Learn more about our management packages today —
Call toll free (888) 565-1226

“Round Peg in a Square Hole” – Mechanic’s Liens Don’t Fit Condominiums

mechanics_lienThe ability to file a mechanic’s lien gives contractors a powerful weapon in their battles to collect money owed them for construction work they have done. But the Massachusetts Condominium Statute, Chapter 183A, prohibits the application of these liens to common areas.
Section 13 of the statute, governing claims against community associations, specifies that any claims involving the common areas “shall be made only against common funds or property held by the organization of unit owner and not against the common areas and facilities themselves….”
Although that language is about as clear as any you are likely to find in statutes or regulations, contractors still periodically file mechanic’s liens related to work on common areas – possibly because they aren’t aware that they can’t use this collection tool with condominiums; but more likely because they know that filing the lien – appropriate or not – will give them leverage in negotiations with an association’s governing board.

Automatic Relief
Contractors don’t need court approval to attach a mechanic’s lien; they need only record it to make it effective. But the property owner on the receiving end of the lien must obtain a court order in order to dissolve it. Because the liens are attached automatically and without judicial review, courts are required to grant a speedy hearing to owners who challenge them. But ‘speedy” can mean several months on crowded court dockets, and as long as the lien remains in place, it is difficult for owners to sell or refinance their units in the restricted lending market, hence the pressure on community association boards to negotiate with contractors, even if they dispute the payments sought.

Two recent court decisions, both rejecting mechanic’s liens filed against community associations, may discourage contractors from pursuing this remedy against condominiums in the future and may encourage more boards to fight those that do.

The most recent case (Business Interiors Floor Covering, Inc. & Others vs. Basepoint Contracting and Trustees of 50-60 Longwood Avenue Condominium Trust), arose from a dispute between a general contractor and the subcontractors he had hired to do extensive renovations and repairs to the common areas of this community association. The association paid the contractor (Basepoint) but the company did not pay the subcontractors. When Basepoint went out of business and filed for bankruptcy protection, the subcontractors attached a mechanic’s lien against the community association’s common areas, seeking to collect the nearly $700,000 Basepoint still owed them.

The condominium trust challenged the lien and Superior Court Justice Paul Troy agreed that it should be dismissed. “The Condominium Statute is clear,” Justice Troy wrote. “Claims cannot be brought against the common area and facilities of a condominium.”

In his decision, Justice Troy quoted extensively from a 2009 Superior Court decision (Powder Mill Builders vs. Powder Mill Square Condominium Trust), in which the judge likened the application of a mechanic’s lien to a condominium to “trying to insert a square peg into a round hole. It just doesn’t fit.”

Both decisions make the same key points: A mechanic’s lien must be filed against the property on which the disputed work is performed. But the condominium statute clearly prohibits the attachment of common areas, while the mechanic’s lien statute targets the contracting party – the condominium trustees in these cases – who do not own the common areas and have no authority to encumber them.

No Ownership Interest

Addressing the latter issue in Powdermill, Associate Justice Timothy Feeley noted that the condominium statute expressly prohibits the trustees from doing anything “by act or by omission, to abandon, partition, subdivide, encumber, sell or transfer any part or all of the common areas and facilities…” While the trust has the authority to regulate activities in the common area and to contract for work done there, Justice Feeley agreed, “it does not have a sort of ownership interest that could be subject to lien and sale.”

Common areas are owned collectively by the unit owners, based on their percentage interests in the condominium. But contractors can’t target the owners’ interests, because they are not the contracting parties, and a mechanic’s lien can be levied only against property owned by parties to a contract. So a contractor could file a mechanic’s lien against a particular unit (and the common area percentage interest related to it) for work done on that unit, but not for work done on the common areas.

