An Alternative Lien Remedy for Residential Contractors.
You may have heard of a “constitutional lien,” which is an entirely different animal than a mechanic’s lien. Constitutional liens can come into play on a residential projects when the homeowner doesn’t pay the prime contractor but the prime contractor doesn’t have a valid mechanic’s lien for some reason (e.g. failure to provide preliminary notice to the owner, failure to timely serve and file a mechanic’s lien statement, or failure to start a foreclosure lawsuit within the time required by law).
Without lien rights of some kind, the prime contractor might have a valid claim against the homeowner but no means of forcing a sale of the improved real estate to pay the claim due to Minnesota’s homestead exemption. Minnesota’s homestead exemption is spelled out at Minn. Stat. § 510.01, which says:
The house owned and occupied by a debtor as the debtor’s dwelling place, together with the land upon which it is situated to the amount of area and value hereinafter limited and defined, shall constitute the homestead of such debtor and the debtor’s family, and be exempt from seizure or sale under legal process on account of any debt not lawfully charged thereon in writing, except such as are incurred for work or materials furnished in the construction, repair, or improvement of such homestead, or for services performed by laborers . . . .
There are some limitations on the exemption. The exemption can’t exceed 160 acres or $390,000 ($975,000 if used for agricultural purposes)*. But many homes fall well within these acreage and market value caps and are completely protected from creditors’ claims. Larger, more valuable parcels may be partially exempt. Fortunately, § 510.01 specifically says that the exemption does not protect a homestead from claims for work or materials furnished in the construction, repair or improvement of the property. For a prime contractor pursuing collection from a homeowner with empty pockets, establishing a constitutional lien may be the only way of getting paid if the contractor doesn’t have a valid mechanic’s lien claim.
So why bother going through the hassle of filing a mechanic’s lien if a constitutional lien is another option? There are some very good reasons:
- A constitutional lien is a remedy available only to someone who had contract directly with the property owner. It is not available to subcontractors or suppliers since they didn’t have a contract with the owner.
- A constitutional lien is more limited than a mechanic’s lien in that it does not automatically spring to life like a mechanic’s lien claim; It can only be established after a lawsuit is started to enforce a claim for payment since the claimant must get a court order establishing the constitutional lien. Because of this delay in establishing a constitutional lien, it might be junior to competing secured claims like mortgages, mechanic’s liens, or judgment liens that attached to the property before the constitutional lien is established in court.
- Under Minnesota’s mechanic’s lien law, a court can award attorneys’ fees to a successful lien claimant, which can be included in the amount of the mechanic’s lien. Attorneys’ fees might not be included in a constitutional lien.
Despite these limitations, a prime contractor should at least be aware that a constitutional lien is another means of getting around the owner’s homestead exemption if the prime contractor’s lien rights have expired or the lien is defective for some reason.
*Minn. Stat. § 510.02. The dollar amount of the homestead exemption is scheduled to change in 2016.