Illinois mortgage lenders, and probably owners as well, got a break from the Illinois Appellate Court (Court) when the Court issued its decision in Cordeck Sales Inc. v. Construction Systems, Inc, (Cordeck Sales) 2008 WL 919684 (1st Dist. Ill. App. Ct., March 31, 2008). That decision upended a commonly held assumption that a contractor 1) could record an initial mechanic’s lien claim during construction, 2) as work progressed, record amended mechanic’s lien claims, and 3) ultimately enforce all the mechanic’s lien claims against both the owner and any mortgage lender.
The Court in Cordeck Sales, however, interpreted Section 7 of the Illinois Mechanic’s Lien Act literally. Section 7 provides, “Such claim for lien may be filed at any time after the claimant’s contract is made … and as to such owner may be amended at any time before the final judgment.” (770 ILCS 60/7)
When a construction project gets into financial trouble, the contractor wants its lien claim to be enforceable against both the owner and the construction lender. The contractor also wants to use the mechanic’s lien process to obtain not just final payment, but also progress payments that pay monthly invoices in full, less any retention authorized by contract. When an owner becomes “slow pay,” or fails to pay progress payments in full, or fails to approve change orders, contractors often seek to protect themselves by recording a mechanic’s lien claim before the work ends. Then, as work progresses, the contractor may record amended lien claims to increase the amount of the lien to match the value of the additional work. Contractors hope the lien claims will 1) bring pressure to bear from the construction lender to force the owner to pay the contractor, or 2) force the owner to pay the contractor in order to eliminate the loan defaults invariably created by the lien claims.
As a result of the decision in Cordeck Sales, however, the only recorded lien claim that will be enforceable against the construction or other mortgage lender will be the first one. While subsequently recorded lien claims may be good against the owner, those amended lien claims will not be enforceable against “third-party encumbrancers” such as a construction mortgage lender.
Contractors must now exercise careful judgment when deciding whether to record a mechanic’s lien claim before completion of a construction project located in Illinois. The chance that a lien claim recorded during construction will hasten payment must be weighed against the certainty than an amended lien claim filed at the end of construction will not be enforceable against a mortgage lender. In most cases, the smart decision will be to delay recording any mechanic’s lien claim until the end of construction.
Owners should benefit from the decision in Cordeck Sales as well. Contractors will now be reluctant to record mechanic’s lien claims while construction is progressing, which means that owners of Illinois construction projects should have to deal with fewer mechanic’s lien claims recorded during construction as compared to those recorded at the completion of construction. Any owner who has had to negotiate with a construction lender about how to handle a mechanic’s lien recorded in the middle of a construction project will understand the value to owners of the Cordeck Sales decision.
Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information to our real estate clients and colleagues. If you have any questions about or would like to discuss this topic further, please contact your Foley attorney or any of the following individuals:
Elizabeth L. Corey, Chair
John D. Lien