Jon David W. Huffman's Legal Blog

Saturday, October 19, 2013

Contractor's Liens - Part 1

Contractor’s Liens – Part 1

This article was first published in the September, 2013 edition of The Profit published by the Atlanta Real Estate Investor Alliance.

In this article, I begin a two-part discussion about contractor’s liens. Under Georgia law, these liens are called mechanic’s and materialmen’s liens. I call them contractor’s liens for simplicity because these liens apply to a broad array of contractors including laborers, professionals and traditional subcontractors.

Contractor’s liens were first introduced into the United States during the formation of Washington D.C. by Thomas Jefferson to encourage construction of the new capital city. Thereafter, contractor’s liens were slowly adopted throughout the country to give contractors an additional remedy upon nonpayment. The policy behind contractor’s liens is simple. Owners are reluctant to pay for construction work before the work is completed. That work, once performed, is impractical to repossess. Therefore, contractor’s liens were created by law to give contractors additional leverage. Today, contractor’s liens are a powerful tool.

It is important to distinguish between the right to lien and the right to sue. Any unpaid contractor (or anyone else) has the right to sue for an amount owed. However, the law grants contractors an additional right to place a lien on the property in which they have delivered goods, labor or services. A contractor wants to file a lien when he is unpaid because it gives him an advantage on collection and leverage in negotiation. After all, an owner cannot generally sell property without satisfying all lien holders.[1]

A variety of unpaid contractors can file a lien. This includes providers of materials including traditional construction materials, tools, appliances, machinery or equipment.[2] It also includes engineers, architects, land surveyors and other development and construction professionals. Finally, it includes all those who provide labor and, of course, any combination of the above.

Contractors have a right to file a lien against the property they have performed the work on or provided the materials to. This is true regardless of whether the provider of materials or services is in contract directly with the owner of the property. Therefore, subcontractors can file a lien against the property they delivered goods or services to.

If a contractor wishes to file a lien, he must follow a strict statutory procedure and do so within ninety days after the substantial completion of work, the furnishing of professional services, or the date the materials are delivered.[3] The contractor also has to comply with the law precisely in regards to notice and form of the lien. Failure to comply with the requirements exactly voids the lien. If the lien does not produce a payment or settlement quickly, the contractor must file suit within one year to preserve his lien and its priority. In next month’s article, I will discuss these requirements in more detail.

Any contractor wishing to file a lien against a property should retain an attorney with experience in this area. One technical mistake will lead to an unenforceable lien. It could also lead to liability against the contractor for slander of title, among other things. Any owner who has had a lien filed against his property should contact an attorney to review it and see if it is enforceable. Many are not.

Disclaimer: The information contained in this article is for informational purposes only and is not legal advice or a substitute for legal counsel. It does not constitute advertising or solicitation. The information in this article may or may not reflect the most current legal developments; accordingly, this article is not guaranteed to be complete, and should not be considered an indication of future results.

[1] One notable exception to this rule is that an owner may post a bond instead of paying a contractor’s lien and thus sell his property. See O.C.G.A. § 44-14-364.

[2] O.C.G.A. § 44-14-360(4).

[3] O.C.G.A. § 44-14-361.1(2).

Monday, September 23, 2013

Commercial Real Estate Broker’s Liens

This article was first published on August 1, 2013 in The Profit published by the Atlanta Real Estate Investor Alliance.

I am consistently asked about liens. Who can file a lien? How can I file one? What are my rights? These are all common questions I hear from real estate brokers, contractors, landlords and others. For the next few months, I will discuss different industries that have the right to file a lien against real estate. In all these industries, the right to lien arises when services or goods provided go unpaid. I will also briefly outline the legal process for perfecting these liens and the necessary next steps. To begin, I discuss real estate broker’s liens, specifically commercial real estate brokers and the Commercial Real Estate Broker Lien Act.[1]

Licensed commercial real estate brokers have the right to file a lien for services rendered, which are not paid. There is no lien statute for residential real estate brokers. Commercial brokers have the right to file a lien for virtually all compensation that has been agreed to. This includes commissions and compensation for sales, leasing, property management, consulting services and auctions.

Commercial brokers have the right to file a lien against commercial property only. Commercial property is defined as all real estate other than: (1) “real estate containing one to four residential units;” (2) vacant land which “is not zoned for nor available for commercial, multifamily, or retail use;” or (3) agricultural land.[2] Again, there is no right for a real estate broker to file a lien against residential real estate.

Commercial brokers must file a lien within ninety days or the broker waives his right to file. The ninety-day clock commences at different points for different transactions. For instance, when a broker is to be paid in a lump sum, then the clock begins upon closing of the sale or when a tenant takes possession under a lease. If the broker is to be paid in installments, then the ninety-day clock begins when the debtor misses the first payment.

