Changes needed in state’s construction law

By John Knier
LaForce Inc.

Wisconsin is regarded as one of the more progressive states with respect to construction law. The state’s construction lien law has several exemplary provisions that protect both the public and contractors.

For example, the law includes sections that prohibit certain harsh or one-sided clauses in construction contracts, require prime contractors to furnish performance and payment bonds on certain public projects and establish that misappropriation of construction funds constitutes theft. In addition, there are prompt payment protections related to public construction projects.

Given all of these positive provisions, one might say let good enough alone, but there are six common- sense changes that would greatly improve the state’s construction law.

• Statutory acknowledgment of conditional lien waivers. We need conditional lien waivers to be acknowledged in construction lien law. The law on lien waivers has not kept pace with current business practices in the industry. Under state law, any lien waiver document is valid whether or not consideration was paid to the contractor. This provision is unfair to contractors.
  
  In the past, it was common for contractors to exchange lien waiver documents for payments. This in-person exchange is no longer the case. Current business practices dictate that contractors provide an unconditional lien waiver to an owner or title company well in advance of receiving payment for work. In these cases, the contractor is essentially waiving lien rights in advance of payment and getting nothing in return.
  
  Several states recognize this inequity and have acknowledged two forms of lien waiver: First, a conditional lien waiver is provided by the contractor prior to receiving payment; and second, an unconditional lien waiver is provided by the contractor after receipt of payment.
  
  Essentially, the conditional lien waiver does not become effective until the contractor receives payment from the customer. This would bring the law in line with today’s business practices. Wisconsin should update its construction law in this respect.
  
  
• Attorneys’ fees to prevailing party. An attorney’s fee provision should be added to the construction lien law as it relates to private projects. When contractors enhance the value of someone’s property, they should be able to recover the enhanced value through their construction lien in the event that the customer does not pay for the work.
  
  But contractors typically recover only a portion of their cost because the current lien law does not require a liable owner to pay the contractor’s attorney fees. These fees can easily reach 30 percent of the contractor’s total claim.
  
  Some argue that contractors should negotiate an attorneys fees provision at the time of sale. However, it is well established in construction that, due to the great competitiveness of the industry, there is a wide disparity in bargaining power between contractors and their customers. The phenomenon occurs at both the owner-general contractor level and the general contractor-subcontractor level.
  
  Given this fact, most construction contracts are weighted heavily in favor of the buyer, and there is no realistic chance of the contractor negotiating an attorney fee clause with the buyer. Therefore, such a provision should be included in the lien law.
  
  
• Project classification rules for identification notice. The current classification rule is confusing and difficult for most contractors. As a result, sophisticated commercial building owners are regularly defeating contractors’ construction liens due to technicalities in the law.
  
  The law states that a contractor is not required to provide the owner with an identification notice if more than four family living units are provided or added for a residential project. That’s also the case if more than 10,000 useable square feet of floor space is provided or added on a partly or wholly nonresidential project. There has been much litigation over just what each word in this section means.
  
  The courts have not fashioned a clear and standard interpretation. To improve the identification notice criteria, it should be changed to include two categories of projects — residential and nonresidential. The residential category should include a residential one- or two-family home or an individual residential condominium unit in which the owner either resides or will reside upon completion of construction. All projects that meet this definition should require an early identification notice.
  
  On the other hand, all other projects should be exempted from the identification notice requirement. These criteria would strike a good balance. Contractors will be able to understand and apply the lien law, and inexperienced homeowners will be given adequate notice of the possibility of construction liens.
  
  
• Require notice to lienor on public improvement liens. State law affords contractors and suppliers the right to a lien against the money due the prime contractor if the lienor (subcontractor) gives written notice to the public body and prime contractor before payment is made to the prime contractor.
  
  After the lienor gives notice, the prime contractor has 30 days to dispute the lien. If the prime contractor disputes the lien, a court action must be brought within three months of the lienor’s notice. If no action is brought within this time period, the lien rights are barred.
  
  In our experience, this law has saved thousands of dollars that would otherwise have been misappropriated by insolvent or unscrupulous prime contractors on public projects.
  
  But there is no requirement that the prime contractor provide the lienor with notice of the lien dispute. This places an unreasonable burden on the lienor because of the three-month limitation period described above.
  
  The public improvement lien law should be modified to require the prime contractor to send a copy of its dispute letter to the lienor at the same time that the prime contractor sends its dispute letter to the public body. This simple modification would create a much fairer law.
  
  
• Allow certified or registered mail for notices. In general, the construction lien law requires notices to be sent by registered mail.
  
  Many states now allow notices of this sort to be sent by either registered or certified mail. Certified mail is very reliable and less expensive than registered mail. This is a no-brainer. The lien law should be updated to allow contractor’s to serve notices through certified mail.
  
  
• Modify bank priority law. State law pertaining to property gives bank mortgages a super-priority over contractor’s construction liens. While this is a questionable public policy decision that some other states have refused to follow, the fact is that bank super-priority has been the law in Wisconsin for several years.
  
  In those situations where a bank loans money that is specifically earmarked to finance construction or renovation of a building and all parties involved make prompt and full payment to contractors for their construction work, this one-sided provision is largely irrelevant from a contractor’s perspective. On the other hand, the super-priority provision gets a lot of attention from contractors when projects do not go well and owners or contractors go broke or misappropriate funds.
  
  In these instances, banks are often pitted against contractors in a lien priority battle over the improved building. In the best situations, there is adequate value in the building to satisfy both the bank’s loans and the contractor’s liens. Unfortunately, that is often not the case.
  
  In the past few years, the Legislature has broadened the super-priority status of bank mortgages. It did this by adding language to the statute that pertains to funds advanced by the bank under a “commitment.” Most bank mortgages have a safety valve feature built into them. This feature is called a “future advances clause.”
  
  Under the broadened law, if a bank decides to loan any additional funds to a borrower after the original loan closing, those funds are generally secured by the original mortgage and retain super-priority status over construction liens. The only exception to this rule is if the bank has “actual knowledge” of the construction lien — which is difficult to prove — or if the advance was not made under a “commitment” made by the bank before it had “actual knowledge” of the construction lien.
  
  The provision goes on to exculpate banks even if the borrower is in default on a loan or has done something to void future advances under the loan.
  
  Like legislation enacted in the past few years giving banks mortgage priority over worker wage claims, this future advance provision is patently unfair. Banks have a better opportunity and more expertise than contractors to thoroughly review an owner’s finances and to insist on additional security (by means other than a stealthy future advance clause) to protect loans right from the start.

It is difficult to understand why, as a matter of public policy, bank mortgages can now secure nonconstruction related funding through the future advances provision and yet prevail with super-priority over a contractor’s lien. It is the contractor’s hard work that enhances the value of the owner’s property, yet that contractor might be prohibited from recovery.

Unfortunately, many contractors might be unknowingly trapped into working to secure the banking institution’s position on a construction project due to a future advance made by a bank to an owner under this provision. With the exception of advances made by a bank to enable completion of the construction project, this extension of the super-priority law should be repealed in the name of fairness.

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