. That can place it ahead of a construction mortgage recorded after work started, which is why lenders confirm that no work has begun before the mortgage records, or rely on title coverage for mechanics' liens.
During construction the controls are routine and they are what keep the collateral clean. Each draw is conditioned on lien waivers from the contractor and the subcontractors paid with the prior draw, a title date down to confirm no new liens have recorded, and often a payment bond so unpaid parties claim against the surety rather than the property.
When a lien does record, the usual remedies are paying it, disputing it within the statutory process, or bonding it off by posting security so the lien transfers from the property to the bond. A lender will typically require one of those before the next draw.
Common questions
- What is a mechanic's lien?
- A legal claim against property by a contractor, subcontractor or supplier who improved it and was not paid. It attaches to the real estate itself, so it can affect the owner and the lender even when the unpaid debt belongs to the general contractor.
- Can a mechanic's lien take priority over a mortgage?
- In some states, yes. Where a lien relates back to the date work first began, it can rank ahead of a construction mortgage recorded after that date. Lenders manage this by confirming no work has started before recording and by relying on title coverage.
- How do lenders protect against mechanic's liens?
- By requiring lien waivers with each draw, a title date down before funding each draw, payment bonds on the construction contract, and title insurance coverage for mechanics' liens. A recorded lien is usually cleared or bonded off before the next draw.
- What does it mean to bond off a mechanic's lien?
- Posting a bond or other security with the court so the lien is released from the property and attaches to the bond instead. The claimant can still pursue the claim, but the property and the lender's collateral are clear.
- The commercial loan closing checklistWhat goes on the list and who owns each line.
- The due diligence checklist, built to be runChecklists as systems, not documents.
- The commercial loan closing processThe five stages from term sheet to funded.
- Construction loan managementDraws, lien waivers and the inspection record in one place.