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Changes to Virginia Mechanic's Lien and Bond Statutes in 2012

 

House Bill #928 Virginia Code § 43-3(B) of Mechanic's Lien Statute

Virginia Code § 43-3(B) solved many allocation problems for contractors supplying "site development improvements" to serve an entire subdivision, such as streets, storm or sanitary sewer or waterlines. Each lot in the subdivision bears an equal amount of the lien for any improve¬ment that serves all the lots in the subdivision.

There has always been some uncertainty concerning the definition of "a lot." Modern subdivisions usually have parcels of land known as common areas and it was uncertain whether these parcels are considered "lots" for allocation purposes. The safest course was to allocate to this common area parcel the same as one would allocate to all other "lots," even though it resulted in an unhelpful lien on the common area, so that some part of the claim was lost. This was preferable, however, to the risk of a court ruling the entire lien invalid because the contractor overburdened all of the lots because of the failure to allocate part of the labor and materials to the common area. Court rulings have been inconsistent. In the graphic below, the lien claimant would probably lien each lot, including the clubhouse pool lot, for one eleventh (1/11) of the unpaid contract balance.

House Bill #928 has passed the House and the Senate and the Governor is expected to enact this bill into law, effective July 1, 2012. House Bill #928 excludes from the allocation computations "parcels of land within the development which are common area, or which are being developed for the benefit of the development as a whole and not for resale." Assuming House Bill #928 is signed by the Governor, the lien claimant in the graphic below can confidently lien each home lot, for one tenth (1/10) of the unpaid contract balance.

Parcels example

House Bill #928 will also clarify that contractors are entitled to lien rights under Virginia Code § 43-3(B) for traffic signalization, and installation of electric, gas, cable, or other utilities, for the benefit of the development.

In order to get the benefits of § 43-3(B), the claimant must also "prior to the sale of such lot" file a Memorandum of Disclosure with the court clerk, setting forth a full disclosure of the nature of the lien to be claimed, the amount claimed against each lot...and a description of the development."   There has also been confusion whether a subdivision developer sale of a lot to a builder would cut off contractor lien rights or if only a "consumer sale" to a homeowner would cut off contractor lien rights.  The industry did attempt to get an amendment to § 43-3(B) specifically identifying a homeowner sale, but this change was deleted from the final House Bill #928.  However, the Bill as passed does still say that "in the event that payments are made to the contractor without designating to which lot the payments are to be applied, the payments shall be deemed to apply to any lot previously sold by the developer such that the remaining lots continue to bear liability" for the unpaid contract balance.  This gives some help to contractors for sold lots.

House Bill #1265 Virginia Code § 43-4 of Mechanic's Lien Statute

Other proposed changes to the Virginia Mechanic's Lien Statute were defeated, at least for this year.   The original Virginia House of Delegates Bill #1265 required any mechanic's lien claimant on any commercial or residential project in the state to provide notice sixty (60) days before filing a mechanic's lien.  As later approved by the House of Delegates, Bill #1265 required any mechanic's lien claimant only on a one- or two-family residential project to provide notice thirty (30) days before filing a mechanic's lien.   Either version of this Bill would have significantly impacted mechanic's lien rights of contractors or suppliers.  The mechanic's lien itself must be filed as soon as ninety days after the claimant's last supply of labor or material on the project.  If a "pre-lien" notice was required 30 or 60 days before that, then a claimant would have to take legal action 30 or sixty days after delivery to preserve lien rights.  This would often require contractors and suppliers to take legal action before payment was contractually due. Most contractor and suppliers would not do this and the result would be loss of lien rights.

It looked like this Bill would pass in some form, but the Senate Courts and Justice Committee passed over Bill #1265 for the 2012 session.  This was a testament to the active involvement by members of the construction industry.  However, the industry can expect that this issue will return in some form next year.

House Bill #945 Virginia Code § 2.2-4337) of Virginia Procurement Act

The Virginia Procurement Act applies to all construction projects by the state, counties, cities and their agencies, such as the Virginia Department of Transportation (VDOT), state universities and all county school boards.  Virginia Code § 2.2-4337 requires bid, performance and payment bonds for most construction contracts in excess of $500,000, but requires bonding for all transportation related projects exceeding $250,000.

There has been a push to increase the contract amount for transportation related projects that would not require bonding.  Many small, family owned, or minority contractors have difficulty getting bonds and this makes it difficult for them to get VDOT contracts.  On the other hand, unbonded projects mean more risk for the subcontractors and suppliers on such projects, resulting in fewer subcontractors and suppliers willing to work on such projects or requiring higher prices to cover the risk.  The state does also lose performance security and takes on greater risk of default by unbonded contractors.

House Bill #945 was a compromise that has now passed the House and the Senate and the Governor is expected to enact this bill into law, effective July 1, 2012.  This Bill raises the contract amount for which bonds are required on transportation-related projects funded by the Commonwealth from $250,000 to $350,000, but goes on to say that the payment and performance bond can only be waived in projects of less than $350,000 if there is evidence that a surety company has declined an application from the contractor for a bond.

 

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