“Payment Defense” to Subcontractor Mechanics’ Lien Claims in Washington DC and Maryland 

By Nicholas Cowie, Esq. – Maryland Mechanics’ Lien Attorney and Washington, D.C. Mechanics Lien Attorney

Overview: The Payment Defense to Washington DC and Maryland Mechanics’ Lien Claims 

Property owners engaged in construction projects (“owners”) in Maryland and Washington, D.C. face financial exposure when building subcontractors or material suppliers (“subcontractors”) file mechanics’ liens claims. This exposure occurs whenever an owner’s general contractor fails to pay its subcontractors, giving them a right to impose a lien on the owner’s property where the construction project is located. See, Mechanics’ Lien Law in Maryland and Washington, D.C. – by Cowie Law Group, a Maryland and Washington, D.C. mechanics lien attorneys. Once the lien attaches, it can be used to force a sale of the owner’s real property as a source of funds to satisfy the amount the general contractor owes the subcontractor for work and materials provided. All private construction projects in Maryland and Washington, D.C., from commercial real estate developments to private residential home construction, are potentially subject to mechanic’s lien claims.

However, before a mechanics lien can attach to the owner’s property in Maryland, or be enforced in Washington, D.C., the subcontractor must initially provide the owner with written notice of its intent to file and enforce a mechanics lien claim. This notice must include the unpaid amount owed the subcontractor for work performed at the owner’s property. Thereafter, the owner has an opportunity to dispute the subcontractor’s lien claim and prevent it from being enforced or attaching to the property. This notice will often be the first contact the owner has with the subcontractor because the owner has no contractual relationship with its general contractor’s subcontractors.

One defense an owner may seek to assert against a subcontractor’s mechanics’ lien claim is the so-called “payment defense” – a legal doctrine that may protect an owner who has already paid the general contractor in full before receiving the subcontractor’s notice of intent to file or enforce a lien claim. This article discusses the payment defense, which is recognized by the District of Columbia (Washington, D.C.) but statutorily limited to residential projects involving a single-family dwelling in the State of Maryland.

Washington, D.C. Mechanics’ Lien Law and the Payment Defense

Washington, D.C. mechanics lien law recognizes a payment defense against all subcontractor mechanics’ lien claims. The defense is only applicable to “good faith” owner payments made to the general contractor before receipt of the subcontractor’s notice of intent to enforce mechanic’s lien. Specifically, a subcontractor’s Washington, D.C. mechanics’ lien claim against the owner’s property is capped (i.e., cannot exceed) the amount of the unpaid balance owed by the owner to the general contractor at the time the owner receives the subcontractor’s notice of intent to enforce its mechanics’ lien claim. D.C. Code § 40-303.02(a). This “unpaid balance cap” on liens creates a valid and frequently successful payment defense for all property owners in Washington, D.C.

Thus, until the property owner receives the required written notice from a subcontractor that it has not been paid (i.e., notice of intent to enforce mechanic’s lien), the owner can make payments to its general contractor and rely upon the “payment defense” to defeat or reduce a subcontractor’s mechanic’s lien claim. DC Code §40-303.02. For example, if prior to receiving a subcontractor’s notice of intent, the owner has, in “good faith,” already paid the contractor in full (and the amount of payment is not in dispute), then the subcontractor is not entitled to a mechanic’s lien on the property. DC Code §40-303.02(b).

Subcontractor Protections Relative to the Payment Defense Once Owner is Given Notice Under Washington DC Mechanics Lien Law

Owner’s Duty to Withhold Payment After Receipt of Subcontractor’s Notice

Once the owner receives the subcontractor’s notice of intent to enforce a mechanic’s lien, it can no longer rely on the payment defense. At that point, the owner has a duty to withhold any payments it owes the general contractor in an amount sufficient to satisfy the general contractor’s debts to the subcontractor. DC Code §40-303.04. Thereafter, the property will be subject to a subcontractor mechanic’s lien not to exceed the amount the owner still owes its general contractor at the time the owner received the subcontractor’s notice. DC Code §40-303.04. An owner will not be able to use the payment defense regarding any general contractor payments it makes after receipt of the subcontractor’s notice of intent. DC Code §40-303.03(b).

Subcontractor’s Right to Know Contract Terms

The Washington, D.C. mechanics’ lien statute affords subcontractors the right to information regarding the agreement between the owner and the general contractor. Specifically, Subcontractors have a right to demand that an owner provide a statement of the terms of the contract between the owner and the contractor and the amount due thereunder. DC Code §40-303.05. Failure of the owner to respond to such a demand can result in liability to the owner for payments made to the contractor after receipt of the demand. DC Code §40-303.05. This ability to demand information from the owner better enables a subcontractor to protect its lien rights against the payment defense.

