Florida Construction Liens: Representing the Residential Owner
This article explores the legal representation of the owner of a residential dwelling under construction with regards to nonprivity lienors when there is no payment bond. Florida’s Construction Lien Law, Part I, F.S. Ch. 713 (2003), does not have a general reputation of being very “owner friendly.” In fact, the ability of someone who has no contract with a property owner to create a cloud or encumbrance on that property without the owner’s consent might seem contrary to the basic legal concept of private property rights. Were it not for the competing equitable concept of unjust enrichment, construction lien rights for nonprivity lienors would be difficult to defend.
As various communities have, from time to time, experienced the highly-published reports of “bad” builders who have abandoned incomplete jobs, leaving owners to deal with construction liens for unpaid bills, some members of the news media have called for lien law reforms to protect owners. Yet, as legal practitioners in this area know, since the last major rewrite of these laws in the early 1990s,1 the application of this law to residential properties has become more and more favorable to owners.
For example, prior to 1991, each payment made by an owner to the contractor prior to the recording of a notice of commencement was considered an “improper payment”2 ; thus, the owner remained liable for liens even to the extent of having to “pay twice” for the same services or materials. However, effective January 1, 1991, the law was amended3 so that all progress payments made prior to receipt of a notice to owner are now subject to the owner’s “proper payment” defense, unless the notice of commencement has expired4 ; this is also now the same as to the final payment, if it is made based on the contractor’s final payment affidavit. As a result, an owner has no obligation to a nonprivity lienor unless and until that owner timely receives5 a notice to owner in proper form from that lienor.
In addition, various “demands” have been added to this law which, if made by the owner but unmet or unanswered, can have an adverse effect on a lienor’s ability to recover from the owner. One of these demands, known as the “death penalty” for lienors because it operates as a complete defense to the lien, is found in §713.16(2) and (3), the use of which is recommended as described later in this article.
The codification of prior case law regarding lender responsibility,6 added in 1992 as §713.06(2)(d), is another great example of the “owner friendly” approach of the construction lien laws. Likewise with the 2003 statutory additions of a new mandated contract disclosure for every direct contract with owners,7 an enhanced “warning” addressed to owners in the notice to owner form,8 and a new “warning” required in the claim of lien form.9
Armed with these changes, the legal representation of the property owner also becomes more complex, and the attorney’s failure to avail the client of these useful “tools” may well result in an increase in professional malpractice claims. This article will describe the use of some of these statutory provisions to serve the owner’s best interests; conversely, a lienor’s best interests might also be well served by an awareness of these recommended owner friendly techniques and procedures.
Initial Conference with Owner
Unlike many experienced lienors, a property owner may encounter construction lien issues only once or twice in a lifetime. Like most “lay” clients, a property owner encountering an actual or potential lien situation can greatly benefit from carefully following the instructions of their lawyer, many of which are not unlike those that would be given in any potentially adversarial situation: Don’t discuss the matter with anyone, except the attorney, and don’t sign anything, even what may appear to be a simple delivery ticket, without the attorney’s review. In addition, however, the uniqueness of the construction lien law should include other areas of instructions, such as checking the accuracy of the owner’s current mailing address, as reflected on any recorded notice of commencement, and making sure that all registered or certified mail is claimed as soon as possible.10 Also, due to the “prevailing party” nature of an award of attorneys’ fees pursuant to F.S. §713.29 (2003), every property owner should be made aware of his or her possible exposure to additional liability for such fees. In fact, a failure to do so may cause any such liability to fall on the attorney!11
Attorneys are advised to include these initial instructions in their engagement letter, being careful to describe the scope of legal employment in terms the client will understand, including the basis for professional charges.
The official records should also be checked at this point for the purpose of reviewing the client’s deed, comparing the legal description therein with any recorded notice of commencement, determining the “life” of any such notice (i.e., one year or some other period as stated therein), and verifying the priority status of any mortgages.12 The attorney should also attempt to verify that improvements to the property were actually commenced within 90 days of the recording of such notice, as required to have an unexpired notice of commencement.
