WHAT TO DO IF THE PAYMENT BOND IS NOT RECORDED WITH THE NOTICE OF COMMENCEMENT

Posted on November 20, 2015November 20, 2015 by Edward Garber

There is an unconditional payment bond for the project but it was not recorded with the Notice of Commencement. Now there are subcontractor construction liens recorded against the property. What do I do? I thought the point of the payment bond was to exempt the real property from subcontractor and supplier liens.

No need to worry! Liens can be transferred to the payment bond even though the payment bond was not recorded with the Notice of Commencement.

The payment bond operates to “secure every lien under the direct contract accruing subsequent to its execution and delivery.” Fla.Stat. s. 713.23(2). Even though the payment bond was not recorded with the Notice of Commencement as required, the owner or contractor can record a Notice of Bond with a copy of the payment bond that will operate to transfer the lien to the security of the payment bond.

To this point, Florida Statute s. 713.13(1)(e) states in relevant part:

[I]f a payment bond under s. 713.23 exists but was not attached at the time of recordation of the notice of commencement, the bond may be used to transfer any recorded lien of a lienor except that of the contractor by the recordation and service of a notice of bond pursuant to s. 713.23(2). The notice requirements of s. 713.23 apply to any claim against the bond; however, the time limits for serving any required notices shall, at the option of the lienor, be calculated from the dates specified in s. 713.23 or the date the notice of bond is served on the lienor.

Stated differently, just because the payment bond was not recorded with the Notice of Commencement does not mean the payment bond is worthless. Rather, it can still be used to transfer construction liens to the security of the bond.

Further, if discovered early enough, and within the effective period of the Notice of Commencement, an Amended Notice of Commencement can be recorded which attaches a copy of the payment bond. The Amended Notice of Commencement needs to be served by the owner “upon the contractor and each lienor who serves notice before or within 30 days after the date the amended notice is recorded.” Fla.Stat. s. 713.13(5)(b). But, the Amended Notice of Commencement can be used to clarify the omission of the payment bond in the original Notice of Commencement.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

CONDITIONAL PAYMENT BONDS AND TRANSFERRING A LIEN TO THAT BOND

Posted on October 31, 2015October 31, 2015 by Edward Garber

There are two types of statutory payment bonds that can be furnished on private construction projects in Florida: (1) unconditional payment bonds issued pursuant to Florida Statute s. 713.23 and (2) conditional payment bonds issued pursuant to Florida Statute s. 713.245.

With an unconditional payment bond, an owner’s real property is exempt from construction liens from subcontractors and suppliers.

However, with a conditional payment bond, an owner’s real property is not exempt from construction liens from subcontractors and suppliers. The conditional payment bond operates to condition claims against the bond to the extent the general contractor (principal of the bond) received payment from the owner. If the general contractor did not receive payment from the owner, then the conditional payment bond does not apply. If the general contractor did receive payment from the owner, then the conditional payment bond can operate to transfer the lien to the security of the conditional payment bond.

Because a lienor realistically has no way of knowing whether the general contractor was paid for their work, they are required to timely perfect their lien rights under Florida law. This means serving a Notice to Owner and recording a construction lien within 90 days of final furnishing.

Conditional payment bonds are fairly confusing so let’s use hypotheticals to explain.

Hypothetical #1: Owner pays contractor for painting scope of work. Painter timely served a Notice to Owner and recorded its lien for $75,000.

The objective here would be to transfer the painter’s lien to the conditional payment bond since the contractor has been paid for this work. Under this scenario, the owner or the contractor can record within 90 days from the recording of the lien a Certificate of Payment to the Contractor certifying that the contractor has been paid $75,000 (full lien amount) for the work described in the lien. The Certificate of Payment to the Contractor would be recorded with a Notice of Bond attaching a copy of the conditional payment bond.

If the contractor records the Certificate of Payment to the Contractor (together with the Notice of Bond), then the lien will be transferred to the conditional payment bond to the extent of the payment identified.

If the owner records the Certificate of Payment to the Contractor (together with the Notice of Bond), the contractor can do three things: (1) record a Joinder in Certificate of Payment agreeing with the Certificate of Payment to the Contractor recorded by the owner, (2) record a Notice of Contest of Payment stating that the contractor has only been paid “x” amount of the lien; or (3) do nothing. If the contractor does nothing or records a joinder in the Certificate of Payment, the lien will be transferred to the bond. If the contractor records a Notice of Contest of Payment, the “contested” portion will remain a lien against the real property and any uncontested amount will be transferred to the conditional payment bond.

