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Indiana Changes Rules for No-Lien Contracts

Typical home construction projects usually involve numerous parties whose interests may, at times, conflict, including the property owner, the principal contractor, and the subcontractor. One conflict can arise when the property owner claims to have paid the principal contractor for the project, but a subcontractor claims that it never got paid and files a mechanic's lien on the property in the amount of the work performed. In situations where the property owner has in fact paid the principal contractor the full amount, the property owner could be required to pay twice, once to the principal contractor and again to the subcontractor to remove the title-encumbering mechanic's lien.

Until recently, property owners of all types had a relatively easy way to avoid exposure on mechanic's liens. Indiana statutes allowed them to enter into no-lien contracts with principal contractors. Such agreements waived the mechanic's lien rights of the principal contractor as well as all of the subcontractors on the job. As long as the no-lien agreement complied with the statutory formalities (which mandated that the detailed agreements be in writing and be properly recorded within five days of their execution), it would effectively bar mechanic's liens by all workers and material suppliers on the construction project.

However, the Indiana General Assembly recently amended the relevant statutory provisions, and greatly limited the situations in which parties may enter into no-lien contracts. Under the new laws, no-lien contracts are only permitted in two limited situations: (1) where the construction work is performed on a one- or two- dwelling structure (i.e., detached single family homes or duplexes); and (2) where the work is performed on real estate owned or used by certain utility companies. Thus, in a vast number of construction and improvement projects, such as commercial real estate and apartment and condominium buildings, no-lien contracts are void and unenforceable. This new statutory scheme became effective on July 1, 1999.

In addition to the partial ban on no-lien contracts, the General Assembly also enacted other legislation which significantly affects mechanic's liens. For example, there are new laws governing the time for filing a notice of intent to hold a mechanic's lien, the priority of liens and mortgages, the preconditions for recording and foreclosing on liens, and choice of law clauses in construction contracts.

If you are thinking about starting a construction project, be sure you understand and comply with Indiana's new mechanic's lien statutes. §