Gathering Required Information
The proper legal representation of a property owner encountering construction liens requires gathering information that the client may not have. Of course, the attorney may always start with those documents which the client should have, such as the construction contract, construction loan agreement, and copies of all lien documents (especially notices to owners). The client should be advised in the initial conference, and in a follow-up letter, of the importance of continuing to provide the attorney with lien documents which may be received from time to time during the representation. Be sure to include the need to keep all envelopes as well, attached to their contents, and with the client’s notation thereon of the actual date of receipt.13
Next, written contact (or confirmation of contact) should be made with any construction lender to obtain copies of lien documents in their possession, with dates of receipt for each, and a listing of the dates and amounts of each draw payment. While in many cases the building contractor may be or become an adverse party, some attempt should be made as soon as possible, either directly or through the client, to obtain copies of the builder’s contracts, proposals, or purchase orders with all subcontractors and suppliers hired by the builder.14 In addition, it’s usually helpful to obtain a copy of the builders’ “final statement” or billing to the owner as soon as possible, since it may serve to later estop unfounded claims that can arise in anticipation of a contract dispute. The final statement should also reflect all addendums to the construction contract (ATCs) with descriptions of both contract change and the amount by which each such change increases (or decreases) the total contract price, as well as all amounts by which any contract “allowances” were not used or exceeded.15
Disputes may often arise about the critical dates which govern service of the notices to owner and the recording of the claims of lien, with the lienor’s records almost always reflecting that their actions were, not surprisingly, “timely.” Sometimes, it is possible to easily resolve disputed or questionable dates of “first furnishing”16 or “last furnishing”17 by reviewing the contractor’s own records, or any “log” or photos the owner may have made. Often, it will be necessary to obtain and review the lienor’s labor time records, invoices, and delivery tickets. In addition, don’t overlook the “public records” of the building department’s own inspection dates, many of the major ones of which will be reflected on the building permit that is required to be posted on the jobsite until final inspection. Thus, for example, if a concrete supplier is claiming a “first furnishing” date much later than the building inspector’s approval of the concrete foundation, resorting to that lienor’s actual truck delivery tickets would be in order.18
Managing the Information
All of this information will be helpful in the preparation of a complete chronology of events, which will become the basis for the ultimate evaluation of the validity of any recorded claims of lien, as well as the applicability of the owner’s “proper payment” defenses (and the extent of any potential lender responsibility to the owner). In addition, it is usually helpful to create and maintain a spreadsheet for notices to owner and claims of lien. The key dates, such as: first furnishing, service of notice, recording of lien, and last furnishing, along side the name and address of each lienor serving notice, can be reflected in summary format, so that “untimely” events become obvious. Even if a lienor has timely served its notice to owner and timely recorded a claim of lien in the correct amount,19 the application of the owner’s “proper payment” defense may leave little, if any, funds from which the lienor can enforce payment. To this extent, compliance with the construction lien law is no guarantee that a lienor will be paid, just as the owner has no guarantee that construction can be completed at a total cost not exceeding the original contracted price.
In addition, if the final payment has not yet been made to the contractor, such as in the case of an abandonment by the contractor, the owner is required either to make payments to all lienors or to follow a special procedure in order to properly recommence construction in a manner that will also allow the owner to receive credit (as a “proper payment” defense) for the reasonable costs to complete the construction in accordance with the original plans and specifications. Since payment of lienors may be premature in such circumstances and present unnecessary liability risks to the owner, the alternate procedure is usually in the owner’s best interests.20
Even without abandonment by the contractor, an owner has the right, upon proper notice to the contractor and under certain conditions, to make payments directly to lienors. F.S. §713.06(4) (2003) provides an order of payment priorities among competing lienors for the owner to follow safely.
In order to maximize both the correct information being sought and the number of defenses available to the owner, it is vital that every lienor receiving notice be served by certified or registered mail with a demand for “sworn statement of account,” pursuant to §713.16(2). In fact, such notices should be one of the first things an owner’s attorney prepares and mails as soon as possible after being retained. Lienors have 30 days to respond, under oath, and the failure to do so, or the furnishing of false information, will result in a complete loss their lien rights! If responded to properly and timely, however, the information provided should further assist the owner in determining the best course of action, including termination of the construction contract.
While ordering and examining a current title report of the owner’s property for the purposes set out above, the owner should also make written demand on the contractor for a complete list of all subcontractors and suppliers,21 pursuant to F.S. §713.165 (2003). The contractor’s failure to do so within 10 days of receipt of such demand may cause the contractor to forfeit its right to a construction lien, at least to the extent such failure to respond (or any omission therein) is prejudicial to the owner. Copies of each such subcontract or supply contract can also be demanded by the owner pursuant to F.S. §713.16(1) (2003).
Added to the owner’s defenses, such as for “proper payments,” are the following: “untimely” service or recording; use of improper forms; failure to timely enforce a lien; use of a fraudulent or exaggerated lien; or failure to respond properly and timely to various demands for information. There are also defenses available to the owner for a lienor’s misapplication of designated funds to an open account, the lienor’s failure to demand such designation;22 and the failure of a lienor to be properly licensed to perform the construction work.23
Proof of “Privity”
Occasions may arise in which a lienor who appears to be without privity may claim to have come into privity with the owner. Section 713.05 expressly recognizes that a lienor may move from nonprivity status to privity status and authorizes the use of one claim of lien for all the services or materials furnished in both situations. This may present a difficult issue of proof for the lienor, but one which becomes important to excuse a lienor who has not timely served a notice to owner in proper form.
