How to Avoid Liens and Judgements

If you would like to know how to avoid liens and judgements on your property, this article is for you.

Commercial real estate is increasingly considered a safe haven investment, but it can also become a risky venture. We’re not talking about volatility and unpredictable returns—exposure to liability is the real concern here. Properties ensnared by legal claims can easily be encumbered, preventing you from exercising your full rights. Dealing with an encumbrance can mean major headaches, including exorbitant costs or even forced property sales. So how do you protect your investment?

There are two likely scenarios in which a claim against your real estate property may occur. First, you could suffer a judgment. This may result from your status as an owner. Someone could be injured on the premises, or the property could be seized to satisfy a judgment from an unrelated incident, such as an automobile accident.

Liability insurance is an obvious option, but often suffers from high costs and coverage limitations. Wise investors search for ways to insulate themselves from liability. One of the best defenses is to hold your property in an LLC, which provides protection from personal liability. Members of an LLC cannot be named personally in a suit against that entity.

Liens are also an important liability to be aware of. If someone who has done work on your house has not been paid for services rendered, you may find your real estate attached by a construction or mechanics’ lien. A long list of laborers and professionals, from contractors and material suppliers to architects and interior designers, all have a right to file a claim of lien for work or materials. Most often it’s a subcontractor or supplier who has not been paid by the general contractor. When such circumstances occur, you could be on the hook.

There are a few fundamental preventive measures that can substantially safeguard your property. The first step in avoiding unpleasant surprises is knowing exactly who is working on your property. Have your general contractor provide a detailed cost breakdown of the work to be performed. Each task should be listed, along with the expected cost and most importantly all the subcontractors and suppliers with whom the general has a contract. This breakdown will enable you to monitor costs and know the identity of all the parties who need to be paid.

Watch those checks. Don’t simply issue them to your contractor. Either pay your subcontractors and suppliers directly, or issue the check in the names of both the general and the sub, so that both will have to sign off.

Get a release. Perhaps the most important single measure you can take is to obtain a release of lien from anyone who does work for you. Before any money leaves your hands, go down the list your contractor provided and make sure you have a release from everyone you are paying. If you’re making partial payments, it can be a partial release. Before final payment is made, get another list from the general contractor detailing anyone who has not yet been paid. Do not make that final payment before you have releases from everybody on the list.

Adopt the rule. No check goes out without a release of lien. Liens are creatures of state law, and many states and localities offer information about how to avoid them. Be sure to check with the appropriate state agency, such as the construction licensing board. Read the fine print on your contract. Many states require that construction contracts provide information about how to prevent liens. Work closely with your CPA to adopt the best specific preventive measures before you expose yourself to potential liability.

To fully understand how these laws may be relevant to your bottom line, and for more information on how to avoid liens and judgements on your commercial real estate investment, please contact Larry Wood, CPA/CFP and Partner at DZH Phillips, one of the most competent and prestigious accounting firms on the west coast. Larry brings a wide breadth of experience to the table, with a particular emphasis on real estate and income tax planning. Click here to contact him to discuss your specific needs, or email him directly at LWood@Dzhphillips.com.