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In this blog, presented by SunRay Construction Solutions and Richard M Sissman, Counsel, Fracassi Sissman & Rand LLP, we will provide you in-depth information which will help contractors, subcontractors, and suppliers in Maryland get paid. This blog will discuss in detail about all the crucial steps that you need to take, key documents that should be served, timelines for serving documentation and filing petitions, and more.
Construction Contracts
One of the highly recommended actions is to always ensure that you get a signed contract, irrespective of in which jurisdiction your project is located. If you are a prime contractor, then the only one requiring to sign the contract is the owner. Now, in most cases, the owner provides the contract which means that you are bound to the terms and conditions of the owner’s contract. However, you may some room for negotiation about certain terms and conditions. Similarly, if you are a sub signing a prime contractor’s contract, then you may also have room for negotiation. There are several types of contracts that you can sign, such as a materials contract or a cost-plus contract. Most of trs and prime contractors will present an AIA contract for you to review. Here are some things for you take note of when reviewing the contract:
a. Ensure that there is an attorney’s fees provision in the contract which is favorable to you, meaning that when the provision is litigated, the attorney’s fees should come your way and not the other party’s way.
b. If you are presenting your own contract, in a commercial transaction, it is permissible to mention that the attorney’s fees go in a one-way direction. However, in Maryland, there is a commercial law statute which says that unless it is unconscionable, the Court will enforce.
Interest in Your Contract
Let’s take a look at the interest in the body of your contract. If your contract states that you are entitled to prejudgment interest, and you win your litigation, in most of the cases in Maryland, the judge will award the actual interest only if you win the case.
Most states have a usury law. So, let’s say you are purchasing from the supplier, the interest rate mentioned is between 12% to 24% per annum and you are not too happy about it, then you can negotiate with the supplier to reduce the interest rate. Most of them will be willing to negotiate a lower rate of prejudgment interest in the event of you defaulting. This is because, when suppliers sue you, they will also include prejudgment interest along with their attorney’s fees provision in their supplier contract.
Forum Selection Clause
Another element to focus on in your contracts is that it should have a forum selection contract. So, irrespective of whether you are the prime contractor or the supplier, if there is litigation in the body of your contract, then you must explicitly provide the place where you must litigate. The best option is to file the litigation where your principal office is located.
For example, if you are in Montgomery County, Maryland, it is best to have it under the jurisdiction of Montgomery County, so that if any dispute arises, you can get it solved in your own location. If there is no forum selection clause or you sue where the defendant’s principal office is located, and the office is not in Maryland, then it is recommended you sue in the jurisdiction in the county where the project is located.
Although, some states, such as Virginia, have a statutory provision which states that you cannot go outside the state of Virginia to have a job for litigation, there is no such preclusion clauses in Maryland.
Change Orders Construction
Fulfilling the change orders is another widespread problem faced by the contractors, especially when the higher tier contractors refuse to sign the change order. Ideally, if the contract requires that the change order should be signed, then you must get the signature. However, subcontractors are aware that this is not an easy task.
In Maryland, if subcontractors provide the work adhering to the higher tier contractor’s instructions, then the Court will allow you to receive an equitable adjustment or a fair and reasonable value for that change order. This is because you have provided a service which is to the knowledge of the higher tier contractor and you have built your obligations. So, it is either an addendum to the main contract or a separate contract where you offer acceptance and consideration.
However, if the contract does say that a signature on change orders is mandatory, then you must try your best to get the concerned signatures. But also remember that in Maryland, there are ways in which you can deal with this issue and get paid for the change orders, whether they are signed or not.
Joint Check Agreements (JCA)
A joint check agreement can be requested for by subcontractors and suppliers. The prime contractor typically issues the joint check agreement along with a joint payee to ensure that the payment is made. Material suppliers also write joint check agreements called JCA or JPA. What you need to remember is that the prime contractor will place several contingencies in the joint check agreement. It does not guarantee that if the joint check is not issued that they are obligated contractually to pay you.
These agreements are more like an accommodation, so you need to be very careful before you sign these joint check agreements.
JCA for Prime Contractor
Some suppliers have their own joint check agreements which is obviously in their favor, so prime contractors must ensure that they read the agreement carefully before signing it. As a prime contractor, if you are using the JCA, then it is highly recommended that you ask your subcontractor to come to your office or endorse the check in some way so that you can tender the check to the lower tier job. This is because, there are many instances where the sub can do a forged or missing endorsement and the bank will put it through. This in turn will cause a problem for you as you are not paid yet and you will need to go after the deposit for the bank.
So, whether you are prime contractor or a subcontractor, if you are issuing joint checks, make sure that the lower tier sub comes to you and endorses, and then you tender the check to whoever is the intended beneficiary of that check.
Mechanics Lien
In Maryland, there is a provision regarding the waiver of lien rights. So, if your project is in Maryland, and the original contract between you and the upper tier contractor states that you waive all your lien rights, then the Courts will not enforce it. However, there is ana exception to this provision. If the waiver is a separate document which has bene signed after your main contract is executed, then it will be enforceable by the Courts.