The purpose of filing a lien, from the broker’s perspective, is to secure payment and hopefully, accelerate it. However, if a lien does not produce a quick settlement, then a broker must file suit to protect its position. This must happen within either six months or one year, depending upon the transaction. The general timeframe is six months for leases and options to purchase and, for all other matters, one year. The good news is that the law allows for recovery of expenses and legal fees for brokers if they prevail in their suit.[3]

Filing a commercial broker’s real estate lien is something that should be done with caution and by an attorney with experience in this area. An inappropriate or improper filing could lead to an unenforceable lien. It also could lead to liability against the commercial broker for slander of title, among other things.

[1] O.C.G.A. § 44-14-600 et seq.

[2] O.C.G.A. § 44-14-601(3).

[3] O.C.G.A. § 44-14-602(k).

Wednesday, June 5, 2013

Worried about Collecting on a Judgment against your Tenant? Don’t Stress, Distress!

When a tenant is in default, many landlords face a common question: whether pursuing their tenant for a money judgment is worth the extra time and expense. All experienced landlords know that they can quickly evict a tenant. However, the extra effort to obtain a money judgment[1] and even more effort to collect on that judgment may or may not be worth it. In some situations, a distress warrant may solve this dilemma.

Many landlords and property managers may have performed dozens of evictions, but may have never heard of a distress warrant. A distress warrant is an accelerated proceeding by a landlord against a tenant to seize the tenant’s leviable property to satisfy rents owed. Leviable property includes equipment, furniture, machinery – and as one sheriff once reminded me, cows. This would not include property subject to the process of garnishment, such as bank accounts or wages.

The legal background of a distress warrant begins with the concept that every landlord has a lien against the leviable property of his tenant.[2] The way to enforce this lien is through a distress warrant. The process is not extremely complicated, but is riddled with technical requirements and pitfalls for the inexperienced. Unlike the eviction process, which many non-attorneys pursue successfully, I do not recommend that a non-attorney attempt a distress warrant proceeding. Let us now discuss some advantages and disadvantages of a distress warrant.

Advantages

The obvious advantage of a distress warrant is the opportunity to seize the defaulted tenant’s property in order to collect past due rent. Also, the proceeding is quick. The court is required to schedule a hearing within five to seven days of service.[3] At that hearing, the court is obliged to issue a distress warrant (i.e. a command to the sheriff to seize the tenant’s property) if the tenant does not pay what he admits is owed or post a bond.[4]

Disadvantages

First, the distress warrant procedure is a separate and distinct procedure from a dispossessory (eviction) action. Therefore, anyone who wishes to both seize their tenant’s property and evict them must file two actions.

Second, for due process reasons, before a distress warrant can issue, the tenant must have both notice and a hearing before he loses possession of his property.[5] Although the law explicitly commands the tenant not to “convey, remove, or conceal his property” without posting a bond or paying the undisputed rent into the court, this requirement may be ignored by the tenant.[6] This renders the action impractical in some situations.

Finally, because these actions have decreased in their popularity, many courts and especially the clerk’s office may be unfamiliar with the legal process. In my experience, an attorney is needed just to navigate the filing process.

Because of these disadvantages, a distress warrant is most practical in commercial or high-rent residential situations. However, even with the above disadvantages, a distress warrant is a unique and often successful way for landlords to collect on past due rent. Next time you have a tenant in default explore this possibility with your attorney.

[1] The most notable extra effort is the requirement of personal service, as opposed to, tack and mail service only.

[2] See O.C.G.A. § 44-14-341.

[3] O.C.G.A. § 44-7-72.

[4] O.C.G.A. § 44-7-75.

[5] Blocker v. Blackburn, 228 Ga. 285, 185 S.E.2d 56 (1971).

[6] See O.C.G.A. § 44-7-75(d).

Thursday, May 16, 2013

Understanding Lender Options Upon Real Estate Loan Default, Part 2 of 2

This article was first published on March 26, 2013 in The Profit published by the Atlanta Real Estate Investor Alliance.

Last month I began this two-part article on the options and procedures that lenders may take when a borrower defaults on their real estate loan. Understanding this process is important to real estate professionals whether they are lenders, borrowers, agents or investors attempting to buy or manage property during the default process.

When a borrower defaults on his loan, most often by failing to make the monthly payments, the lender has several options. Although not exhaustive nor mutually exclusive, these options include foreclosure, filing suit, self-help repossession or requesting that the court appoint a receiver to manage the property.

The two most popular options differ in their order: lenders can foreclose first or file a lawsuit first. Therefore, the lender gets to choose its starting point: (1) foreclose first and then sue, or (2) sue first and then foreclose. The order is important and it is significant to remember that the second step in either option is at the lender’s discretion. Last month I addressed the first and most popular option for residential loans. In this article, I will discuss the second option.