Key Legal Provisions:

• D.C. Code § 40-303.02(a): Caps subcontractor’s lien to the unpaid contract balance at time of notice
• D.C. Code § 40-303.02(a): If the owner has paid general contractor in full, and in good faith, at the time subcontractor’s notice is received, a subcontractor will not be entitled to a lien on the property.
• D.C. Code § 40-301.02(a)(1): Requires subcontractor to record a notice of intent to enforce mechanics lien in the land records within 90 days of completion or termination of the construction project.
• D.C. Code § 40-301.02(a)(2): require subcontractor send notice to the owner within 5 business days after recording the notice in the land records.
• DC Code §40-303.04: owner must withhold amounts to subcontractor once notice of intent to enforce mechanics lane is received.
• D.C. Code § 40-303.05: Provides that subcontractor entitled to know terms of contract between owner and general contractor.
• DC Code §40-303.08 and §40-303.13(a)(1)(A): Suit to enforce the mechanic’s lien must be filed in court within 180 days after the date that the notice of intent to enforce mechanic’s lien is recorded in the land records.
• DC Code §40-303.13(a)(1)(B): Notice of pendency of the lawsuit (a/k/a “lis pendens”) must be recorded in the land records office within 10 days of filing suit to enforce mechanic’s lien.

Key Points in D.C.:

• The notice of intent to enforce lien must be recorded within 90 days of days of completion or termination of the construction project and notice sent to owner within 5 business days thereafter.
• Suit to enforce the mechanic’s lien must be filed within 180 days after the date that the Notice of Intent to Enforce Mechanic’s Lien is recorded and notice of pendency of the suit must be recorded in the land records office within 10 days of filing suit.
• A subcontractor’s lien is limited to the amount the owner still owes the general contractor at the time notice is given.
• If the owner has already paid the general contractor in full before receiving notice, the subcontractor’s lien is defeated.
• This is commonly referred to as the “payment defense” or “unpaid balance rule.”

Risk Management Tip

In summary, Washington, D.C. mechanics’ lien law reduces the risk of double payment for an owner by shielding owners who act in good faith and pay their general contractor before receiving subcontractor lien notice. As such, the subcontractors in DC must proactively protect their mechanics’ lien rights.

Owners:

The owners can rely on the payment defense only to the extent of full payment to the general contractor prior to receipt of the subcontractors notice. So long as there is an unpaid balance, the owner’s property remains subject to a subcontractor’s mechanics’ lien. Therefore, property owners should work with an experienced Washington, D.C. mechanics lien attorney to implement lien risk management strategies, such as general contractor payment retainage connected to receipt of subcontractor lien releases / waivers for work performed and materials provided, with subcontractor’s acknowledging in writing that they have been paid in full or in part for specified work.

Subcontractors:

Likewise, subcontractors should work with an experienced Washington, D.C. mechanics lien attorney to protect their mechanics’ lien rights, such as serving early notice of intent to enforce mechanics lien on an owner while it still owes monies to the general contractor, and, when necessary, to demand information from the owner regarding its agreement with the general contractor so as to anticipate when  general contractor payments are to be made.

Maryland Mechanics Lien Law and the Payment Defense

In contrast to Washington, D.C., the Maryland mechanics’ lien statute only provides owners with a payment defense on residential construction projects. Maryland property owners engaged in commercial construction projects cannot assert a payment defense against a subcontractor’s mechanics claim.

Payment Defense to Maryland Mechanics’ Lien Claims not Available to Commercial Property Owners on Commercial Construction Projects

Maryland has no “payment defense” available to owners on commercial construction projects. As such, an owners payment of a general contractor is never a defense to a subcontractor’s mechanics’ lien claim on a commercial construction project. Even if the owner has paid the general contractor in full,  its subcontractor will be able to proceed to establish a mechanics’ lien on the owner’s property, in effect, forcing the owner to pay twice for the same work.

Thus, in commercial projects, the Maryland’s mechanics lien statute places the burden on the commercial property owner to make sure subcontractors are paid by the general contractor. The owner has the duty and a right to withhold from the general contractor amounts due it determines to be due an unpaid subcontractor on the project.

Owners can protect themselves by requiring their general contractor to provide subcontractor lien releases before making payment. A subtractor’s lien release can be used as a defense against any mechanics’ lien claim filed by that subcontractor such that owner will not be required to pay twice for a subcontractor’s work identified in its mechanics’ lien release.

Also, once an owner receives a subcontractor’s written notice of its intent to file a mechanics lien claim, the owner has a right to retain amounts owed its general contractor up to the amount claimed in the subcontractor’s notice. If a subcontractor is successful in obtaining a mechanics’ lien against the property, the owner may pay the subcontractor the established lien amount monies withheld from the general contractor up to the amount of the lien established.

Payment Defense to Maryland Mechanics’ Lien Claims is Available to Residential Property Owners on Single Family Dwellings Projects.

The Maryland mechanics’ lien statute does provide a statutory payment defense for homeowners constructing a “single family dwelling” or an addition thereto. A homeowner who has made “full payment” to a general contractor before receiving a subcontractor’s notice has an absolute defense to the mechanic lien claim under § 9-104(a)(2) of the Maryland mechanics’ lien statute. If the homeowner has only made partial payment to the general contractor before receiving the subcontractor’s notice, then the subcontractor’s right to obtain a lien against the property is capped by the amount the homeowner still owes the general contractor. § 9-104(f).

