March 11, 2021
By Matthew T. Collins
Matt is a shareholder in the Construction Litigation Department at the Fabyanske, Westra, Hart & Thomson law firm. He can be reached at 612.359.7610 or firstname.lastname@example.org
In Minnesota, contractors and material suppliers may seek to enforce a mechanic’s lien against real property for the value of the improvements made. So too may a contractor and supplier in North Dakota seek to enforce a construction lien for non-payment, but the rules between the two states differ in significant ways. This Briefing Paper outlines the essential basics of and differences between the two states’ lien laws.
Pre-Lien Notice – When and What
Only in Minnesota are contractors required to provide pre-lien notice to the owner of the real property. In general, one who contracts directly with the owner of the real property must provide the statutory pre-lien notice in the contract or separately within ten (10) days of agreeing to perform the work. The pre-lien notice must be in 10-point bold type in capital letters. The specific statutory notice language is located here: https://www.revisor.mn.gov/statutes/cite/514.011.
Subcontractors and suppliers must provide the owner a differently worded pre-lien notice within forty-five (45) days of furnishing their first day of labor or materials. The required notice is found here: https://www.revisor.mn.gov/statutes/cite/514.011. The subcontractor/supplier pre-lien notice has similar typographical requirements as the contractor’s pre-lien notice.
Most large commercial projects and large multi-family residential projects do not require pre-lien notice, but the lien statute is a trap for the unwary, and the exceptions to pre-lien notice should be carefully examined before you decide not to give pre-lien notice. The best practice for the types of projects that are subject to the statutory pre-lien notice requirement are: (1) any residential project consisting of four or fewer units; (2) any commercial project consisting of less than 5,000 square feet.
North Dakota does have a lien notice requirement, but it varies significantly from Minnesota’s pre-lien process. In North Dakota, a lien claimant must first send by certified mail a Notice of Intent to File a Lien ten (10) days before recording the construction lien.
When Lien Attaches – Priority
Understanding the priority of interests in the chain of real estate ownership is fundamental to a contractor’s ability to recover the value of its improvement. The priority of interest establishes who gets paid if the real property is sold at auction. Typically, the “first in line” rule applies. The first recorded interest in the real property is typically first to be paid from the proceeds from the sale of the real property.
In Minnesota, typically the mechanic’s lien attaches to the property not by recording a document against the property, but upon the first visible improvement to the real property. All subsequent lien claimant’s priority relate-back to that first visible improvement.
The same will be true in North Dakota, with a couple of exceptions. In North Dakota, a mortgage given to secure proceeds provided under a loan used for the construction of the improvement will take priority, even if the work started on the property before the recording of the mortgage. North Dakota also prioritizes the type of contribution with manual labor being recognized as the highest class of contribution.
Lienable Improvements & Overstatement
Generally, North Dakota and Minnesota allow contractors to include in their lien amount the value of the improvements made to the real property and will include reasonable overhead and profit earned.
In Minnesota, a contractor can be liable for damages, including attorneys’ fees, for intentionally overstatement of the lien amount. This requires a showing that the contractor knowingly included amounts it knew it could not recover. For example, an intentional overstatement would include the cost of work not completed.
In North Dakota, the bar for a court to find an overstatement appears lower and does not require a showing of intent, but merely successfully contesting the validity and accuracy of the lien. If done, the owner may recover the attorneys’ fees it incurred contesting the validity of the lien.
Lien Waivers – Consideration
In Minnesota, courts have held lien waivers are not enforceable if the contractor has not been paid for the work performed, unless a third-party relies on the waiver without knowledge of the non-payment. Minnesota also prohibits lien waivers for work that has not yet been performed.
In North Dakota, lien waivers are enforceable even if the contractor has not been paid.
Minnesota law requires lien statements to be provided to the owner and recorded within 120 days from the contractor’s last day of work. Completion of punch list work will usually qualify as establishing the last day of work. A contractor in Minnesota will lose its lien rights if the lien statement is not properly recorded and served within 120 days of the last day of work.
North Dakota allows a construction lien up to three years after the first day of the first item of material is furnished. The better practice is to record within ninety (90) days of the last day of the improvement to avoid losing priority after the ninety (90) day safe harbor to a subsequent purchaser or encumbrance to the property.
Bonding-off a lien
Minnesota and North Dakota have statutory mechanisms for petitioning a court to discharge a lien upon the posting of sufficient security to protect the lienholder’s right to payment upon prevailing in a lien foreclosure lawsuit.
Bottom Line – Get yourself a lawyer experienced in mechanic’s/construction liens
This Briefing Paper presents a high-level overview of important concepts applicable to lien law in Minnesota and North Dakota. This writer cannot emphasize enough that the lien law in both states is technical and filled with nuances that can result in the uninformed losing their lien rights. Every reader should proceed with caution and retain competent counsel who can properly help you enforce your right to payment through the use of mechanic’s/construction liens.
Fabyanske, Westra, Hart & Thomson, P.A. is pleased to announce the election of its new President and Executive Committee. The following six attorneys now comprise the Fabyanske Executive Committee: Matthews T. Collins (President), Katie A. Welsch, Dean B. Thomson, Mark R. Becker, Thomas J Tucci, and Jeffrey W. Jones.
Fabyanske, Westra, Hart & Thomson, P.A. has been honored as a 2021 U.S. News-Best Lawyers “Best Law Firm” with a First Tier ranking in Minnesota in the practice areas of Banking and Finance, Construction, Litigation-Construction, Litigation-Real Estate and Real Estate Law.
This discussion is generalized in nature and should not be considered a substitute for professional advice. © 2021 FWH&T