This illustrates the ‘round peg-square hole’ problem both courts identified: The mechanic’s lien simply does not fit the condominium ownership structure. Even if it were possible to get past the condominium statute’s clear wording and allow a lien against the common areas, Justice Feeley wrote in the Powdermill decision, “the court is at a loss to understand how the lien would be effected. What value do common areas have separate and apart from the owners’ undivided percentage interests in the common areas? What interest would be conveyed to a purchaser, even assuming there is any market for a less than full interest in common areas separate and apart from condominium units? Without ready answers to such questions, the court is confident that the mechanic’s lien statute is not available to establish a lien against common areas through an action against the condominium association/trust,” Justice Feeley concluded.

Other Remedies Available

Contractors have other means of collecting funds allegedly owed by community associations. Like any other creditor or litigant in any other lawsuit, they can seek to attach an association’s bank accounts, common area funds and possibly the association’s revenue stream (common area fees) as well. And if these resources fall short of what is needed to cover a claim, the condominium statute specifically requires an association to assess owners to make up the difference to pay a judgment.

All of those remedies are available to contractors, but they must go to court in order to pursue them. The mechanic’s lien, by contrast, is automatic; contractors don’t have to prove a claim to obtain a lien, they need only file a lien asserting that they have one. That’s why contractors keep testing the legal waters periodically, trying to find an argument that will make this vehicle work in condominiums.

The contractors in the (Longwood case) raised several arguments, but the court rejected all of them:

  • Argument One: Because the Mechanic’s Lien statute does not specifically exempt condominiums, the contractors argued, the Legislature clearly did not intend to do so. But the condominium statute specifically prohibits the attachment of common areas, the court noted. And “when two statutes are inconsistent, as the Mechanic’s Lien and Condominium statutes are here, they should be ‘construed in a way that gives reasonable effect to both statutes and creates a consistent body of law.’” There is no reasonable construction of the Mechanic’s Lien statute, Justice Troy concluded, that will make it work in the condominium context.
  • Argument Two: Contractors should be able to enforce a mechanic’s lien, if not against the common areas, then against any liens for common expenses that the association may have. That won’t work either, the court said, because the Mechanic’s Lien statute specifies that the lien can be applied only against “real property, lands, buildings, structures or improvements.”
  • Argument Three: The contractors did the work and the association should pay them for it; otherwise, the trust would be enriched unfairly at the contractors’ expense. This equitable argument (“quantum meruit”) applies only if there is no valid contract, the court said. And there was a valid contract here between the trust and the general contractor.

Appeal Possible

The Longwood and Powdermill cases are the first cases in Massachusetts to extensively address the use of mechanic’s liens against condominiums and they provide welcome affirmation that the state’s condominium statute means what it says – common areas aren’t subject to attachment.

Longwood may also produce an appellate decision on this question, because one of the contractors has filed an appeal, arguing that the condominium statute doesn’t state specifically that the mechanic’s lien statute doesn’t apply. That is true enough, as far as it goes. But the statute does specify what can and cannot be attached. And if common areas can’t be attached, as the statute states clearly, the mechanic’s lien is useless against a condominium association. Two Superior Courts have reached that conclusion. Hopefully, the Appeals Court will concur.

Avoiding the Cross-fire

Community associations in Massachusetts don’t have to be overly concerned about fighting mechanic’s liens and may encounter them even less frequently as a result of these decisions. Still, they should take steps to avoid being caught in the cross-fire when contractors and their subcontractors fight over payments. We recommend three precautions for association boards:

  1. When paying a general contractor, obtain a release signed by the contractor and the subcontractors affirming that all have been paid, so you don’t end up with a back-door claim like the one from subcontractors in the Longwood case.
  2. On a major project, have a clerk of the works or an architect handle the payments. Board members are unlikely to have the time or experience required to manage this process effectively.
  3. Structure the payments carefully and document them clearly. One option is to pay the subcontractors separately, subtracting their payments from the amount due the general contractor. Alternatively, the contractor and the subs should be required to sign requisition forms for each payment request, stating that the subcontractors’ fees are included in the total…(Read whole news on source site)