In a continuing four-part series, LT Construction Lawyer Wally Irvin discusses the Tennessee Lien Law. Wally recently posted Part 1 of 4 on “Speaking the Lien Language,” Part 2 of 4 on “Lien on What?” Wally continues his examination of the Tennessee lien law, and Part 3 of 4 on “”Notice Requirements.” Wally completes his examination of the Tennessee lien law in this post, “The Final Payoff.”
BACK TO BASICS: TENNESSEE LIEN LAW PART 4 – THE FINAL PAYOFF
In the first three posts in this series, Speaking the Lien Language, Lien on What?, and Notice Requirements, I discussed what terms mean under Tennessee lien law, the property to which the lien, the extent of the lien and the notices that are required. In this post, you hopefully receive the payoff through enforcement of the lien.
Enforcing the Lien
Although a lienor may file a lawsuit to enforce the lien, Tennessee lien law does not prevent the lienor from maintaining an action on the underlying contract as if the lien did not exist. Tenn. Code Ann. §66-11-125. Instead, the lienor could simply file a lawsuit for breach of contract without prejudicing the right to later assert and enforce the lien. Id. Thus, the lienor may file a lawsuit for breach of contract or quantum meruit, despite, or in addition, to filing a lien enforcement action.
A. Time to file suit
1. Prime contractor
A prime contractor’s lien is enforceable for one (1) year following the date the improvement is completed or abandoned, and remains an encumbrance against the owner’s property until the conclusion of any timely filed enforcement action. Tenn. Code Ann. §66-11-106. Thus, a prime contractor must file a lien enforcement action within 1 year of completion or abandonment of the project, or lose its security for the underlying debt.
2. Remote contractor
In contrast to a prime contractor, the lien of a remote contractor is only enforceable for a period of 90 days from the date the remote contractor serves a notice of lien on the owner, which must also be recorded in the local Register of Deeds Office. Tenn. Code Ann. §66-11-115. Accordingly, a remote contractor must file a lien enforcement action within 90 days of serving the notice of lien. As I indicated in my last post, a remote contract must record and serve its notice of lien within 90 days of the project’s completion or abandonment. Thus, the latest a remote contractor may file a lawsuit to enforce a lien is 180 days after the completion or abandonment of the project, assuming it waited until the 90th day to record and serve its notice of lien as well as the 90th day to file its lawsuit. Due to practical problems that arise in determining the date of completion and serving and filing the notice of lien and lien enforcement action, Tennessee Construction Lawyers strongly advise contractors to retain a qualified construction attorney as early as possible during construction to preserve and protect the contractors lien rights under Tennessee lien law.
B. Lien enforcement action
To enforce a lien, Tennessee lien law requires a prime contractor and remote contractor to file a lawsuit in a court of law or equity by attachment or in a court of general sessions having jurisdiction by a warrant for the sum claimed and a writ of attachment filed under oath, setting forth the facts and describing the real property, and served upon the owner. Tenn. Code Ann. §66-11-126. In English, lienor must file its lawsuit in the chancery or general sessions court for the county in which the property is located. Because a court of general sessions is not a court of record, a lienor who files an enforcement action in general sessions must record an abstract of the levy in the Register of Deeds Office for the county in which the property lies within twenty (20) days after the levy is made. Tenn. Code Ann. §66-11-134. The purpose of filing the abstract is that title searchers, in performing a title search prior to the sale of a property, only look for record encumbrances. In general, a title searcher reviews court records from the chancery court as well as the records available from the Register of Deeds. They do not, however, typically review general sessions filings. Accordingly, regardless of whether a lien enforcement action is filed by the prime contractor or the remote contractor, if the action is filed in general sessions court, an abstract must be recorded to provide notice of the lien enforcement action. The chancery court action, or the abstract, then provides notice of the continuing validity of the lien, until the lawsuit is concluded. In practice, if an owner attempts to sell the property during the period when the lien is still valid and enforceable, the closing attorney will notify the contractor of the pending sale and work out arrangement to pay off the lien out of the sale proceeds.