The lack of a statutory definition for “privity” hasn’t made this proof of privity any easier, and numerous case decisions have attempted to identity the elements required for the application of this concept. The commonly understood meaning of “privity” is the existence of a direct contract with the owner. However, there are at least two problems which can arise from using “privity” in this manner. First, “direct contract” is already defined in F.S. §713.01(9) (2003) to mean “a direct contract between the owner and any other person,” so that “privity,” as used in §§713.05,. 06 and. 07, must mean something different. Second, “privity” is also used in §713.23(1)(c)24 to refer to the relationship between a lienor and a contractor.
Case law has been consistent in holding that privity between a lienor and an owner means more than mere knowledge by the owner that the lienor was working on the owner’s property.25 When an owner has given directions directly to a lienor for corrective work, “privity” has not been found to arise, even as to the costs of the corrective work performed.26 In fact, absent proof of an owner’s express or implied promise to the lienor to make payment for labor or materials furnished, no privity can be created.27
In addition, any promise of direct payment by an owner would have to be supported by some consideration,28 and any such “guarantee” of a third party’s payment would require a writing signed by the owner in order to satisfy the statute of frauds requirements of F.S. §721.01 (2003).29 Thus, any claim of “privity” by a lienor may very well require either a direct contract with the owner (as in the case of a payment guarantee) or some proof that the owner has received consideration from the lienor to support a promise of direct payment.
Therefore, a careful inquiry and investigation should be undertaken with the owner regarding all personal contacts and communications with those lienors who may otherwise appear to have no privity with the owner, especially any such lienors who have failed to serve timely and properly a notice to owner.30 In particular, those lienors who have had an opportunity to communicate directly with an owner, such as for the selection of equipment, materials, colors, or styles to be furnished or installed, might undertake some extraordinary efforts to later claim and support a finding of “privity” with the owner. For example, would the owner’s signature on a written confirmation which only identifies selections made by the owner create “privity”? Not likely. What if that written confirmation also included the pricing of those selections? Again, probably not. However, if that written confirmation included both pricing and the owner’s express promise to pay the lienor directly for same “privity” might be found to arise, if there was also a finding that consideration for that promise had been given.
Some of the various factors to be considered in making such a determination should include the following: Who received the lienor’s initial proposal and price for supplying of labor or materials? Did the lienor communicate with the owner regarding delivery dates or defects? Did the prime contractor abandon the job or otherwise default? To whom were the lienor’s invoices sent? How did the lienor describe its relationship with the owner in lien documents or otherwise? Did the lienor execute any partial releases at the owner’s or lender’s request? Did the lienor receive any written promise from the owner for direct payment or guaranteeing payment?
Proof of consideration should fall on the lienor, if the owner asserts a lack thereof as a defense, and might be difficult to establish. If the owner has already “promised” to pay the contractor for such selections, or otherwise stated, the contractor is already obligated to furnish such selections to the owner,31 there would already exist a means to enforce the delivery or installation by way of a claim for breach of contract. In addition, why would an owner obligate themselves to pay both the contractor and the lienor for the same goods or services?32
On the other hand, if the lienor communicates an unwillingness to rely solely on the contractor’s credit worthiness for continued furnishing of goods or services, such as when a bad payment history has developed or when the contractor has abandoned construction or has declared bankruptcy, an owner’s promise of direct payment might be founded on adequate consideration to support a “privity” relationship. In such cases, however, any “guarantee” of payment will still have to be in writing and signed by the owner.
Finally, a lienor who intends to rely on a “privity” relationship with an owner should be careful to be consistent in that position, both in any attempted notice to owner it serves, or in any claim of lien it records, the latter of which is a sworn statement the falsity of which might lead to a finding that the lien was fraudulent. Such a result would not only provide a complete defense to the owner against enforcement thereof,33 but might also trigger recovery of both compensatory damages consisting of fees and costs to remove or terminate the lien, and punitive damages consisting of the amount fraudulently claimed to be due.34
Selecting Offense or Defense
As with many other legal matters, the facts, circumstances, and the client’s desires regarding each lien will frequently govern just how aggressively the owner’s legal actions and reactions will be. For example, with regard to each recorded claim of lien, the choices are to make payment in full, or in some negotiated amount; wait until the lien automatically expires one year after recording, if no foreclosure proceedings are instituted thereon; accelerate the foreclosure period by limiting it to a 60-day period with a notice of contest of lien being served on the lienor by the owner; or, file a complaint to show cause with a summons to the lienor requiring that, within 20 days, the lienor show the court why their lien should not be discharged (with a prayer for attorneys’ fees to the owner as the “prevailing party”).
