In A Nutshell
- When final payment becomes due, the contractor must provide the owner the Contractor's Final Payment Affidavit listing all lienors who have not been paid in full.
- The owner must not pay the final payment until he receives the Final Affidavit.
- When final payment is due and the owner fails to withhold for monies owed to lienors, the property will be subject to the full amount of all valid liens of which the owner has notice.
- If the Affidavit states that all lienors have been paid, and if all lienors who have served a Notice to Owner have also provided a Release of Lien, and if you have no reason to believe that there are lienors who have not been paid but should be, then you should be able to make the final payment to your contractor with confidence. Otherwise …
- Laborers, and lienors who have given Notice to Owner, are required to be paid directly by the owner.
- Lienors listed in the Contractor Final Payment Affidavit not giving notice, but whose 45-day notice time has not expired, must be paid directly by the owner.
- It is the responsibility of the owner to make direct payment to those who have a right to payment after giving notice to the contractor that he intends to do so.
- A lienor who has not given Notice to Owner and whose Notice time has expired has no right to payment from the owner.
- If the payment due your contractor is not sufficient to pay all of the lienors who have served Notice and those still in the time period for doing so, the law requires pro rata payments to the different classes of lienors in a specified order.
- If you are faced with these direct payment issues, it is time to consult an attorney with thorough knowledge of Construction Lien Law.
- Before making final payment you should make certain that all inspections have been completed and if appropriate a Certificate of Completion or Occupancy is issued.
If you have received the Contractor's Final Payment Affidavit and
- The Affidavit indicates that all lienors have been paid in full and
- All lienors that have served you a Notice to Owner have also provided you a Release of Lien and
- You don’t believe that there is any lienor out there who has not been paid and is still in the time period for serving a Notice to Owner and
- Your Notice of Commencement is still current and valid -
Then you should be able to make the final payment to your contractor with confidence.
But if all of these conditions have not been met, you must follow the Construction Lien Law and make proper payments yourself directly to the lienors in order to defend against valid lien claims and to avoid paying twice for some aspects of the project. If this is the case then go right to the subsection below titled Consult an Attorney, because you should not make a final payment to your contractor and you should not be unguided in the final unwinding of your construction project.
If you feel ready to make the final payment to your contractor you should review your Journal and the remainder of all sections presented on the website first, but it is particularly important to read the subsection Before Making Final Payment found below.
Before Making Final Payment:
Before making final payment to your contractor:
- You are obligated by law to make certain that all lienors who have served you a Notice to Owner, and those who are still in the allowable time to do so, have been paid and you have the Final Release of Lien documents. A review of your Journal might assure you that you have final documents for everyone.
- All necessary final inspections should be complete; permits have been finalized and signed off on by the local building inspectors.
- If a Certificate of Completion or Occupancy is necessary make sure that you have received it. This will come from your local building department, call them if you are uncertain as to whether your project requires these certificates.
- Do a walk through inspection with your contractor. You might want to confirm that all items requiring attention have been taken care of. You can refer to our downloadable form titled Walk-Through/Inspection Punch List for guidance.
If you have issues that cause you to have to make direct payments to lienors and not to your contractor you should ...
Consult an Attorney:
If you are faced with having to pay lienors directly you should seek professional help with a lawyer who is experienced in Construction Lien Law. The following discussion will give you an understanding of what is expected of an owner and how to conform to the law, but it is not a substitute for professional legal advice.
Final Payment Affidavit:
We discussed the Contractor's Payment Affidavit in a prior section. It is a sworn statement made by your contractor which either states that all lienors have been paid, or if not, lists any lienors who have monies due them and the amounts that are owed.
At the time that the final payment on the contract becomes payable, your contractor is obligated to provide the Contractor's Final Payment Affidavit. He or she can have no lien, or right of action, against the owner while in default for not giving the owner the Affidavit.
You shouldn’t have to request the final Affidavit as you might for progress payments; it is his/her obligation under the Construction Lien Laws to provide it. If your contractor does not furnish it, your attorney will more than likely demand in writing that she or he does so.
Most importantly, under the statute requirements you must not make a final payment to the contractor until you receive this document. If you do, it is considered an “Improper Payment” and “the property improved shall be subject to the full amount of all valid liens of which the owner has notice at the time the contractor furnishes his or her affidavit.” That is directly from the statutes and it means that you could pay more than once for the improvements if the contractor or subcontractor fails to pay those who have valid liens.
The owner can rely on the Contractor's Final Payment Affidavit in making the final payment unless there are lienors who have given Notice to Owner and are not listed in the Affidavit. If there are lienors giving Notice who are not listed, the owner should pay those lienors directly. This is a “Proper Payment”.
Notice of Intent to Pay:
At least ten days prior to making direct payments the owner is required to inform the contractor that he intends to do so. The owner should list who he will pay and the amount of the payment. Your attorney will take care of serving this notice on your contractor.
Who to Pay – When There is Enough to Pay Everyone in Full:
If there is enough money left on the contract to pay everyone in full then pay:
- Outstanding bills from laborers and other lienors who provide services or materials and who are listed on the Final Affidavit;
- Other lienors who have sent you a Notice to Owner and from whom you have not received a Final Release of Lien – whether they appear on the affidavit or not;
- And those lienors listed in the affidavit, not giving Notice but whose 45 day notice time has not expired
You should then deduct these payments from the balance due the contractor.
Do not pay any lienor, listed or otherwise, who didn’t give Notice to Owner and whose 45-day notice time has expired. These people will have to be paid, or not, from those persons with whom they had a direct contract.
Never make a payment to any person or company without obtaining a Release of Lien.
