Chapter IX Mechanics' Liens

• Library: SC Construction Law Desk Book (SCBar) (2022 Ed.)

Chapter IX Mechanics' Liens¹

Tracy T. James Carmela E. Mastrianni

A. Overview

Construction liens on real property, commonly known as mechanics' liens, provide contractors, laborers, suppliers, architects, surveyors, and engineers a security interest in real property. The construction lien will cloud title to real estate before a judgment is entered. In some cases, receivers may be appointed to complete construction, apply rents to the payment of the lien, and possibly to sell property in satisfaction of the liens. A construction lien foreclosure sale causes the proceeds to be applied toward satisfaction of the liens, subject to superior encumbrances. Any surplus proceeds are generally turned over to the owner.

Why are unpaid contractors, subcontractors, and suppliers afforded powerful construction lien remedies, while the law leaves other unpaid creditors unsecured? Public policy favoring construction and the magnitude of construction expenses give rise to this extraordinary remedy. As technological advances led to greater specialization in the building trades, the general contractor became dependent upon specialized independent contractors and subcontractors. Concurrently, the subcontractor became dependent upon the general contractor's ability to derive payment from the property owner. Subcontractors needed an assurance of payment, while owners and construction lenders were seldom willing to pay a contractor in advance of work actually being performed. Contractors were similarly unwilling to venture the substantial capital required for a construction project without a firm assurance of payment. Absent construction liens, negotiations between contractors and owners would essentially reach stalemate.

There are several practical implications to filing a mechanic's lien and foreclosing on a mechanic's lien. The filing of the lien places pressure on everyone in the contract chain to resolve the dispute. Construction lenders commonly require title updates before approving interim construction draws. A mechanic's lien can hold up a large payment to the general contractor, or a draw needed by the owner. Foreclosing on a mechanic's lien also provides a method by which attorneys' fees may be recovered.

B. South Carolina Legislative History

South Carolina enacted its mechanic's lien statute in 1816, providing "a lien in favor of 'every master mechanic, handicraftsman and artificer' upon any building erected, improved or repaired by him, for the amount justly due him therefore."²Just like the current mechanic's lien statute, the lien arose inchoate. In order to perfect the lien, however, the 1816 Act required "an agreement in writing, in the nature of a contract," executed "by the parties to such contract and the proprietor of the premises" be recorded.³ The purpose of requiring a written contract was to ensure the owner had consented to the work to be performed and thereby acquiesced in payment for the work prior to lien rights attaching to his/her property.⁴ The 1816 Act, therefore, did not allow subcontractor liens.

By the early twentieth century, an entirely new statute was created, which essentially created the framework for the State's current lien statute.⁵ The statute took the principles behind the early nineteenth century acts and expanded upon them to include liens for subcontractors.⁶

Section 1 provided that "every laborer mechanic, sub-contractor or person furnishing material for the improvement of real estate where such improvement has been authorized by the owner shall have a lien thereon subject to existing liens of which he has actual or constructive notice . . . ."⁷ Sections 2 and 3 required notification to the property owner of the labor or material and the amount or value of the same if the work was being performed by anyone other than the contractor. In no event could the aggregate amount of liens by such person exceed the amount due by the owner on the contract with the prime contractor.⁸ Section 4 required proration of liens, and Section 5 dealt with foreclosure of the lien.⁹ With some modification, the contents of the 1952 Code became the 1976 Code of Laws that generally apply today.

Since the original enactment of our lien statute in 1816, the rules for mechanics' liens have slowly relaxed in an effort to afford additional remedies to contractors, subcontractors, and suppliers alike, while balancing the needs of the owner to protect his property. Over the years, however, one thing that has not changed is the statute's strict timing and notice requirements, which must rigidly be followed.¹⁰

The purpose of this chapter is to enable the attorney to develop a general familiarity with the nature of construction lien litigation. However, construction lien statutes result from lobbying by contractors, mortgage bankers, consumers, labor unions and various trade organizations. The relative political clout of each special interest group varies. As such, the mechanic's lien statute is constantly evolving and a construction practitioner should always refer to the statute directly, as well as its supplements and case law updates.

