Q: Does a general contractor transform into a subcontractor where a property owner sells its property to a third party AFTER the general contractor completes its improvements but BEFORE it records its mechanics lien?
Q: Does it matter?
A: Yes. Because unlike a general contractor, a subcontractor must serve a 90-day notice to the new owner in order to preserve its lien rights under Section 24 of the Mechanics’ Lien Act (the Act). 770 ILCS 60/24. If the subcontractor doesn’t serve the 90-day notice, the lien is invalid against the third party buyer.
Those are the key questions and answers distilled from Dirtwerks Excavating, Inc. v. Koritala, 2013 IL App (2d) 130329-U, a December 2013 Second District case where real estate was sold by the original owner to various purchasers after a paving general contractor completed its work but before it timely filed its mechanics’ lien.
Plaintiff general contractor timely recorded his lien against several properties within the four month time period required by Section 7 of the Mechanics’ Lien Act (the “Act”), 770 ILCS 60/7. But before the contractor recorded its lien, the owner sold the properties to various home buyers.
Those home buyers successfully moved to dismiss the lien on the basis that the plaintiff converted to a subcontractor once the properties were sold. And since the plaintiff contractor never sent a 90-day notice (per 770 ILCS 60/24), the contractor’s lien wasn’t enforceable against the defendants.
Held: Trial court reversed. Plaintiff’s lien was proper, timely and valid against the homeowner defendants.
Illinois Mechanics’ Lien Act: ‘Contractor’ v. ‘Subcontractor’
The Act’s purpose is to protect those who in good faith furnish material or labor for the improvement of real estate. The Act permits a lien on the property where a (a) benefit has been received by the owner and (b) where the property’s value or condition has been increased or improved by the furnished labor or materials. ¶ 5.
A “contractor” under the Act is any person who contracts with a land owner or someone authorized by the owner to enter a contract with the contractor. A “subcontractor” is one who performs construction work for the contractor. 770 ILCS 60/1(a)(contractor def.); 770 ILCS 60/21(a)(subcontractor def.). A subcontractor must serve the owner with written notice of its lien within 90 days after completion of the work. 770 ILCS 60/24. A contractor does not have to comply with the 90-day notice requirement. He (a contractor) only has to file his lien within 4 months of completion. 770 ILCS 60/7.
Can Unverified Pleading Come Back to Haunt You?
No. A complicating factor in Dirtwerks was that plaintiff alleged in its original complaint that it was a subcontractor. But in later complaint amendments, it alleged it was a general contractor. But since the original complaint wasn’t verified, it was superseded by the later filed complaints.
A verified complaint that is amended remains a part of the record and can be used to impeach the pleader. Not so with an unverified pleading. Once an unverified pleading is amended, it’s erased from the record. Even so, the plaintiff’s allegation in the first complaint that it was a subcontractor wasn’t a binding admission since it was a legal conclusion (and not a factual allegation). (¶¶ 6-7).
Lien Claimants’ Status Is Determined by the Original Contracting Parties
The Court’s key holding is that the plaintiff’s status (general contractor or subcontractor) was determined by the original contracting parties. Plaintiff originally contracted with an entity that owned the properties. That the properties were later sold to third parties didn’t change plaintiff from a general contractor to a subcontractor (who was required to send a 90-day notice). (¶ 9).
The court pointed to cases dating back more than a century for the proposition that once a lien attaches on the date of the owner-general contractor contract, a property buyer takes the property subject to the lien – so long as the lien is recorded/perfected within the four-month window.
In fact, Section 7 of the Act expressly binds subsequent property buyers. That section states that a timely recorded lien binds a creditor, incumbrancer or purchaser. (¶10); 770 ILCS 60/7.
Take-away: This seems like a fair result. The contractor shouldn’t be penalized just because a prior owner happens to transfer the property to a new buyer before the contractor records its lien. Dirtwerks also solidifies lien law axioms that a plaintiff’s status – be it contractor, subcontractor, or sub-subcontractor, is determined by the original contracting parties and a timely recorded lien will bind subsequent purchasers.