The intent of this legislation is to protect homeowners’ single family dwelling property from subcontractor mechanics’ liens in amounts that exceed what the homeowner still owes the general contractor at the time the owner receives a subcontractor’s notice of intent file a mechanics’ lien claim. Once that notice is received, the homeowner can withhold the claimed lien amount from its general contractor pending resolution of the mechanics’ lien claim.

Key Maryland Mechanics’ Lien Legal Provisions:

• Md. Code Ann., Real Prop. § 9-104(a): Requires subcontractors to provide written notice of intent to file a mechanics’ lien claim within 120 days after last furnishing labor or materials.
• Md. Code Ann., Real Prop. § 9-104(a)(2): Requires, in the case of a single-family dwelling, that the 120-day notice be received by the owner before full payment has been made to the general contractor.
• Md. Code Ann., Real Prop. § 9-105: Subcontractors must file suit  (a/k/a “petition to establish mechanic’s lien”) within 180 days after last performing work.

Key Case Law:

• Diener v. Cubbage, 259 Md. 555, 270 A.2d 471 (1970). Maryland courts rejected the commercial owner’s argument that double payment barred the subcontractor’s lien.
• Ridge Heating, Air Conditioning and Plumbing, Inc. v. Brennen, 783 A.2d 691, 366 Md. 336 (2001) and Winkler Construction Co. v. Jerome, 355 Md. 231, 734 A.2d 212 (1999). Discussing payment defense applicable to single-family dwellings

Key Points in Maryland:

• Strict compliance with statutory notice deadlines is required (notice of intent to file mechanic lien within 120 days of last work and lawsuit filed within 180 days).
• Subcontractors do not need to have a direct contractual relationship with the owner.
• Commercial Owners are not protected by statute from liens by simply proving payment to the general contractor (i.e., no statutory payment defense on commercial projects).
• Maryland courts have held that equitable (non-statutory) defenses like double payment are not recognized when a lien claimant complies with the Maryland mechanics’ lien statute.
• Maryland does have a statutory payment defense applicable to single family dwellings.

Risk Management Tip

In summary, Maryland mechanics’ lien law only recognizes a payment defense for single-family dwelling construction projects, thereby reducing the risk of double payment for homeowners building their own home or adding an addition. Commercial owners, on the other hand, cannot avail themselves of the payment defense, and are subject to a risk of double payment if they pay a general contractor that has failed to pay its subcontractors. Thus, the burden is on the owner in a commercial project to ensure subcontractors have been paid.

Owners:

Because of this framework, property owners should work with an experienced Maryland mechanics lien attorney to implement lien risk management strategies, such as general contractor retainage connected to receipt of subcontractor lien releases (a/k/a “lien waivers”) and other construction escrow procedures. Owners can require a contractor to obtain signed mechanic’s lien releases from all subcontractors on a project for work performed and materials provided, acknowledging that they have been paid in full or for a specified portion of the work. The general contractor can be contractually obligated to provide subcontractor lien releases to the owner upon completion of the subcontractor’s work or a portion thereof, and, in either case, this will provide some assurance that payment was made and protect owners from subcontractor mechanic’s lien claims.

Subcontractors:

Likewise, subcontractors who have not received payment from the general contractor, should consult with an experienced Maryland mechanics’ lien attorney to discuss strategies for ensuring payment, especially on financially challenged projects. One of the best strategies to ensure payment is for the subcontractor to assert a valid mechanics lien claim against the owner’s property. In the case of a single-family dwelling construction project, subcontractors who have not been timely paid must consider serving notice of intent to file mechanics lien on the owner as soon as possible so that notice is received before the owner pays the general contractor in full.

Note About Spelling of Term “Mechanics”:

The Maryland and Washington, D.C. Mechanics’ Lien Acts spell the term “mechanics lien” differently by placement of an apostrophe in the word “mechanics:”

• “Mechanic’s lien” (apostrophe before the “s”) is the spelling used in the Washington, D.C. Mechanics’ Lien Act in the Code of the District of Columbia 40–301.01 et seq.
• “Mechanics’ lien” (apostrophe after the “s”) is the spelling used in the Maryland Mechanics’ Lien Act in the Annotated Code of Maryland, Real Property Article 9-101 et seq. and Maryland Rule 12-301 et seq.

For the sake of consistency, the spelling adopted by Maryland (“mechanics’ lien”) is generally used herein.

WASHINGTON DC MECHANICS’ LIEN ATTORNEYS

MARYLAND MECHANICS’ LIEN ATTORNEYS

CONSTRUCTION LAW ATTORNEYS

Washington, D.C. and Maryland

Cowie Law Group, P.C. Law is a construction law firm practicing construction and real estate law throughout the State of Maryland and Washington, D.C. We handle construction industry performance and payment disputes, including Maryland mechanics’ lien claims and Washington, D.C. mechanic’s lien claims for owners, general contractors, design, professionals, subcontractors, and material suppliers. Law Partner George A. Bealefeld III is the Author of the Lexis Maryland Mechanics’ Lien Law Practical Guidance® Practice Note. Contact Cowie Law Group to speak with a Maryland or Washington DC mechanics’ lien attorney.