C. The Parties Involved

1. Generally

The mechanic's lien statute provides a lien to contractors, subcontractors, and suppliers for payment for services rendered or materials provided to the structure and underlying real property upon which the improvements were made. The lien arises provided there is a direct contract with the owner and labor or materials are "furnished and actually used in the erection, alteration or repair of a building or structure."¹¹ Where there is no direct contract with the owner, the lien arises where the materials are furnished and the improvement has been expressly or impliedly authorized by the owner.¹² Because the statute requires that labor or materials be supplied with the consent of the owner, issues often arise as to who is an owner and/or who has the authority to consent on behalf of the owner.

2. Who Is an Owner?

Unlike most jurisdictions, South Carolina's mechanic's lien statute does not define the term "owner" and there is very little South Carolina case law regarding the definition of an owner as it relates to the mechanic's lien statute. According to Black's Law Dictionary, there are two types of property owners, equitable or beneficial owners and legal owners.¹³ An beneficial or equitable owner is "one who is recognized in equity as the owner of something, because use and title belong to that person, even though legal title may belong to someone else (e.g., one for whom property is held in trust)."¹⁴

A legal owner, on the other hand, is "one recognized by law as the owner of something; especially one who holds legal title to property for the benefit of another."¹⁵ There may be two "owners" to the same property; one the nominal or legal owner, the other, the beneficial or equitable owner. There may also be joint or co-owners having a share of ownership in the same property.¹⁶

In determining ownership, principles of agency law may come into play. Consent by successors in interest of the owner and agents of the owner acting within the course and scope of their authority satisfy the requirements of the mechanic's lien statute.¹⁷ For example, where a purchaser of property under an installment contract consents to the construction of improvements to a building on the property, giving her spouse authority to buy the materials, a mechanic's lien may arise for the materials based on the husband's agency. Note, however, that the marital relationship does not by itself establish an agency relationship. To establish a construction lien on real property owned by husband and wife, the contractor must have a contract with both the husband and wife or, at a minimum, be able to produce evidence of the non-contracting spouse's affirmation or ratification of the contract to improve the real property.¹⁸

3. The Landlord/Tenant Relationship

Tenant work also raises a number of issues related to "ownership." Unless a contractor or supplier obtains the landlord/owner's or his agent's direct consent to provide materials or make improvements to the leased premises, a lien claimant contracting with a lessee can perfect and enforce a mechanic's lien only against the leasehold interest of the tenant, not upon the larger fee interest of the lessor.¹⁹ For a construction lien to attach to a lessor's interest in improved real property, absent a direct contractual relationship between the contractor and the lessor or his agent, the lien claimant must produce evidence that the owner allowed the improvement to be made after having reason to believe the contractor was looking to him for payment. ²⁰

It is important that the consent from the lessor is consent not just for the improvements to be made, but specifically to pay for the improvements.²¹ In a majority of jurisdictions, the lessor's consent can be implied from any number of circumstances, including authorizations to make improvements in the lease and/or actual knowledge of improvements.²² However, South Carolina does not follow this prevailing view. Rather, our courts have specifically held that the fact that a lease requires the lessee to make improvements to the leased real property or that the lessor is onsite when improvements are made does not create a lien on the lessor's interests.²³

In F&D Electric Contractors, an electrical contractor could not enforce a mechanic's lien against the lessor, even though the lessor was on site and allowed the work to be performed, because the contractor could not establish that the lessor gave him anything more than general consent to make improvements or mere acquiescence to be on the property.²⁴ Thus, in order for the lien rights to arise on the lessor's interest, the contractor must obtain the express or implied consent of the lessor (1) to perform the improvements and (2) for the lessor to be obligated for payment.

D. Persons Entitled to Lien Rights

1. Generally

The South Carolina...