The more “unenforceable”35 a lien appears to be, the more aggressive might be the owner’s actions. If, for example, the owner needs to refinance the property (or may desire to sell it), the more aggressive approach is usually indicated, unless the owner wishes to pay the cost to post a “transfer” bond or amount with the clerk of court pursuant to F.S. §713.24 (2003). On the other hand, the less aggressive approach of a notice of contest of lien may be best if “unenforceability” appears likely, especially if the lienor is informed of any “defects” or defenses that might cause it to lose the lien and understands its exposure to the additional burden of paying the owner’s attorneys fees. Some of these choices may be impacted by the owner’s relationship with the construction lender and by the level of any “lender responsibility” that may have arisen. In other cases they may be impacted by the owner’s desire to be able to rely on a particular lienor for further warranty coverage and service.
Since at least 1991, Florida’s construction lien laws have become more and more “owner friendly.” An owner faced with the possibility of such liens should seek legal advice as soon as possible in order to avail himself or herself of the advantages and protections offered by this law. The owner’s possible defenses to each lien, if any, should also be identified and evaluated.
Proper legal representation of a residential property owner with regard to construction liens requires a working knowledge of the statutory provisions and case decisions under F.S. Ch. 713, including the various defenses which may be available to the owner; proper instructions to the client, including possible exposure to the additional liability of paying attorneys’ fees to the “prevailing party”; the application of good information gathered from credible sources; and close communications with and good advice to the client. All of these tools should be used by the owner’s attorney to assist in determining the best course of action to be taken for each lien that may be claimed against the client’s property.
1 Fla. Laws Ch. 90-109, is the legislative enactment of S.B. 1330, sponsored by the author, which contained the recommendations of the Mechanic’s Lien Law Study Commission which he chaired.
2 “Proper payments” are considered a defense for the owner, since they reduce the potential liability an owner would otherwise have to pay liens on his or her property.
3 This particular change was in addition to the recommendations of the study commission and was the result of a successful floor amendment by then-Representative Tom Drage (R -Orlando).
4 anotice of commencement expires: when no improvements to the property have been commenced within 90 days; or, one year from date of recording, or sooner as set forth in the notice, unless a longer time period is stated in the notice or the notice is amended and extended within one year or other stated time period from date of recording. Payments made by the owner to the contractor after expiration of the notice, are “improper” (i.e., they are not credited against the owners’ potential liability for payment of liens).
5 Note that §713.18(1)(b)2 provides for a form of “constructive receipt” in the case of certain mailed notices which have been properly addressed, but returned.
6 Kalbes v. California Savings & Loan, 497 So. 2d 1256 (Fla. 2d D.C.A. 1986), in which the lender was held liable to the owner for continuing to make loan disbursements to the builder after receiving notices to owner without first obtaining releases from the lienors serving notice. See also Fla. Stat. §713.3471 (2003), for additional provisions adding to a lender’s responsibilities.
7 See new Fla. Stat. §713.015 (2003).
8 See amended Fla. Stat. §713.06(2)(c) (2003).
9 See amended Fla. Stat. §713.08(3) (2003). While some may contend that such a warning is “a little late,” it directs the owner to a possible statutory means for termination of the lien. In addition, even though this change does not specify a “penalty” for failure to include this new warning, that might well be the future case law by analogy to Allstar Building Materials v. Kronauer, 724 So. 2d 616 (Fla. 5th D.C.A. 1999), which negated the effect of a notice to owner which failed to follow the statutory form.
10 This area of legal advice has dramatically changed since the statutory amendments to §713.18(1)(b)2 as described in note 4.
11 See Shear v. Hornsby & Whisenand, 603 So. 2d 128 (Fla. 3d D.C.A. 1992), in which the trial court’s summary judgment in favor of the law firm was reversed and remanded for further proceedings.
12 If, as rarely happens, the notice of commencement was recorded before the construction mortgage loan, the owner’s concerns about construction liens will most likely be shared with those of the construction lender and its title insurance underwriter as well!