2. Sue First and Then Foreclose (if you want)

The second most popular option by lenders is what I have entitled the “sue first and then foreclose (if you want)” process. This process is very popular in commercial loan defaults. Some may even argue that this is the lender’s first choice in a commercial context. An example is the best way to illustrate this.

Rob borrows $5,000,000 to buy a small commercial property. After his purchase, the market declines leaving his commercial property valued at $3,000,000. Rob’s best tenant, who was occupying 60% of the space, goes out of business. Therefore, Rob is unable to make his mortgage payments. Predictably, the bank sends a demand for payment. When Rob fails to pay, instead of foreclosing, the bank files a lawsuit.

In a lawsuit like the example above, a bank will easily prevail. After winning the lawsuit, the court will enter a judgment for $5,000,000+ against Rob. If Rob does not pay the judgment, the bank has collection options like any other judgment holder. It can, among other things, garnish wages, garnish bank accounts, seize Rob’s business holdings, take his personal property or seize any of Rob’s real estate holdings, including the property in our example. The bank does not have to pursue the property that the loan was borrowed against, but it may.

The “sue first and then foreclose (if you want)” option gives banks more options and, in turn, generally applies more pressure to their borrowers. This option also does not require the bank to go through the costly and unpredictable confirmation process that was discussed in last month’s article. In today’s market, many banks are selecting this option when their borrowers default. For banks and borrowers, these disputes often wind up as a complex game of negotiating. Any bank or borrower in this situation should hire an attorney with experience to help them navigate these tumultuous waters.

Understanding Lender Options Upon Real Estate Loan Default, Part 1 of 2

This article was first published on March 1, 2013 in The Profit published by the Atlanta Real Estate Investor Alliance.

Recently, I was asked to describe the options and procedures that lenders may take when a borrower defaults on their real estate loan. Understanding this process is vital to real estate professionals whether they are lenders, borrowers, agents or investors attempting to buy or manage property during the default process.

The two most popular options differ in their order: lenders can foreclose first or file a lawsuit first. Therefore, the lender gets to choose its remedy: (1) foreclose first and then sue, or (2) sue first and then foreclose. The order is important and it is significant to remember that the second step in either option is at the lender’s discretion. This article only addresses the first and most popular option. Next month, the second option will be discussed.

1. Foreclose First and Then Sue

The first and most popular option by lenders is what I have entitled the foreclose-confirm-sue process. The name describes the exact steps a lender takes.

For example, Becky borrows $100,000 to buy her house. Afterwards, the market declines leaving her house valued at $60,000. Becky is unable to make her payments. So, the bank begins the foreclosure process. In order to do this, the bank sends Becky all the required notices and advertises in the newspaper for four consecutive weeks. On the first Tuesday of the month after the advertisement has run, Becky’s house is sold on the courthouse steps for $60,000 – its market value. Most real estate professionals understand this process. However, many may not understand what can happen next. In other words, what happens to the $40,000 deficiency?

If the lender desires, it can pursue the $40,000 deficiency. In order to do so, the lender must follow a two step process: confirm and sue. First, the lender must apply to the court to confirm the foreclosure sale. This confirmation hearing must be requested within 30 days of the foreclosure sale. The purpose of this judicial hearing is to determine the fair market value of the property and both the lender and borrower are allowed to present evidence. Once the court has determined the fair market value, it issues an order of confirmation. This then allows the lender to, secondly, sue Becky for the $40,000 deficiency.

Because of this double judicial procedure and the likelihood that many judgments of this nature are uncollectable, lenders rarely pursue a deficiency action against residential borrowers. Commercial borrowers are another story. In today’s market, commercial lenders are pursuing deficiency actions with vigor.

This article only addresses the most popular option: foreclose first. Next month, I will address the second option: suing first and then foreclosing. The second option is becoming increasingly popular in commercial loan defaults; the first is almost universally the choice of residential lenders.

Wrongful Foreclosure

This article was first published on May 1, 2013 in The Profit published by the Atlanta Real Estate Investor Alliance.

Over the last couple of months, I have described some of the options lenders have when borrowers default on a real estate loan. In this article, I will discuss borrower’s rights and lender’s obligations when lenders foreclose upon mortgaged real estate.

If the loan documents are drafted properly, lenders have the right to foreclose without a court order when their borrower defaults on their mortgage. However, lenders must foreclose legally. Failure to provide proper notice and follow the legal procedures can lead to an illegal foreclosure. If a lender breaks the law and forecloses illegally, then borrowers can sue the lender for “wrongful foreclosure.”

