Mechanic’s Lien Act – Amendments
In the March 2012 issue of this newsletter I addressed the Illinois Supreme Court’s decision in the case known as Cypress Creek. This is the decision that stood on its head the concept of enhancement when there are competing liens of a prior mortgage and mechanics lien claimants. In Cypress Creek the majority of the Court held that if construction disbursements are used to pay for lienable work the lender is subrogated and has equal priority to an enhancement claim under section 16 of the Mechanic’s Lien Act. As I advised in the March issue this decision adversely affected a mechanic’s lien claimant faced with an enhancement situation since it would dilute the lien claimants percentage of any sale proceeds.
Legislation was introduced to overturn the Cypress Creek decision. I am pleased to report that this legislation was passed and signed into law by our Governor on February 11, 2013. The law takes effect immediately. The bill passed with the minimum number of votes for passage, 60. There were 44 votes against and 9 present votes.
The passage of this legislation and enactment into law is important because it restores the concept of enhancement as set forth in Section 16 of the mechanic’s lien act. Section 16 as amended now clearly provides that a prior mortgage holder is only preferred as to the value of the land at the time the contract is made and shall not be preferred to the value of any subsequent improvements. Further Section 16 as amended provides that each mechanic’s lien claimant is to be preferred to the value of all subsequent improvements whether or not they were provided by the lien claimant.
In my opinion these amendments regarding enhancement were essential to level the playing field once again. I doubt if restoring the concept of enhancement is going to stop construction lending as some in the banking industry have predicted. While it may cause lenders to more carefully scrutinize their risk and take precautions to better protect their interests, that is a good thing. Certainly a lender is in a much better position to protect itself then those in the construction industry such as subcontractors, material suppliers, architects and engineers who are most times removed from the credit risk analysis process. After the Supreme Court’s decision in Cypress Creek I read in several trade articles about dire situations where contractors lost several hundreds of thousands of dollars in enhancement situations and several were forced into bankruptcy. These unfortunate situations should no longer occur and those who have provided value to the property will now be better able to recover for their work when a project runs into financial difficulty or goes bust.
The bill that dealt with enhancement also made another amendment to the Act. Section 34 allows an owner to serve on a mechanic’s lien claimant a notice to proceed to file suit and if not done in thirty days the lien is lost. The notice that is given must now provide a warning. It has to contain the following language in at least 10 point bold face type: Failure to respond to this notice within 30 days after receipt, as required by Section 34 of the Mechanic’s Lien Act, shall result in the forfeiture of the referenced lien.
Another amendment to the Mechanic’s Lien Act took effect on January 1, 2013. In response to the slowdown in our economy especially with regard to commercial projects which are often started but then stopped and put on hold Section 6 of the Act has been amended to state that a claimant can still have a lien so long as the work is done or material furnished within 3 years from the time it is commenced as to owner-occupied residential property and within 5 years as to any other type of property.
While the amendment to Section 6 is not as dramatic as the amendment overturning the Cypress Creek decision it is still important and a benefit to those of you in the construction industry. If you have any questions as to how these amendments might affect any situations you are confronting give me a call or send me an email and I will be happy to respond.