This article originally appeared in the July 23, 2021 edition of the Daily Journal of Commerce Oregon.
As most construction contractors and subcontractors know, construction liens can provide important payment security and also the ability to recover attorney fees if they prevail in foreclosing their liens. In past articles, I have discussed some of the myriad of issues which can arise regarding liens, such as statutory notice requirements and lien recording deadlines.
Another issue that arises with some frequency is whether particular items included in a lien are “lienable”—that is, whether they are items which are allowed under the lien statutes.
Both Oregon and Washington lien statutes provide that a contractor or subcontractor shall have a lien for furnishing labor, materials, and/or equipment on an improvement (i.e., a construction project). In Oregon, a contractor or subcontractor has the right to a lien for labor that adds value to the improvement, including wages and overhead. The lien may also include the cost of labor not performed on the project site if that labor is expended to fabricate goods to be incorporated into the project, like the fabrication of steel beams or wooden trusses. However, if the labor does not “add value” to the improvement, such as costs for demobilizing well drilling equipment when a project was terminated, it is not lienable. Washington lien statutes define labor as the “exertion of the powers of body or mind performed at the site for compensation” which is performed on the project site. Thus, Washington law expressly limits “labor” for purposes of lien claims to labor performed on the project site. Case law limits what constitutes labor even further, holding that labor does not include construction management and administrative tasks, which the courts have found do not improve the property.
Regarding materials, in Oregon, a contractor or subcontractor has a lien for materials furnished to a construction project, provided that the materials become part of the project or are consumed by the project. Courts will generally make the assumption that materials delivered to a project site became part of or were consumed by the project. However, if the materials are not delivered to the project site, but instead to another location, the lien claimant must show that they were used to fabricate an item that is ultimately incorporated into the project, such as beams or trusses, which are fabricated specifically for the project. In Washington, the materials must be intended to be incorporated into the project. Recognizing the difficult task a claimant would face if it had to prove that the materials it furnished were actually incorporated into the project, courts in Washington, as in Oregon, assume that if materials are delivered to the project site, they were incorporated into the project. Washington courts require that materials be furnished in good faith to be incorporated into the project, which means that delivery of materials that were not ordered will not provide or extend lien rights.
Provision of equipment is apparently straightforward in both Oregon and Washington, as only one case discusses the issue of the inclusion of equipment costs in a lien, a Washington case in which the court held that if the use of the equipment is merely incidental to labor, then a lien does not arise for the equipment.
The above illustrates that there are no bright line rules about what is lienable and what is not. Courts must determine, on a case-by-case basis, whether the claimed items are lienable based on subjective criteria, such as whether the labor “added value” to the project. Thus, claimants are sometimes left guessing about what is lienable and what is not. So, what happens if a court determines that a lien contains lienable and non-lienable amounts and how can a claimant protect its lien rights? The answer depends on how detailed the lien is as to the amount claimed. In both Oregon and Washington, if the non-lienable items can be segregated from the lienable items, then the lienable portion of the lien will likely survive.
However, if the lien simply contains what is required by the lien statutes—which is simply the principal amount of the lien—it would likely be difficult to segregate out the non-lienable items. In other words, simply following the statute and stating the lien amount in a lump sum can leave the claimant’s lien rights in jeopardy. If a court is unable to segregate the non-lienable items, then there is a strong chance that the court will hold that the lien is invalid.
Further, owners have legal recourse, provided by statute, against a lien claimant for invalid liens. In Oregon, a lien claimant who “knowingly files” an invalid lien is liable to the owner for the greater of $5,000 or the owner’s actual damages, whichever is greater. In Washington, an owner may bring an action under the state’s “frivolous lien” statute and a court may order the lien released if the owner proves that the lien is “frivolous and made without reasonable cause, or clearly excessive.” In both states, a lien claimant whose lien is determined to be invalid is potentially liable to the owner for the owner’s costs and attorney fees incurred in challenging the lien.
Thus, while a lien provides valuable security, that security is not without risk. Fortunately, the means of mitigating that risk is fairly straightforward—do not record a lump sum lien. Instead, attach a breakdown of the lien amount as an exhibit to the lien. That way, if there is any question about whether an item is lienable or not, it should be fairly simple to segregate out any amounts in the lien which turn out to be non-lienable. The claimant could then record a partial release of lien in the amount of the non-lienable items and the remainder of the lien would likely stand. This outcome is obviously a lot better than the lien being declared invalid altogether and the claimant having to pay the owner’s attorney fees.
Brent Carpenter is a shareholder at Jordan Ramis and focuses his practice on construction law. Contact him at (503) 598-5524 or firstname.lastname@example.org.
Tags: Construction, Business, Construction and Development