In today’s market, I am often asked about “illegal foreclosures.”   The stories in this area are many and everyone appears to have heard of someone’s aunt or cousin whose mortgage was “forgiven” because of an illegal act by a lender. The truth is that lenders very rarely make the types of errors that allow for complete forgiveness of the debt. Most often the errors lenders make are technical and can be remedied. Sometimes however, lenders do foreclose in an illegal manner and this can lead to liability for wrongful foreclosure. Let me discuss a few rights of borrowers that are more commonly violated:

First, borrowers are entitled to a notice of default and notice of the lender’s intent to foreclose. While the loan documents may provide additional rights, the law requires lenders to give at least a thirty-day notice prior to foreclosure. O.C.G.A. § 44-14-162.2. Be mindful, however, that the notice only has to be sent to the borrower, not received.

Second, borrowers have the right to receive this notice from the “secured creditor” at the time of the notice. This is an interesting requirement. As many are aware, lenders often sell and pledge mortgages for various business reasons. In doing so, lenders are required to file document(s)[1] in the court records to provide notice as to the ownership of the mortgage. In order to comply with the law, the foreclosure notice must come from the secured creditor (the owner) at the time the notice is sent. Additionally, it must include contact information for an individual that can discuss and/or negotiate the terms of the mortgage. O.C.G.A. § 44-14-162.2.

Third, lenders must file the transfer document(s) before the foreclosure sale takes place. O.C.G.A. § 44-14-162(b). In other words, the foreclosing party must be on record as being the owner of the mortgage.

Failure to follow these requirements can lead to lender liability for a wrongful foreclosure and, in some cases, intentional infliction of emotional distress. These claims carry liability often set by a jury for both compensatory and punitive damages. Lenders need good counsel to navigate the foreclosure process in order to protect their rights and to avoid any additional liability.

Disclaimer: The information contained in this article is for informational purposes only and is not legal advice or a substitute for legal counsel. It does not constitute advertising or solicitation. The information in this article may or may not reflect the most current legal developments; accordingly, this article is not guaranteed to be complete, and should not be considered an indication of future results.

[1] This document is most often called a Transfer and Assignment.

Friday, February 8, 2013

Caution Landlords: Accepting Money After Filing an Eviction Impacts Your Rights

Caution Landlords: Accepting Money After Filing an Eviction Impacts Your Rights

By: Attorney Jon David W. Huffman

As first published on February 1, 2013 in The Profit
by the Atlanta Real Estate Investor Alliance.

Landlords often have mixed emotions when their tenants call and offer them money after a dispossessory warrant (an eviction) has been filed. On one hand, landlords are in the business of collecting rent. However, they worry how it may affect moving forward with the eviction. Accepting a payment after an eviction is filed does affect your rights.

Residential Landlords

A residential landlord has a duty to accept a payment from a tenant who is in default if and only if the tenant tenders “all rents allegedly owed plus the cost of the [eviction].”[1] However, the tenant cannot wait until the last moment to do this. They must tender the full payment within seven days of the day they were served the eviction paperwork.[2] There is no need to worry about a tenant doing this perpetually because a landlord is only obligated to accept this type of payment once per year.[3] Making this payment provides a complete defense to the eviction and, upon receipt, a landlord should dismiss the eviction.

If a residential tenant offers a partial payment, however, BEWARE! A residential landlord who accepts a partial payment from a tenant after an eviction has been filed waives his right to continue with the eviction and admits the continuance of the lease.[4] In simple terms, the eviction fails and the landlord must start the eviction process over if he wishes to evict the tenant. It does not matter when the partial payment is made – whether one hour after the eviction is filed or five minutes before the eviction trial. Thus the landlord must either reject the partial payment or, if accepted, he must restart the eviction process.

Commercial Landlords

Perhaps unsurprisingly, the law on “non-residential” or commercial leases allows more freedom to contract.

A commercial tenant’s right to tender past due rent and the dispossessory fee can be contractually waived.[5] Indeed, in many commercial real estate leases, this right is waived. All commercial landlords should have an attorney review their lease to ensure that they have the right to regain possession of their property upon default without giving a tenant the right to pay the past due rent and dispossessory fees.

Following the freedom-to-contract principle, a commercial landlord can accept a partial payment without waiving his rights to evict. Under O.C.G.A. § 44-7-52(c), a commercial landlord is free to take a partial payment and continue the eviction process unhindered. Of course, any money received would offset the landlord’s damages. So commercial landlords, cash that check and keep on going!

[1] O.C.G.A. § 44-7-52(a).

[2] Id.

[3] Id.

[4] Gay v. American Oil Co., 115 Ga. App. 18, 153 S. E. 2d 612 (1967).

[5] Hardwick v. 3379 Peachtree, 184 Ga. App. 822, 824, 363 S.E.2d 31 (1987).