In This Issue

• Legislative Update
• Lien Claimants Beware: Illinois Court Holds that a Mechanics Lien Claim Could Not be Amended As Against Lender's Interest in the Property

Legislative Update

There are several bills under consideration in the Illinois legislature which may be of interest to the construction industry.  These bills would amend the Mechanics Lien Act, the Contractor Prompt Payment Act, the Construction Bond Act, the Foreclosure Act, the Architecture Practice Act, and the Environmental Protection Act (concerning construction debris), as well as establishing the Electricians Licensing Act and the Residential Building General Contractor Act. 

For example, Senate Bill 2073 would amend the Mechanics Lien Act, for owner-occupied single family residences, by requiring contractors to include on the face of every contract a notice of the owner's duties to the contractor and to any subcontractors. SB 2073 also would relieve the owner from any duty to pay subcontractors if the required notice is not set forth in the contract. House Bill 0344, amending the Contractor Prompt Payment Act, would make it unlawful to hold more than 5% in retainage on payments due to contractors and subcontractors. House Bill 0335 would create the Residential Building General Contractor Act, providing for the registration of residential building general contractors with the Department of Labor beginning January 1, 2010. Senate Bill 0137 would create the Electricians Licensing Act, setting forth the regulation of electrical contractors and electricians by the Department of Labor.

The Chicago Bar Association's subcommittee on Construction Law and Mechanics Liens will have an opportunity to advise Illinois lawmakers regarding these bills and the reaction of the construction industry to them. If you would like further information or if you would like to make known your views regarding the proposed legislation, please feel free to contact Gould & Ratner's attorneys.

Rich Reizen is the Chair of Gould & Ratner's Construction Group. Howard Turner and Eric Sparks are members of the Chicago Bar Association's subcommittee on Construction Law and Mechanics Liens.

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Lien Claimants Beware: Illinois Court Holds that a Mechanics Lien Claim Could Not be Amended As Against Lender's Interest in the Property

Mechanic's lien claims are notoriously fraught with peril.  The Mechanics Lien Act (770 ILCS 60/1 et seq.) (the "Act") contains many procedural technicalities, and the courts have often noted that "a contractor must strictly comply with the Act to be eligible for relief."  Despite the fact that the Act does not expressly prohibit amendments of recorded lien claims, the First District of the Illinois Appellate Court has ruled that a recorded lien claim cannot be amended as against the interest held in the property by a third-party encumbrancer, such as a mortgagee, even when the amended lien claim is amended only to add new work that occurred after the filing of the original lien claim. 

In the recent case of Cordeck Sales, Inc. v. Construction Systems, Inc. et al., 382 Ill. App. 3d 334 (1^st Dist. 2008), a company providing construction management services (the "construction manager") for the owner of an 89 unit condominium construction project filed its original lien claim for approximately $700,000 with the County Recorder's Office within four months of the completion of certain work, as required under the Act. As the project continued, the general contractor on the project eventually abandoned the project, leaving the construction manager to take over and perform much of the general contractor services to complete the project.

As work on the project continued, the construction manager recorded amended lien claims setting forth the new total amount due as its work progressed. The last amended lien claim recorded by the construction manager asserted that over $1 million was due and owing. In the lawsuit to foreclose the construction manager's mechanic's lien claim, the construction manager's lien was held to have priority over the mortgage lien of a lender on the project.

However, the lender (mortgagee) for the condominium project objected that the construction manager's lien was limited, as against the lender's interest in the property, to the amount listed in the construction manager's original lien claim. The Appellate Court agreed and limited the priority of the construction manager's lien, as against the lender's interest in the property, to the amount described due in the construction manager's original lien claim.

The basis for the Appellate Court's ruling was that although the Act expressly permits a recorded lien claim to be amended as against the owner at any time before the final judgment is entered in the litigation, the Act's silence on the propriety of amendments as to other parties (such as a third-party encumbrancer like the lender) implies that there can be no amendments of a recorded lien claim as against a third-party encumbrancer. Cordeck, 382 Ill. App. 3d at 360. Obviously, the Act does not expressly state that amendments of recorded lien claims will not be effective against third parties, but the implicit rule is now made explicit in the opinion of the Appellate Court.

The ruling in Cordeck is a cautionary tale for all mechanics lien claimants because the Act contains many implicit rules that are not obvious and immediately apparent upon reading the plain language of the Act. As one Illinois legislator has said, "For those of you who have had the misfortune of trying to read this piece ... this statute [the Mechanics Lien Act], it's very confusing.... it has been a patchwork of quilts ... of patches put on this quilt over the past hundred years." 94 Ill. Gen. Assem., House Proceedings, May 31, 2005, at 17-18 (statement of Rep. Scully).

For advice on how to navigate through this patchwork, contact the Construction Group at Gould & Ratner LLP.

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