Who and How to Pay – When There is Not Enough to Pay Everyone in Full:
If the balance due on the final payment is not enough to pay in full those lienors listed in the Affidavit and other lienors who have given Notice to Owner, the owner shall pay no money to anyone until the contractor has furnished him or her with the difference. More than likely your attorney will send a demand to your contractor for additional money.
The contractor has 10 days from delivery of the Final Affidavit or the owner’s request for a Final Affidavit, to provide the additional money needed. If the contractor fails to provide the additional funds then the owner should make payment to those lienors in the manner described below in the sub-heading Proration of Payment.
Before paying any money directly to any lienor except any laborer, the owner shall give the contractor at least 10 days' written notice of his or her intention to do so, and the amount he or she proposes to pay each lienor. See the section above – Notice of Intent to Pay.
Never ever make a payment to any person with out obtaining a Release of Lien. I know that we are repeating this here, but it is very important and worth repeating.
Proration of Payment:
If you reach this point, where you have to pro rate payments to non-privity lienors, you should already be in touch with an attorney who has experience in Construction Lien Law and do this proration with his guidance and concurrence. The following is how the payments will be made in conformance with the statutes.
When the payment due is not sufficient to pay all bills of lienors, the owner shall prorate the amount then due under the contract among the lienors pro rata. Lienors receiving money shall execute partial Releases of Lien to the extent of the payment received.
Pro Rata Payments should be calculated as follows:
Make payments in the following order to the “class” of lien listed–
- Liens of all laborers
- Liens of all persons other than he contractor
- Lien of the contractor
Pay all liens in a class in their full amounts before any amounts shall be paid to any subsequent class. From the available funds pay all laborers in full first before you make any payments to the lienors in class 2 or to the contractor who is in class 3.
Should the amount available for payment be insufficient to permit all liens within that class be paid their full amounts, each lien shall be paid for its pro rata share of the total amount applicable to liens of that class.
A payment is due to your contractor based on the terms of the contract. It could be either a final or progress payment and it totals $20,000.
There are four laborers who have worked on the job, hired by the general contractor who have not been paid and are owed a total of $4,000. They are listed on the Contractor’s Payment Affidavit as due the money and the amount due is confirmed by the laborers.
In addition to the laborers there are five subcontractors and two material suppliers who are owed a total of $26,000. as follows:
|Air Condition & Heating||3,000|
|Drywall Installer & Finisher||2,500|
|Air Condition Supplier||3,500|
With $4,000 due the laborers and $26,000 due to the other lienors the total due is $30,000. The amount due on the contract is only $20,000 and that leaves you $10,000 short to pay everyone.
If this is the final payment your contractor has 10 days from providing you with the Final Payment Affidavit (or your demand that he provide the Affidavit) to furnish enough money to make up the difference between what is due to lienors and what is left to pay on the contract. If he provides the additional money that is great, pay everyone, but if he fails to do this you then make direct payments on a pro rata basis.
First things first – determine who must be paid.
The laborers did not serve a Notice to Owner but they are not required to. They are listed on the Contractor’s Payment Affidavit and everyone agrees to the amount that is due to them. They are in the first “class” of lienors and if there is enough money to pay them in full that is what you are supposed to do. So $4,000 of the $20,000 available is set aside for the laborers - leaving only $16,000 to satisfy the remaining $26,000 in claims.
The Plumber and the Electrician are listed on the Contractor’s Payment Affidavit as due money and they have also served a Notice to Owner. You are obligated to pay them at least something.
For some reason the Drywall subcontractor is not listed on the Affidavit that the contractor gave you but you did receive a Notice to Owner from him. You had asked for a Release of Lien for this subcontractor from your contractor and he has never gotten it for you. You found out that he is still owed money because he responded to the Demand for Sworn Statement of Account that you served him and you contacted him again to make certain that he still has not been paid. If you received a Notice, whether or not he appears on the Affidavit, you are obliged to pay him something, if not in full than at least something.
The Air Conditioning contractor appears on the Contractor’s Payment Affidavit, has not served a Notice to Owner but is still within the allowed time period (45 days from first furnishing his labor or service) to do so. You have to pay him something because he is still in the time period for serving a Notice to Owner.
The Mason appears on the Affidavit but has not served a Notice to Owner and he is 50 days out from his first day of work on the project. He is out of the time period for serving a proper Notice to Owner and you can not pay him. He will have to look to the contractor for payment. He will not be able to lien your property to recover what is due him.
Both the suppliers of Air Conditioning equipment and Plumbing supplies have served you a Notice to Owner and neither of them appear on the contractor Affidavit. It doesn’t matter that they don’t appear, because they served the Notice they need to be paid.
You send a Ten Day Notice of Intent to Pay to your contractor, telling him who you intend to pay and how much. The Ten Day Notice of Intent to Pay is required for the “Final Payment” on a contract, but your attorney may want to do it this way for “Progress Payments” too. Ten days after sending this Notification you can start paying out the balance of money to the lienors.
Make payments directly to the laborers for the $4,000 due them making certain that you receive a Final Release of Lien from them when you give them the money. You need to pro rate the remaining $16,000 to the following lienors based upon each ones relative share of the total due (remember the Mason doesn't get any money - he never filed a Notice to Owner and was out of time to do so), multiplied by the $16,000 as follows:
|Amount Due||% of Total Due||Amount to Pay|
|Air Condition and Heating||3,000||12.5%||2,000|
|Drywall installer and finisher||2,500||10.4%||1,667|
|Air Conditioning Supplier||3,500||14.6%||2,333|
Never ever make a payment to any person without obtaining a Release of Lien.
Never make a payment to any person other than your prime contractor without consulting an attorney skilled in Construction Lien Law.
Next: The next section in the program is Terminate Notice of Commencement
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