When it comes to getting paid for construction materials, suppliers need all the help they can get. Since they are often at the bottom of the payment chain, it can often take months to get paid. Of course, construction businesses have a variety of tools, like a mechanics lien, to secure payment. But it’s always best to have as many avenues open as possible to collect payment. The Uniform Commercial Code gives suppliers and some contractors an often underused tool to help recover unpaid funds: the UCC lien.
Let’s look at what UCC liens are, how they’re used in construction, and the process for filing one.
What is a UCC lien?
A UCC lien protect sellers of goods from nonpayment by providing a security interest in a borrower’s personal property. If the borrower fails to pay, the seller has the right to repossess the property listed as collateral in the filing.
The Uniform Commercial Code (UCC) is a set of rules that governs national commercial transactions and has been adopted for use by most states. The good thing about it is it’s universal throughout the country, so the forms and regulations are consistent — unlike mechanics lien laws.
Liens are covered under Article 9 of the UCC, allowing material suppliers to attach a lien to a piece of property, usually (but not necessarily) the goods that are being sold, similar to a mechanics lien.
The document that is filed is often called a UCC filing, UCC-1 statement, UCC lien, or a UCC financing statement. Whatever it’s called, the document and the filing process are the same no matter what state you’re in.
Using the UCC to get paid in construction
UCC liens are generally used by material suppliers to guarantee payment when they’re providing credit to their customers. The protection provided by a UCC filing is for goods purchased, but it may apply to contractors as well, depending on the type of work being provided. If the majority of the contractor’s contract is for supplying materials with only a small amount or incidental labor, then a UCC filing may apply. If the majority of the contract is for installation and other labor, then a UCC lien may not be an option (but you still have a mechanics lien to back you up).
UCC liens can be used as backup security if a customer doesn’t meet a company’s credit requirements. They allow the customer to provide collateral to secure financing.
These liens can also be used in conjunction with mechanics liens to help protect payments to suppliers. They can also be used when mechanics lien rights don’t apply, such as in supplier-to-supplier transactions.
Note: Some contracts or purchase orders may qualify for both a mechanics lien and a UCC lien. UCC liens are usually applied to the material or equipment that’s being financed, but can be attached to other assets the customer owns as well.
While UCC liens, provide payment protection, they are generally not as powerful as mechanics liens.
Filing a UCC lien
At the time of the material purchase or order, a UCC financing statement or UCC-1 statement is completed by both the seller and the purchaser. Both parties agree to the security agreement that identifies the material or equipment being used as collateral. The statement says that the customer agrees to the payment terms and the supplier’s right to file a lien, called the security interest.
There are three parts to the UCC-1 financing statement:
- A description of the material or equipment being sold and the price
- The identification of the purchaser
- The identification of the seller
Again, this form is standardized, so it will look the same no matter where the purchase takes place. Download a blank UCC form here.
After the financing statement has been completed and signed by both the purchaser and the seller, it’s filed with the Secretary of State in the state where the purchaser resides, or where the purchasing company is incorporated.
A UCC lien remains attached to the business’s file for five years — unless it’s removed sooner. After five years, the seller can renew it if the financing terms are longer. UCC filings are a matter of public record and can be searched by anyone.
If the purchaser files for bankruptcy and the debt hasn’t been paid, the lien goes into effect, and the purchaser will get paid from the bankruptcy settlement. Otherwise, if the purchaser doesn’t get paid within the terms of the agreement, they would file a lawsuit to perfect or collect on the UCC lien. This process is similar to that of a mechanics lien.
Having a UCC lien on a company’s Secretary of State file is not as detrimental as having a mechanics lien. Since a UCC lien is filed before a company defaults on their payments, it isn’t considered as negative as a mechanics lien. However, banks and other financial institutions may not be as willing to loan money when they see others have a UCC lien ahead of them.
But, because UCC liens attach to specific assets of the company, there can be several liens filed at the same time. These liens will have priority over other liens — including mechanics liens — depending on when they were filed.
Use all the tools at your disposal to protect your payment rights
Unlike a mechanics lien, which is filed after payment has already been delayed, a UCC lien is filed at the time of the purchase. If the customer pays as per the terms of the agreement, the UCC lien either expires or is removed. If payment is not made, then the supplier can file a lawsuit to recover the funds they are out.
It’s important to know all the ways your company can protect its payment rights. While contractors have access to mechanics liens to enforce their right to be paid, suppliers and those that provide only incidental labor may not have the same rights. UCC liens provide a way for suppliers and contractors to ensure that they will be paid.