13 Using the envelope itself for this notation may serve to reinforce the need to retain it.
14 Otherwise, an owner may wish to make a demand for such information pursuant to Fla. Stat. §713.165 (2003).
15 Unfortunately, the “norm” is that no such ATCs were ever prepared and signed as the construction progressed, notwithstanding the express terms of many contractor-prepared contracts that require the same. A discussion of this particular problem is beyond the scope of this article, but the actual “dealings” of the parties during the course of the construction may control over such expressed terms.
16 Before or within 45 days of which (or the date of any final payment at the latest), a lienor’s notice to owner much be received (or deemed to have been received) by the owner.
17 Within 90 days of which a lienor’s claim of lien must have been recorded. Note: Actual completion of the lienor’s contracted work is not required: it’s only the date the lienor was last on the job pursuing its contract.
18 Due to the statutory presumption in favor of a lienor that materials delivered directly to the jobsite were incorporated therein (one of the elements of proof in a lien foreclosure that would be impossible for most material suppliers to actually prove), suppliers are usually very careful in making and maintaining accurate delivery records.
19 “Fraudulent” or exaggerated liens are unenforceable.
20 See Fla. Stat. §713(7)(4) (2003) for the owner’s affidavit and notice of re-commencement required to preserve the proper payment defense as to payment of the costs of completion.
21 These are the lienors upon whom the owner’s demand for the sworn statement of account should be made. An owner’s attorney should, however, also be aware of Fla. Stat. §713.16(5) (2003).
22 Fla. Stat. §713.14 (2003).
23 Fla. Stat. §713.02(7), as well as §§489.128 and. 532 (2003).
24 This subsection sets forth the requirements for service of a “notice to contractor” where there is a payment bond, which is the functional equivalent of the requirements for service of a “notice to owner” pursuant to Fla. Stat. §713.06(2)(a).
25 For a good example of this, see Floridaire Mechanical Systems, v. Austin-Daper of Tampa, Inc. 470 So. 2d 717 (Fla. 2d D.C.A. 1985), rev. den., 480 So. 2d, 1293 (Fla. 1985), in which no privity was found even though the same individual was both a partner in the owner and the major shareholder and president of the contracting entity. This case was partially overruled on other grounds by AETNA Casualty and Surety Co. v. Buck, 594 So. 2d 280 (Fla. 1992),
26 Tomkins Land Co. v. Edge, 341 So. 2d 206 (Fla. 4th D.C.A. 1977).
27 First National Bank of Tampa v. Southern Lumber, 106 Fla. 821, 145 So. 594 (1983), which is an “equitable” lien case. See also Foley Lumber Co. v. Koester, 61 So. 2d 634 (Fla. 1952), in which privity with the owner was found to exist for tile work.
28 Moore v. Chapman, 351 So. 2d 760 (Fla. 1st D.C.A. 1977).
29 Clover Interior System v. General Development Company, 357 So. 2d 459 (Fla. 2d D.C.A. 1978).
30 For a factually intensive case in which a bankruptcy court found no privity between the owner and a cabinet company (and which overturned a state court’s lien foreclosure judgment entered after commencement of the bankruptcy proceedings because the debtor-contractor was not joined as a party), see Matter of Listle Shreeves Corp, 27 R. R. 108 (Bkrtcy. M.D. Fla. 1983).
31 Including any contractual provisions for “allowances.” See Adee v. Great S.E. Carpet Gallery, Inc., 562 So. 2d 409 (Fla. 5th D.C.A. 1990), in which no privity was found where the contractor had given an allowance to the owner, lienor had dealt solely with the contractor for payment, and lienor had filed lien document reciting that its contract was with the contractor.
32 Query: Which “price” would control such payment: the contractor’s costs at wholesale or the lienor’s price at retail? Where there is an allowable mark up for these items in their contract, the contractor would not even want the owner (customer) to be aware of these price differences.
33 See Fla. Stat. §713.31(2)(b) (2003).
34 See Fla. Stat. §713.31(2)(c). In addition to these civil sanctions there are criminal penalties generally applicable to the act of perjury, and specifically to a false statement (sworn or not) as provided for in Fla. Stat. §713.35 (2003).
35 This, or course, is usually determined by the nature and extent of the owner’s defenses, if any.
Fred R. Dudley received a Juris Doctorate from Stetson College of Law. He is a board certified construction law lawyer. Mr. Dudley served in the Florida House from 1982-1986 and in the Florida Senate form 1986-1998. A shareholder of Akerman Senterfitt, he maintains a construction, administrative, and public policy practice in Tallahassee and teaches real estate and construction law at the Florida State University College of Law.
This column is submitted on behalf of the Real Property, Probate and Trust Law Section, Julius J. Zschau, chair, and William P. Sklar and Richard R. Gans, editors.