If you perform work for developers of residential sub-divisions or builders of single-family homes, you may be cheated---legally---out of your rights to a mechanic's lien. Two Maryland Court of Appeals decisions, Himmighoefer v. Medallion Industries, Inc., 302 Md. 270(1985) and York Roofing, Inc. v. Dale W. Adcock, et al., 333 Md. 158 (1993), have been construed by certain Maryland circuit courts to prohibit liens in favor of site, road or utility contractors where the developer had entered into a contract for sale for the property with a builder prior to the filing of a mechanic's lien suit. Also, pursuant to these cases, a subcontractor who performs work for a builder will lose its rights to a mechanic's lien where the builder enters a contract with a "bona fide purchaser" prior to the filing of the mechanic's lien suit.
- Maryland's Mechanics Lien Statute
Pursuant to the terms of Maryland's Mechanics Lien Statue.
Every building repaired, rebuilt, or improved to the extent of 25 percent of its value is subject to the establishment of a lien---for the payment of all debts, without regard to the amount, contracted for work done for or about the building and materials furnished for or about the building.
Md. Real Prop. Code Ann. SS 9-102.
If one does not have a contract with "the Owner" of the property, one is viewed as a "subcontractor", who must serve a mechanic's lien notice on the owner within 90 days after doing the work or furnishing materials to have the right to later file suit for a lien. Id. SS 9-104. Pursuant to the words of the statute, a building is not subject to a lien if, prior to the establishment of a lien, legal title has been grated to "a bona fide purchaser at law when a deed is executed and delivered to a purchaser. The statute does not define "bona fide purchasers for value", but the Court of Special Appeals has held essentially that mere knowledge by the purchaser that work was being performed is not enough; there must be a showing that the purchaser knew of the "claim or potential claim or had reasonable cause to make inquiry into whether there were any claims as of the time (he or she) purchased the realty". Sterling Mirror v. Rahbar, 90 Md. App. 193, 202 (1992). The statue does provide, however, that "The filing of a petition [i.e. the law suit] shall constitute notice to a purchaser of the possibility of a lien being perfected". Md. Real Prop. Code Ann. SS 9-102.
- Himmighoefer
The facts of the Himmighoefer case occurred on the following time line:
May 30, 1991 to Sept. 21, 1991
Medallion Industries, Inc. ("Medallion"), a contractor, furnished work and materials on two sites in a sub-division in Prince George's County, pursuant to a contract with K. R.
Yates Builders. The land was owned by Ridgely Builders, Inc. ("Ridgely").
Nov. 17, 1991
Ridgely contracted to sell one lot to Mr. and Mrs. Himmighoefer.
Nov. 24, 1991
Ridgely contracted to sell another lot to Mr. and Mrs. Holmes.
Dec. 23, 1991
Medallion filed a petition in Circuit Court to establish mechanic's lien on each lot.
Dec. 31, 1991
The Himmighoefers' lot was conveyed to them for full purchase price.
Jan. 8, 1992
The Holmes' lot was conveyed to them for full purchase price.
Mechanic's lien hearings later proceeded and the trial court granted the liens, and held that the purchasers had constructive notice of the liens by virtue of the filing of the petitions prior to the purchasers' settlement on their respective homes. The Court of Appeals of Maryland reversed, holding that:
- The purchasers acquired "equitable title" to their properties as soon as they signed contracts for sale. Pursuant to the doctrine of "equitable conversion", the purchases were deemed to be owners of the properties at equity at the time they signed the contracts: and
- Because "equitable title" vested in the buyers prior to the docketing of the suits to establish mechanic's lien, the contractors could not argue that the purchasers were not "bona fide purchasers" pursuant to the Mechanic's Lien Act.
This case simply ignores the words of the statue expressly stating that it is legal title of a bona fide purchaser (not equitable title) that forecloses the right to lien.