Hypothetical #2: Owner paid contractor $50,000 but painter’s lien is $75,000. Owner records Certificate of Payment to the Contractor for $75,000.

Under this scenario, the contractor may want to record a Notice of Contest of Payment within 90 days from the lien certifying it has only been paid $50,000. If the contractor does this, the painter will have a $25,000 lien claim (the contested amount) and a $50,000 claim transferred to the conditional payment bond (the uncontested amount) since this amount would be transferred to the bond.

Hypothetical #3: Owner paid contractor for the painter’s scope and the painter liened. Neither the contractor nor the owner recorded a Certificate of Payment to the Contractor together with a Notice of Bond within 90 days from the lien.

Under this scenario, the painter’s lien has not been transferred to the conditional payment bond even though the owner paid the contractor for the painting scope of work. But, the lien can still be transferred to the security of the conditional payment bond even after 90 days and even after the painter files a lien foreclosure lawsuit. The same procedure will still need to be followed with the recording of a Certificate of Payment to the Contractor together with the Notice of Bond. The difference is that the Notice of Bond must be jointly signed by the owner, the contractor, and the surety for the lien to be transferred to the bond. See Fla.Stat. 713.245(4) (“Any notice of bond recorded more than 90 days after the recording of the claim of lien shall have no force or effect as to that lien unless the owner, the contractor and the surety all sign the notice of bond.”).

As you can see, conditional payment bonds can be procedurally confusing. The key for a lienor is that it still must perfect its lien rights and record and pursue its construction lien. The key for the owner and the contractor is that there are steps in place to transfer the lien or a portion of that lien (based on what the contractor has been paid) to the security of the conditional payment bond.

CHARTS AND GRAPHICS SUMMARIZING PAYMENT BOND AND CONSTRUCTION LIEN RIGHTS

Posted on July 1, 2015July 1, 2015 by Edward Garber

As they say, a picture is worth a 1,000 words. How about charts and graphics?

Check out this chart that summarizes preserving and enforcing construction lien and payment bond rights in Florida.

Check out this chart that summarizes Miller Act payment bond rights in comparison to Florida private and public payment bond rights.

Check out this graphic that depicts Miller Act payment bond claimants.

And, finally, check out this graphic that depicts those entities entitled to construction liens and payment bond rights under Florida law.

RESIDENTIAL CONSTRUCTION – SHOULD BOTH HUSBAND & WIFE SIGN THE CONTRACT?

Posted on June 7, 2015June 7, 2015 by Edward Garber

It is always good practice for residential contractors to get both husband and wife to sign the residential construction contract. But, even if only one spouse signs the contract, Florida’s Lien Law doesn’t really punish the contractor when its comes to construction liens.

Florida Statute s. 713.12 provides:

When the contract for improving real property is made with a husband or wife who is not separated and living apart from his or her spouse and the property is owned by the other or by both, the spouse who contracts shall be deemed to be the agent of the other to the extent of subjecting the right, title, or interest of the other in said property to liens under this part unless such other shall, within 10 days after learning of such contract, give the contractor and record in the clerk’s office, notice of his or her objection thereto.

In other words, one spouse is deemed the agent of the other spouse when it comes to subjecting the other to construction liens. This makes sense because generally when one spouse signs a contract for construction at his/her property, the other spouse has knowledge and is on board of the construction project. But, assuming the other spouse wasn’t aware, Florida’s Lien Law allows that spouse to provide the contractor an objection to the contract and record that objection in the public records in order for any construction lien not to impact that spouse’s interest in the property.

However, the statute only applies to real property and doesn’t apply to personal liability relating to the non-signing spouse. See Mullne v. Sea-Tech Const. Inc., 84 So.3d 1247, 1249 (Fla. 4^th DCA 2012); Meadows Southern Const. Co. v. Pezzaniti, 108 So.2d 499, 502 (Fla. 2d DCA 1959). This is why it is good practice for the contractor to get both spouses so sign the contract because while the contractor may be able to lien the non-signing spouse’s interest, that will be about it because it will not be able to impose personal liability against the non-signing spouse.

