IPVMU Certified | 12/07/14 04:18pm
I am no lawyer so this is not legal advice and it is worth what you have paid for it. This is just my own understanding of how the system works. In Kentucky anyone who furnishes labor or materials for the improvement of property automatically has a lien on that property (and here I am talking about private property - the law is different for public property). If you are a subcontractor or an equipment vendor (e.g. someone who doesn't have a direct contract with the property Owner) then you must send a notice of intent to acquire the lien to the property Owner within 120 days of last date of work or last date materials were furnished as the case may be. If the debt is not paid (and it is enough to justify hiring an attorney to make it happen) then ultimately the property can be forced to be sold to satisfy the debt. I've never personally had to take it that far however. On several occasions I've sent the notice of intent to acquire the lien and that usually motivates the end user to pay their bill. Once I had to actually go to the courthouse and pay the clerk filing fee to perfect the lien. The end user finally paid their bill after that so I released the lien. Now I'm sure the undisclosed cynics on here will say we just don't have a good relationship with the end user or are rinky dink installers or something like that. More often than not however we are executing as a subcontractor and the Owner gets into a dispute with the G.C. or a different subcontractor over something completely unrelated to our portion of the contract. Then our payment gets held up for no reason, and I have found that the mechanic's lien is a very good way of securing payment in that case. A lien is basically worthless if you don't do your job right because a judge would ultimately throw it out and not allow the sale of the property.
So I would think from the distributor's perspective (perhaps some can chime in here) that having a project account set up with equipment only for a particular job site that this reduces their risk of not getting paid. The preliminary aspects of acquiring the lien (sending the notice and filing at the courthouse, etc) is not expensive at all and has always resulted (for me) in the payment getting sent. Fortunately I've never had to foreclose on a property lien.
This method is typically used by distributors and manufacturers when allowed by law as a courtesy to an integrator who has landed a job that is outside of their normal buying habits or credit line. The integrators are always allowed to use another form of guarantee such as from a bank or credit institution, or pay cash. The goal is to allow them to continue to do their daily sales while working a long project that may require 60+ days of payment terms or an amount 2 to 10x their normal credit. It helps solve a problem stated above when the integrator doesn't want to perfect the lien against a good customer but some dispute with a GC and Owner is holding up payment. It help solve the problem of an integrator who uses a payment for materials for payroll or a vacation. I know, never happens. The other option besides outside funding is to decline the sale and that's bad for everyone.
Silva Consultants | 12/07/14 05:44pm
The specifics of the lien process varies from state to state, but Ben and Greg have done a good of summarizing the basics. Here in Washington, it is very common for suppliers to send out "Right to Lien" notices to property owners when they furnish equipment, materials, or labor for a construction project. This is done routinely without regard to the creditworthiness of any of the parties.
This notice has no power in itself, but serves to forewarn the property owner that someone could place a lien against their property if their contractor(s) don't pay their bills.
Before making final payment to a contractor, the property owner should request "lien releases" from all contractors and suppliers related to his project. This is one checkbox on the project closeout checklist typically used by architects/engineers/consultants.
IPVMU Certified | 12/07/14 06:07pm
This worked very well for us. Back in 1999 we landed a huge job for us. It required over 120K of camera equipment - way outside our normal buying limits. To get the equipment, we needed sign off from our bank and the customer. They created the separate account and required a letter of agreement from our customer. It was the first time I had ever heard of such a thing, but it came down very nicely. We got incremental billings as equipment was delivered and made incremental payments to the manufacturer. When we sent a final payment to the manufacturer, they sent a letter of release to both the customer and the bank. I don't recall it being super formal, but those were a little easier ( less lawyerly ) times and I'm sure the paper meant something.
Since then we have grown. That would still be a big job for us, but we now have the resources to handle it without asking the manufacturer.
100% True Story.
A friend of mine owns a telecom company, he sould a $50,000 large phone system to a company and was properly paid. Four months later he recieved a court order to return the funds, as the company had filed for bankruptcy, and the court decided the company had improperly paid non secured vendors ahead of others. He lost the equipment too, as they hadn't filed the proper lien paperwork. So the equipment became an asset and was sold at auction to pay secured creditors. This experience destroys the saying, "It's not a sale until the check cashes." So protect your own interests by filing the necessary paperwork in your own state, even if the customer is paying cash.
Ben Murphy's law also applied daily in Serbia. Know second-hand a few people who got liened on by creditor when they do not pay. Liened on hard.
Interesting the timing in this, as we had our first experiance with this recently as an integrator doing an install, using a new distrubutor who is used to doing this, sent our customer a letter. Let's just say the poop hit the fan. We were very ticked about this because it caused our customer concern and we did not intend for it to happen. The distributor was very good about sending a recind letter and we let it pass as a misunderstanding. But it was a learning experiance and based on these comments, maybe useful in the future.