Ohio Lien Law Update - When Should a Notice of Furnishing be Submitted?
On May 10, 2010, Ohio's Twelfth District Court of Appeals issued an opinion contrary to common practices in the construction industry. Halsey, Inc. v. Isbel, 2010 Ohio 2052, 2010 WL 1850660 (Ohio App. 12 Dist. May 10, 2010). The court held that "a notice of furnishing should not be served until after materials are furnished," and that service of a notice of furnishing is complete when mailed (not when received), if sent via certified mail.
The Ohio Constitution guarantees the right to file a mechanics’ lien. Chapter 1311 of the Ohio Revised Code addresses the specifics and technical aspects of liens. A mechanics’ lien may be filed by an Original Contractor, Construction Manager, Subcontractor, Material Supplier or Laborer against the real estate improved by the labor or materials of the lien claimant. A lien expires six years after the date it was filed. However, the six year period can be shortened by proper service of a Notice to Commence Suit, which requires the lien claimant to institute a foreclosure action within 60 days of the date that the Notice to Commence Suit was properly served or the lien will become void. The lien may also be removed from the real estate by bonding it off. The bonding requirements, the posting of cash or a surety bond, vary depending on the amount of the lien claim. The bond or cash takes the place of the real estate as security for the lien.
Private commercial construction projects require that the project owner (or his or her agent) prepare and file a Notice of Commencement with the county recorder in the county where the project is located. A Notice of Commencement is a condition precedent to the legal requirement of a Notice of Furnishing. The purpose of the Notice of Furnishing is to avoid “surprise liens” to the project owner. If the Notice of Commencement is filed, subcontractors and suppliers who want to preserve their lien rights are required to serve a Notice of Furnishing on the owner/part owner, lessee or the "owner's designee” (owner's agent identified in the Notice of Commencement). The Notice of Furnishing should also be served on the original contractor, depending on the contents of the Notice of Commencement and the relative position of the lien claimant. General contractors need not submit notices of furnishing.
The recent Halsey case involved residential construction. Robert Isbel d/b/a Isbel Custom Homes, Inc., the general contractor, entered into a verbal agreement with Halsey to provide materials for construction. National Bank & Trust Co. (NB&T) financed the project through a construction loan. On May 14, 2007, Halsey sent to NB&T via certified mail a Notice of Furnishing, which stated that Halsey intended to provide approximately $64,000 of materials to Isbel during construction of the Fleming's residence. Halsey first furnished materials on May 15, 2007 – the very next day. Even though the Notice of Furnishing was mailed on May 14th, the bank received the Notice of Furnishing on May 17, 2007 – after materials were first supplied to the project. The court noted:
[The] service provision of Ohio's lien statute provides, ‘service is complete upon receipt by the party being served * * * if service of a notice of furnishing is made by certified mail, service is complete on the date of the mailing.’ (Emphasis added.) R.C. 1311.19(B).
Service of the notice of furnishing in this case occurred before any materials had been supplied by Halsey. Specifically, Halsey sent the notice of furnishing by certified mail on May 14, 2007. Due to the statute's service provision, the notice was considered served on that date. Materials were first furnished on May 15. [The statute] clearly provides that a notice of furnishing should not be served until after materials are furnished. Since Halsey's notice was served before materials had been furnished, its notice of furnishing was not valid. Buy-Rite Lumber Co. v. Bank One, Akron, N.A. (1991), 81 Ohio App.3d 74, 76-77.
Halsey, 2010 Ohio 2052 at ¶¶13, 14.
Because the contractor mailed out its Notice of Furnishing by certified mail the day before it provided any labor or material to the project, the court concluded the Notice of Furnishing was invalid, which rendered the mechanics’ lien invalid and absolved the lender of liability for any claims under Ohio’s lien law.
So, when should a Notice of Furnishing be submitted? Within 21 days after the first labor or materials are supplied to a project. The best practice is for a subcontractor or supplier to mail the Notice of Furnishing immediately after labor or materials have been provided to a project.