OWNER REQUESTING PROGRESS PAYMENT AFFIDAVITS FROM CONTRACTOR

Posted on June 3, 2015June 3, 2015 by Edward Garber

Florida’s Lien Law provides an owner, in particular, an infrequently used tool to take advantage of before making a progress payment to a contractor.

Previously, I talked about a contractor’s requirement to furnish the owner with a final payment affidavit before foreclosing on its construction lien.

But, an owner can request for a contractor to serve a progress payment affidavit before making a progress payment to a contractor. The owner, however, seldom requests this progress payment affidavit before making a progress payment.

Florida Statute s. 713.06(3)(c) provides:

(c) When any payment becomes due to the contractor on the direct contract, except the final payment:

1. The owner shall pay or cause to be paid, within the limitations imposed by subparagraph 2., the sum then due to each lienor giving notice prior to the time of the payment. The owner may require, and, in such event, the contractor shall furnish as a prerequisite to requiring payment to himself or herself, an affidavit as prescribed in subparagraph (d)1., on any payment made, or to be made, on a direct contract, but the furnishing of the affidavit shall not relieve the owner of his or her responsibility to pay or cause to be paid all lienors giving notice. The owner shall be under no obligation to any lienor, except laborers, from whom he or she has not received a notice to owner at the time of making a payment.

2. When the payment due is insufficient to pay all bills of lienors giving notice, the owner shall prorate the amount then due under the direct contract among the lienors giving notice pro rata in the manner prescribed in subsection (4). Lienors receiving money shall execute partial releases, as provided in s. 713.20(2), to the extent of the payment received.

3. If any affidavit permitted hereunder recites any outstanding bills for labor, services, or materials, the owner may pay the bills in full direct to the person or firm to which they are due if the balance due on the direct contract at the time the affidavit is given is sufficient to pay the bills and shall deduct the amounts so paid from the balance of payment due the contractor. This subparagraph shall not create any obligation of the owner to pay any person who is not a lienor giving notice.

4. No person furnishing labor or material, or both, who is required to serve a notice under paragraph (2)(a) and who did not serve the notice and whose time for service has expired shall be entitled to be paid by the owner because he or she is listed in an affidavit furnished by the contractor under subparagraph (c)1.

One reason an owner should want to comply with these provisions in Florida’s Lien Law and request a progress payment affidavit is to safeguard what is known as the proper payments defense. Under the proper payments defense, an owner will not be liable for construction liens that exceed the owner’s contract price with its contractor. See Continental Concrete, Inc. v. Lakes at La Paz III Ltd. Partnership, 758 So.2d 1214 (Fla. 4th DCA 2014) (“The [proper] payment defense provides that where an owner fulfills all the duties the Mechanics’ Lien Law places upon him, his liability for all mechanics’ lien claims cannot exceed the contract price.”) (internal citation omitted). But, for the proper payments defense to apply, an owner is required to comply with the requirements of Florida’s Lien Law. An owner makes proper payments by obtaining progress payment affidavits in consideration of each progress payment made to the contractor (and a final payment affidavit in consideration of the final payment) and by getting progress / partial lien wavers and releases from the contractor and subcontractors and suppliers that preserved their lien rights (and a final lien waiver / release in consideration of final payment).

AN AMENDED LIEN DOES NOT DELAY THE 60 DAY WINDOW TO FORECLOSE A LIEN WHEN A NOTICE OF CONTEST OF LIEN IS RECORDED

Posted on May 1, 2015May 1, 2015 by Edward Garber

I previously discussed the value of an owner recording a Notice of Contest of Lien under Florida Statute s. 713.22 to shorten a lienor’s statute of limitations to foreclose a construction lien to 60 days from the date the lien is contested. For more information on recording a Notice of Contest of Lien please look at this posting and this posting.

What happens if after a Notice of Contest of Lien is recorded the lienor amends its construction lien? For instance, say the following sequence occurs:

1: Lien

2: Notice of Contest of Lien

3: Amended Lien

Does an owner need to record another Notice of Contest of Lien for the Amended Lien? If an owner does, then a lienor could extend its 60 day window to foreclose its lien by simply recording an amended lien.

