In the construction industry, a mechanics lien is by far the best option for contractors to get paid the money they’ve earned. Each state has its own rules and requirements that must be met to secure their lien rights. In a few states, one requirement is that the work was performed pursuant to a written contract. But what constitutes a written contract? A recent case out of Massachusetts dealt with a mechanics lien that was filed pursuant to work authorized by a letter of intent.
Massachusetts mechanics lien requires written contract
The Massachusetts mechanics lien law is just one of 7 states (with some minor exceptions) that require a written contract to have the right to file a mechanics lien. This requirement can be found under Mass. Gen. Laws. ch. 254 §2;
A person entering into a written contract with the owner of any interest in real property, or with any person acting for, on behalf, or with the consent of such owner for the whole of part of the erection, alteration, repair or removal of a building, structure, or other improvement to real property or for furnishing material or rental equipment, appliances, or tools therefor, shall have a lien upon such real property, land building, structure or improvement owned by the party with whom or on behalf of whom the contract was entered into…
Although this seems like a pretty cut and dry requirement, this isn’t always as clear.
A Massachusetts court considered a case in which a contractor filed a lien based on work performed pursuant to a letter of intent to enter into a contract. Does that count?
Contractor files a lien based on work performed pursuant to a letter of intent
The case in question is Golden Pond Resident Care Corp. v. Congress Building Corp.
Project Snapshot:
- Owner: Golden Pond Resident Care Corp. (Golden Pond)
- Contractor: Congress Building Corp. (Congress)
Golden Pond is the owner of an assisted living facility who was planning the construction of the facility in two phases. They accepted bids from five different contractors, one of which was Congress. After reviewing Congress’ bid, they executed a letter of intent (LOI) with Golden Pond for a guaranteed maximum price of $7,725,000. The LOI stated that Golden Pond would hold the price for 10 days.
In addition to that, the LOI authorized Congress to “immediately commence procurement of all subcontractors and materials for the project” but also stated that the “owner had no obligations until a final contract was signed.”
A letter of intent executed between the parties
Shortly thereafter, Golden Pond emailed Congress and proposed that a contract be executed the following month. But, a few days later, Golden Pond then informed Congress that the LOI had terminated by its own terms because the 10-day timeframe had passed. Regardless, Congress sent them a written contract draft, and the parties continued to communicate until Golden Pond ultimately advised Congress that they weren’t selected.
Upon receipt of this information, Congress sent an invoice to Golden Pond for $359,000, which included labor charges and the GC fee that Congress anticipated earning on the project. When Golden Pond refused to pay, Congress recorded a Notice of Contract and a Statement of Account to secure a mechanics lien on the property. Golden Pond filed an action to summarily discharge the lien claim.
Contractor’s mechanics lien was dismissed for lack of written contract
At trial, Golden Pond argued that the LOI was not a a “contract” within the meaning of MGL c. 254 §2. Instead, it was merely a document executed in anticipation of signing a formal contract within 10 days; which never occurred.
Congress responded by stating that the LOI had no unilateral termination provision and that Golden Pond’s behavior indicated their intention to be bound by the LOI. Particularly because Golden Pond proposed to execute a written contract outside of the 10-day window.
The judge agreed with Golden Pond and stated that the LOI “merely represents an agreement to negotiate in the future. Thus, the LOI was not an enforceable contract. The lien claim was dismissed. Congress appealed.
Appeals court revives the lien claim
On appeal, the court stated that under MGL c. 254 §15A, summary discharge of a mechanics lien claim will typically be granted for:
- defects in the notice of contract or statement of account,
- failure to timely record either, or
- a judgment or release that would preclude the lien.
Golden Pond hadn’t argued any of these. Instead, Golden Pond’s argument relied on the belief that the LOI is not an enforceable contract.
To form an enforceable contract, at a minimum, there must be an agreement between the parties on the terms of the contract, and the parties must have a present intention to be bound by the agreement. Since there was conflicting evidence regarding the parties’ intention, the facts would need to be disputed at trial. Therefore the discharge of the lien by the lower court was vacated.
Avoid performing work before executing a contract
Massachusetts mechanics lien laws strictly require a written contract between the parties in order to have a valid lien claim. In this case, the contractor’s claim was saved by the existence of the LOI – for the time being at least.
This is a lesson not only in what constitutes a contract in Massachusetts but more importantly, that reliance on a letter of intent or other documents in preparation of a contract may affect your lien rights.
The letter of intent authorized Congress to begin hiring subs and purchasing materials. However, if the LOI is later determined not to be an enforceable contract, they may find themselves without any mechanics lien recourse for non-payment. Contractors should always be wary about commencing work before a full written agreement is in place.