The general practice in a construction project is that when you give a construction draw, you submit your AIA with your payment application and your schedule of values. You are also expected to give a partial waiver which is always recommended. You must ensure that your partial waiver release contains conditional language, which states that the partial waiver is conditional upon getting the payments. Because if you do not make it conditional, you are giving away all your lien rights if you don’t get paid, because there is a failure of consideration. This conditional language can be included in the body of your final waiver release form.
When it comes to filing a mechanics lien in Maryland, you need to follow several steps. Before you do that, you must remember that in Maryland, if you do not have a contractual privity with the owner (either the property owner, or the person/entity that owns the property, or if the prime contractor is doing a build out of a store), then the owner is deemed as the tenant. So, you need to be extremely careful about what you are naming the owner.
For parties who do not have a contractual privity with the owner, the best option is to name the property owner and the tenant (if available) in the body of the Notice of Intent to Lien letter. In Maryland, only the first and second tier subcontractors have the right to lien. Here are some key things to remember:
a. The Notice of Intent to Lien letter must be sent within 120 days (about 4 months) of your last day of work on the project.
b. This Notice of Intent to Lien letter does not have title on any real property, it is just a letter that is served to the owner (tenant/property owner, or both).
c. The letter should be served personally to the individual if it is an individual or to the resident agent if it is a Company, Corp, LLC, or LLP.
d. You can also serve it through certified or registered mail, but it comes with a little bit of risk.
e. Another alternative option would be posting. If you do choose this option, then you must have a witness with you at the time of posting on the property where you have done the work.
Next Steps after Serving the Notice of Intent to Lien
Once you have the Notice of Intent to Lien, the next step under the Maryland law is to file a petition to establish and enforce your mechanics lien.
a. If you are a lower tier sub with no contractual privity with the owner (property owner/tenant), then you need to file a lawsuit within 180 days (about 6 months) of your last work on the project.
b. Remember that you should not count your 180 days (about 6 months) from the day when you serve the Notice of Intent to Lien letter. It should be from the last day of your work.
c. This is a complicated lawsuit, so ensure that you work with attorneys who know construction disputes and the lien laws of your jurisdiction.
d. Once the petition is filed, the Clerk will issue a summons. This summons should be served with a show cause order.
e. The purpose of the show cause order is that you must have a probable cause hearing within 45 days of the date of filing the petition. You can extend this timeline with consent from the opposing party.
How to File Liens?
a. Interlocutory Order
Let us say you get service upon the owner and you have a show cause hearing which is in the circuit court. What you need to do is, present your case and make the threshold of probable cause. The threshold of probable cause is a little bit lower than the standard of a preponderous of evidence in a civil case. If you meet the threshold, the Court will grant you an interlocutory order. This order ideally means you have met the probable cause determination and are entitled to an interlocutory lien on the project.
This order can be against the tenant or property owner in contractual privity with the prime contractor's. This order will encumber the real estate and the owner will try to bond off that lien, which again has its own process. When the lien is bonded, it does not encumber the property because if it is the property owner, it has a deed of trust, and this would breach it.
Typically, the lender will find out and will ask you to move the lien. This will be beneficial for you because what they do is place some amount of money in the court’s registry and if you are successful in your hearing, you can go after the bond and money within the court’s registry.
Once the interlocutory order is in place, the next step is a trial which must be held within six months of the date when the interlocutory order was entered. The trial is base don preponderous of evidence which is a civil action. It is an equitable claim which means that only a judge can hear the case. It is also a non-jury trial.
b. Judge or Jury Trial
Sometimes you may have a bifurcated case wherein your attorney may put in a contract action and a guaranty action (if available) along with the petition action. In such cases, the judge may deal with the mechanics lien action while the other action may be dealt by the jury, if there is no waiver of jury demand in your contract.
Most of the construction contracts will have a waive of jury trial. It is also recommended to have this waiver included in the contract due to the complicated nature of construction disputes.
c. Arbitration Clause
Your contract may contain the arbitration clause which means that when you file your petition, the other party will request you to stay the petition and go for arbitration, and deal with the contractual obligations as per the binding arbitration which could either be the American Arbitration Association or any other arbitration forum.
d. 15% and 25% Rule
In Maryland, there is a 15% rule and a 25% rule for mechanics lien. For example, you are a first-tier sub working on a rehab project on a commercial property for an apartment building. As per your prime contractor’s contract, the entire scope of work (not just your scope of work) and the value of the contract should improve the property by 15% of the underlying value of the apartment building. You can do this by getting an appraiser to come and evaluate the value of the apartment.
So, if you have a rehab job, it is conceivable that the value of the entire contract by the prime contract (including that of the subs and suppliers) will not reach the threshold, which in turn means that your lien will not have any value. The best option is to always determine whether the threshold value can be met or not before sending a bunch of money.
For leasehold interests, the threshold value is 25% of the leasehold interests. Ideally, if you are successful in your mechanics lien, then you are in the role of the tenant and taking over the dependent interests. But if you look at it, the property owner would be in material breach and the tenant would be evicted. So this 25% rule does not really have much value.
However, the leverage that you will have is that it will give the tenant time to work something out with you. If you are the prime contractor, then it will give you this leverage with your customer.
We hope this blog helps contractors, subcontractors, and suppliers in understanding what steps they need to take, what documentation they need to serve, and what timelines they need to adhere to in order to ensure that they get paid.