This exact scenario was addressed long ago by the Florida Supreme Court in Jack Stilson & Co. v. Caloosa Bayview Corp., 278 So.2d 282 (Fla. 1973) which held that the foreclosure of an amended lien MUST still be brought within the 60 days from the initial Notice of Contest of Lien. In other words, the recording of an amended lien does NOT toll (or stop) the running of the 60 day window to foreclose the lien when a Notice of Contest of Lien is recorded.

Therefore, if you are an owner, there is certainly a benefit to recording a Notice of Contest of Lien. Conversely, if you are a contractor, do not think you can delay or escape the 60 day window to foreclose your construction lien if you received a Notice of Contest of Lien by simply amending your lien.

SERVING CONTRACTOR’S FINAL PAYMENT AFFIDAVIT BY CONTRACTORS (OR SUBCONTRACTORS) IN PRIVITY OF CONTRACT WITH PRIVATE OWNER

Posted on April 8, 2015April 8, 2015 by Edward Garber

Contractors (or even subcontractors) in privity of contract with a private owner must serve a Contractor’s Final Payment Affidavit within 5 days before foreclosing on the lien. The objective is to swear to the owner the final payment the contractor is seeking and those unpaid lienors working under the contractor. This is set forth in Florida Statute s. 713.06(3)(d) which provides:

(d) When the final payment under a direct contract becomes due the contractor:

1. The contractor shall give to the owner a final payment affidavit stating, if that be the fact, that all lienors under his or her direct contract who have timely served a notice to owner on the owner and the contractor have been paid in full or, if the fact be otherwise, showing the name of each such lienor who has not been paid in full and the amount due or to become due each for labor, services, or materials furnished. The affidavit must be in substantially the following form:

CONTRACTOR’S FINAL PAYMENT AFFIDAVIT

State of Florida

County of _______

Before me, the undersigned authority, personally appeared (name of affiant) , who, after being first duly sworn, deposes and says of his or her personal knowledge the following:

1. He or she is the (title of affiant) , of (name of contractor’s business) , which does business in the State of Florida, hereinafter referred to as the “Contractor.”

2. Contractor, pursuant to a contract with (name of owner) , hereinafter referred to as the “Owner,” has furnished or caused to be furnished labor, materials, and services for the construction of certain improvements to real property as more particularly set forth in said contract.

3. This affidavit is executed by the Contractor in accordance with section 713.06 of the Florida Statutes for the purposes of obtaining final payment from the Owner in the amount of $___.

4. All work to be performed under the contract has been fully completed, and all lienors under the direct contract have been paid in full, except the following listed lienors:

NAME OF LIENOR _______AMOUNT DUE

Signed, sealed, and delivered this ____ day of ____, ____.

[Add signature and notary seal]

The contractor shall have no lien or right of action against the owner for labor, services, or materials furnished under the direct contract while in default for not giving the owner the affidavit; however, the negligent inclusion or omission of any information in the affidavit which has not prejudiced the owner does not constitute a default that operates to defeat an otherwise valid lien. The contractor shall execute the affidavit and deliver it to the owner at least 5 days before instituting an action as a prerequisite to the institution of any action to enforce his or her lien under this chapter, even if the final payment has not become due because the contract is terminated for a reason other than completion and regardless of whether the contractor has any lienors working under him or her or not.

Not timely serving the Contractor’s Final Payment Affidavit 5 days before commencing the construction lien foreclosure action has the unkind affect of invalidating the contractor’s construction lien. See Timbercraft Enterprises v. Adams, 563 So.2d 1090 (Fla. 4^th DCA 1990) (contractor hired to clear land lost its construction lien by failing to timely serve Contractor’s Final Payment Affidavit); Sunair Development Corp. v. Gay, 509 So.2d 1361 (Fla. 2d DCA 1987) (contractor hired to perform painting and carpentry lost construction lien by failing to timely serve Contractor’s Final Payment Affidavit); Bishop Signs, Inc. v. Magee, 494 So.2d 532 (Fla. 4^th DCA 1986) (sign contractor lost its construction lien by failing to serve Contractor’s Final Payment Affidavit).