- York Roofing, Inc In York Roofing, Inc. v. Dale W. Adcock, et al., 333 Md. 158 (1993), the following occurred at the times noted:
Sept. 28, 1990
Richard Palm ("Palm"), owner of a property in Anne Arundel County, entered into a contract with Commerce, Ltd. To construct a new office and warehouse building on the property.
July 1990
Palm entered into a lease with w. w. Adcock Co., Inc. ("Adcock") for the property. The lease provided that the building would be constructed and Adcock would be the sole tenant. The building would be "built to suit" the specific needs of Adcock.
Nov. 29, 1990- Jan. 8, 1991
York Roofing, Inc. ("York") installed a roof, roof insulation and architectural sheet metal coping for the entire building as a subcontractor for Commerce Park, Ltd.
Nov. 12, 1990- Jan. 18, 1991
Central Air Conditioning Contractors, Ltd. ("Central Air") installed the air conditioning system for the entire building pursuant to the subcontract with Commerce Park, Ltd.
Dec. 10, 1990
Palm entered into a contract with Adcock for the sale of the property and the building still under construction.
Feb. 20, 1991
Palm and Adcock went to settlement. Interestingly, the settlement sheet showed that nine contractors remained unpaid.
April 3, 1991
York served its a mechanic lien notice on Adcock.
April 15, 1991
Central Air served its mechanic lien notice on Adcock.
July 5, 1991
York filed its Petition to Establish and Enforce Mechanic's Lien.
July 15, 1991
Central Air filed its Petition to Establish and Enforce Mechanic's Lien.
Nov. 27, 1991
After a hearing on both York's and Central Air's petitions, the Circuit Court denied both York's and Central Air's petitions for mechanic's lien.
The Court of Special Appeals affirmed, and the Court of Appeals of Maryland agreed, holding:
- Because "equitable title" had passed to Adcock prior to the filing of the mechanic's lien petition, pursuant to Himmighoefer, the property was not longer subject to lien because the Adcock was "equitable owner" of the property; and
- Even, so Adcock was not an "owner" for purposes of the mechanic's lien statute because in order to be an owner subject to a lien, the owner must have entered into a contract for the improvement of the property. Adcock had entered no construction contract.
Thus, incredibly, Adcock was "equitable owner" of the property, but for the purposes of mechanic's lien statute, Adcock was not owner of the property!
- Because Adcock was not aware prior to signing the contract for sale that the contractor had not been paid, Adcock was a "bona fide purchaser", even though it knew various subcontractors were performing work on the property prior to the time the contract for sale had been entered.
- The Impact on Contractors
Using these cases as ammunition, a developer may cheat a site, road or utility contractor out of mechanic's lien by entering a contract for sale with a builder prior to the contractor's filing a mechanics lien petition. If the contractor later files a lien, the builder will defend on the basis that it became "equitable owner" of the property prior to the filing of the mechanic's lien petition, and that when it became equitable owner it had no notice that the contractor had not been paid. Furthermore, the builder will argue that no mechanic's lien could lie against it because it had no contract for construction of improvements for the property, and thus it is not an owner subject to a mechanic's lien.
Similarly, these cases can be used against subcontractors to prevent establishment of a mechanic's
lien against homes which are to be constructed pursuant to contracts to sell the land and the homes to be constructed. Once a prospective buyer who has not knowledge of the fact the subcontractor has not been paid signs a contract for sale, the property is no longer subject to a lien.
There are arguments that can be made by the contractor. For instance, one may argue that a
builder who entered a contract for sale of an undeveloped property cannot be a bona fide purchaser because the builder "contracts" with the developer for site, road and utility work, etc. At least one Circuit Court has rejected this argument. It may also be argued that the doctrine of equitable conversion does not apply where the purchase agreement is subject to express conditions precedent to the obligations of the party to close and the conditions have not been satisfied. This argument has not been tested yet.
We strongly suggest, that the contractor's lawyer be consulted at the inception of any contract to perform work on a subdivision and that, if work has been performed on a subdivision and the contractor has bot been paid, a petition to establish and enforced mechanic's lien should be filed and perfected as soon as possible.