A Subcontractor who timely serves a Notice of Claim and timely files a Lien, does not necessarily have the right to foreclose a Lien against the Property to pay an unpaid debt. Most people do not realize that a Lien filed by anyone other than the Original Contractor, is actually a Lien only against two “pots of construction funds”, i.e., statutory retainage and trapped funds (as opposed to the Property) unless the Property Owner fails to withhold the two pots of funds upon receipt of a Notice of Claim.

Statutory Retainage: A Property Owner is required to withhold 10% of the overall prime contract amount from the Original Contractor for at least until 30 days from when the overall Project reaches substantial completion. This is known as “statutory retainage” or “reserved funds”. These are different funds than “contractual retainage”, which is what a contractor withholds from a subcontractor’s progress payments pursuant to a contractual provision contained in the subcontract. If a Property Owner fails to withhold all or a portion of statutory retainage, then it can be personally liable and its Property subject to Lien foreclosure for an amount up to 10% of the prime contract amount. In contrast, if a Property Owner withholds 10% from the Original Contractor’s progress payments for the required time period, then neither the Property Owner nor its Property are subject to a Lien. Instead, the Lien is solely against the “reserved funds”. If there are multiple Lien Claimants, then the reserved funds are shared on a pro rata basis between the Lien Claimants who timely and properly perfected a Lien; which is not always enough to pay all Liens Claimants in full. Moreover, if the Property Owner has not received a valid Notice of Claim within 30 days from substantial completion, then it may release the reserved funds to the Original Contractor and will not have any further liability for unpaid claims. This is why serving a Notice of Claim as soon as possible (especially if the work was performed toward the end of a Project) is a good practice to implement.

Fund Trapping: When a Property Owner receives a Notice of Claim, it is required (or should) withhold the claim amount from the Original Contractor until the dispute is resolved or the deadline to file a Lien has passed. Doing so is referred to as “fund trapping”. If a Property Owner withholds these funds as required, it is not personally liable for the debt (other than the trapped funds) and its Property is not subject to Lien foreclosure. In contrast, if it fails to trap the funds, then it can be personally liable and the Property may be subject to Lien foreclosure. Additionally, if there are no funds to trap at the time the Notice of Claim is received (because all monies have already been paid to the Original Contractor), then the Lien Claimant’s only recourse is against the reserved funds, unless those have already been timely and properly released to the Original Contract; in which case, the Lien is likely invalid. Again, this is another reason to send the Notice of Claim shortly after performing the work if you have not been paid.