If a contractor fails to serve the Contractor’s Final Payment Affidavit before filing its lien foreclosure action, it needs to (a) promptly serve the Affidavit and file an amended complaint within the applicable statutory limitations period, (b) argue that its noncompliance should be excused, or (c) argue that the owner waived the right to invalidate the contractor’s lien through the contractor’s failure to serve a Contractor’s Final Payment Affidavit.

A. Serving Affidavit and Amending Complaint within Statutory Limitations Period

The Florida Supreme Court in Holding Electric, Inc. v. Roberts, 530 So.2d 301 (Fla. 1988) held that if a contractor fails to timely serve a Contractor’s Final Payment Affidavit before initiating a lien foreclosure lawsuit, the contractor can remedy this noncompliance by serving the affidavit and amending its complaint within the statutory limitations period. See Holding Electric, 530 So.2d at 302 (“[A]n amended complaint may be filed to show delivery of the contractor’s affidavit, provided the statute of limitations has not run prior to the filing of the amended complaint.”).

B. Noncompliance should be Excused

In Coquina, Ltd. V. Nicholson Cabinet Co., 509 So.2d 1344 (Fla. 1^st DCA 1984), noncompliance with the timely service of the Contractor’s Final Payment Affidavit was excused when the owner contested the lien by recording a Notice of Contest of Lien that shortened the statutory limitations period to foreclose the lien to 60 days and the contractor served the Affidavit 3 days (instead of 5 days) before filing suit. Notwithstanding, the Fourth District in Pierson D. Construction, Inc. v. Yudell, 863 So.2d 413 (Fla. 4^th DCA 2003) still held that the Contractor’s Final Payment Affidavit needed to be served within the applicable statutory limitations period (even if it was not served within 5 days before filing the lawsuit). In other words, not serving it at all could be fatal to the contractor’s lien foreclosure action.

Also, the Fourth District in Bishop Signs held, “[t]he applicable concern should be whether it is the type of contract which, by its nature, does not entail the services of subcontractors or the furnishing of labor or material by others.” Bishop Signs, 494 So.2d at 534. Hence, if the contractor failed to serve the Contractor’s Final Payment Affidavit, it may want to argue that its noncompliance is excused because the type of project it was hired to perform does not entail the services of suppliers or subcontractors. Though, on most projects, this is a difficult argument to realistically make!

C. Owner Waived the Right to Argue Noncompliance

In Rivera v. Hammer Head Constr. & Development Corp., 14 So.3d 1190 (Fla. 5^th DCA 2009), the contractor failed to serve the Contractor’s Final Payment Affidavit. The contractor’s complaint pled that all conditions precedent to bringing the action had occurred, had been performed, or were waived. In response to this allegation, the owner pled is was “without knowledge” as to whether this allegation was true. The owner, however, did not plead that this was not true because the contractor failed to timely serve a Contractor’s Final Payment Affidavit. As a result, when the owner raised this issue at trial to invalidate the contractor’s lien, the court held that the owner waived its right to raise this argument because the owner never pled the contractor’s non-performance with any particularity.

In conclusion, it is always good practice to timely serve the Contractor’s Final Payment Affidavit within 5 days before filing suit, even if the statutory limitations period is shortened through a Notice of Contest of Lien (or even a lawsuit to show cause). But, if the Affidavit is not timely served, there are arguments a contractor can raise under the law to try to defeat an owner’s efforts to invalidate the lien due to this noncompliance.

YES, LIEN PRIORITY IS IMPORTANT

Posted on December 19, 2014December 19, 2014 by Edward Garber

When a construction lender forecloses, a lienor (e.g., contractor, subcontractor, supplier) is in a bad predicament because the lender’s mortgage will maintain priority over the lienor’s construction lien. The lienor would be named in the lender’s lawsuit (provided a lien has been recorded) because the lender will look to foreclose or wipe out the lienor’s inferior construction lien.

From a real-world standpoint, if there is not enough equity in the real property to satisfy the lender’s mortgage / loan, there is not going to be any surplus from a foreclosure sale to satisfy the inferior construction lien(s). Since a lien really is only as good as the equity in the real property being liened, if there is not any equity in the real property and/or the construction lender is foreclosing, pursuing the lien may be an exercise in futility.

Sometimes, due to the lack of equity in the real property at the time of the foreclosure, the lender will file the foreclosure lawsuit but delay in prosecuting the action. One reason is that the lender knows the owner is under water and hopes the value in the property increases down the road. The lender knows that it will ultimately take possession of the real property but at the time of the foreclosure the value of the property is much less than the amount owed under the loan.