Interestingly, a remote contractor is not required to sue the prime contractor in the same lawsuit as the owner. Tenn. Code Ann. §66-11-126. However, the remote contractor, may, in its discretion, serve the prime contractor or remote contractor in any degree with whom the complainant is in contractual privity. Id. In common terms, this means a lower tier remote contractor may file an enforcement action and include any number of intervening remote contractors upstream of the lienor. If the remote contractor proceeds only against the owner, the owner may nevertheless make the prime contractor or remote contractor a defendant by third party complaint or cross-claim as is otherwise provided by law. Id.
A lien enforcement action may be filed by an individual lienor alone or with other lienors. Tenn. Code Ann. §66-11-131. If multiple lienors file a joint lien enforcement action, the individual lienors must each still separately satisfy all applicable notice requirements. Accordingly, an intervening lien enforcement action does not create or preserve a lien for another lienor when the latter lienor fails to serve the owner with a valid notice of lien or lien enforcement suit under the Act. Bird Bros. v. Southern Sur. Co., 200 S.W. 978 (Tenn. 1918).
A benefit of filing a single action between multiple lienors is that if multiple lienors file individual lien actions in the same court for the same property, Tennessee lien law requires the court to consolidate the lawsuits. Tenn. Code Ann. §66-11-132. If the actions are brought in different courts, a latter action may be removed into the first court, provided the court is a court of record. Tenn. Code Ann. Id. A more practical benefit arises if the lienors retain the same counsel, which should, in theory, reduce the overall attorney fees necessary to enforce the liens. However, joint representation can only be accomplished if there are no potential claims between the lienors and if the lienors consent to the joint representation.
Potential pitfalls of delayed enforcement
Although Tennessee lien law sets forth the maximum periods of a lien’s enforceability, lienors should be advised Tennessee lien law also provides owners an avenue to cut that period short. An owner, owner’s agent or the prime contractor may, upon written demand served upon the lienor and endorsed as to service, require the lienor to commence an action to enforce the lienor’s lien within sixty (60) days after service. Tenn. Code Ann. §66-11-130. Additionally, an owner may also cut off a contractor’s right to a lien by recording a Notice of Completion, which then requires all contractors that have not done so already, to provide notice of their lien within a shorter time frame, depending upon whether the project is residential or commercial/industrial/institutional. Tenn. Code Ann. §66-11-143. The potential pitfalls that may arise in the assertion and enforcement of a lien are beyond the scope of this series, but will be addressed in future Tennessee Construction Lawyer series’. In the interim, should you have any questions regarding these pitfalls or the assertion or enforcement of mechanics’ and materialmen’s liens in Tennessee, please feel free to contact one of the Lewis Thomason Construction Lawyers.
Tennessee law provides a lien in favor of any person who furnishes labor or materials in furtherance of an improvement to real property. To create a valid lien, the lienor must comply with all statutory requirements, including providing all notices and filing a timely lien enforcement suit. If the lienor satisfies the requirements, a court will likely validate the lien and allow the lienor to sell the property to satisfy the debt. The process of selling the property is beyond the scope of this series, but suffice it to say, only a very small number of cases resulted in the sale of the property, historically. Instead, many cases settle or are resolved by payment of the underlying debt.
As with most things, practice makes perfect. Tennessee lien law is filled with tricks and traps, occasionally snaring even the most experienced practitioner. In addition, the Tennessee legislature frequently amends the Tennessee lien law. Therefore, it is important to review Tennessee lien law periodically, noting any changes, to ensure you protect your business interest by obtaining, preserving and enforcing a valid lien.
Tennessee Construction Lawyers are a great resource for any questions contractors, subcontractors, material suppliers and design professionals may have in the event of a payment dispute on a project. In the future, look for additional series on Tennessee lien law, including analyzing a construction lien from the owner’s perspective, reviewing applicable defenses and strategies for discharging a lien and a similar series on bond claims, both on federal and state projects.