Unfortunately, irrespective of any delay by the lender in prosecuting the foreclosure, the lender’s interest in the real property will always take priority. There is little the lienor can do to establish that its lien should jump priority over the lender’s mortgage. This point was confirmed in the non-construction case U.S. Bank National Association v. Farhood, 39 Fla. L. Weekly D12594a (Fla. 1^st DCA 2014), where the appellate court claimed that it was error for a trial court to sanction a lender in a mortgage foreclosure lawsuit for dilatory practices by deeming that a condominium association’s lien on a unit for unpaid assessments took priority over the mortgage.

So, yes, the priority of your construction lien is important and should always be a consideration in a lien foreclosure action.

CHART SUMMARIZING PRELIMINARY NOTICE REQUIREMENTS FOR LIENS AND PAYMENT BONDS

Posted on December 16, 2014December 16, 2014 by Edward Garber

In previous articles, I discussed preliminary notice requirements to properly preserve construction liens and payment bonds on private projects, payment bonds on public projects, and public payments bonds for Florida Department of Transportation (FDOT) projects. Now, how about a chart that assists in summarizing this information:

[ws_table id=”1″]

INCLUDE PROPER (LIENABLE) AMOUNTS IN YOUR CONSTRUCTION LIEN!

Posted on December 13, 2014December 13, 2014 by Edward Garber

Contractors, subcontractors, and suppliers need to appreciate what amounts to actually include in a construction lien before preparing and recording that lien. Stated differently, contractors, subcontractors, and suppliers need to appreciate what items are lienable and what items are not. In a nutshell, the item needs to relate to a labor, service, or material constituting an improvement to the real property—the item needs to bestow a permanent benefit on the real property and should be performed under another’s (e.g., general contractor) direct contract with the owner.

Not every item constitutes an improvement / bestows a permanent benefit to real property.

Items that have NOT been found to be properly lienable include without limitation:

Extended general conditions / delay damages;
Residential cleaning;
Maintenance services including landscaping and pool upkeep (see example below);
Materials from a supplier not incorporated into property (excluding specially fabricated materials);
Lost profit;
Expert witness services;
Insurance and property tax payments for partially constructed home (see example below);
Constructing a removable kiosk at a mall (see example below); and
Extras (change order work) not performed in good faith, pursuant to the terms of a contract, within a reasonable time, and were unnecessary to finish a job.

For example, in Palm Beach Mall, Inc. v. Southeast Millwork, Inc., 593 So.2d 1121 (Fla. 4^th DCA 1992), a contractor constructed a kiosk in a mall and recorded a lien for unpaid amounts. The kiosk was not a permanent improvement to the mall, but was removable at the termination of the tenant’s lease. The Court held that the contractor could not lien for constructing the kiosk.

As another example, in Levin v. Palm Coast Builders and Const. Inc., 840 So.2d 316 (Fla. 4^th DCA 2003), a contractor recorded a lien that included costs for lawn maintenance, pool upkeep, utility charges, and association maintenance fees. Not only did the Court hold that these items were not lienable, but affirmed that the lien was fraudulent!

And, as the last example, in Sam Rodgers Properties, Inc. v. Chmura, 61 So.3d 432 (Fla. 2d DCA 2011), discussed in detail in a previous posting, a contractor was building a custom home when a payment dispute arose. The owner stopped making payments and the contractor ceased construction and recorded a lien. Subsequently, the contractor performed additional work to protect the unfinished structure from the elements and amended its lien to include these amounts as well as property taxes and insurance the contractor paid on the property. Regarding the additional work to protect the unfinished structure, the Court held that these amounts were lienable: “All of these items were contemplated by the contract, and all of them were completed in a good faith effort to secure the property and mitigate damages so that a bad situation did not become worse.” Chmura, 61 So.3d at 439. But, as it related to the property taxes and insurance, the Court held these items were not lienable as they pertained to the maintenance of the property as opposed to improvement of the property.

By including inappropriate amounts in a lien, a lienor runs the risk of having its lien declared fraudulent under Florida’s Lien Law that would not only render the lien invalid, but expose the lienor to liability. Do not let this happen to you!