Be Wary Of The Changes To The Illinois Mechanics Lien Act Which May Effect Your Ability To Enforce Your Lien Rights

By Corey B. Stern, Chitkowski Law Offices

Part 2 of the Cypress Creek bill

In Part 1 of this article, I described the implementation and beneficial effects of the Cypress Creek bill (HB 3636), which was signed by Governor Quinn on February 11, 2013. However, lenders have also made changes in response to the Cypress Creek bill and another change in a section of the Illinois Mechanics Lien Act ("Act"). This article will address how lenders have or will react to the changes and how to avoid the pitfalls of the lenders' actions.

Lenders have become accustomed to the super priority afforded them under Cypress Creek Supreme Court decision and do not want to give it up. In response to the Cypress Creek bill, some lenders are taking steps to try to maintain their super priority by requiring property owners to include lien subordination clauses in their contracts with general contractors and their subcontractors. Under a lien subordination clause, a contractor can agree in its contract to give the mortgage on the property priority over the contractor's eventual mechanics lien claim. Accordingly, as an owner or general contractor, a corporate practice should be made of reviewing contracts which specifically includes reviewing for a mechanic lien subordination clause.

As for subcontractors, while lien subordination clauses are allowed, the Act sets forth specific requirements for lien subordination clauses to be enforceable against subcontractors. Section 21(b) of the Act requires subcontractors be given actual notice of the subordination clause prior to entering into the subcontract. A simple incorporation clause making the terms of the general contract a part of the subcontract will not be enough. Section 21(b) also provides that subordination clauses shall not be binding on subcontractors unless the subordination clause from the general contract is set forth in its entirety in writing in the subcontract. The language of Section 21(b) gives subcontractors a basis to determine, before entering into a subcontract, whether they will be subject to a lien subordination clause.

In a foreclosure action, an enforceable lien subordination clause would put a lien claimant in a similar position to what they were before the Cypress Creek bill was implemented, so it is important to be aware of these clauses. If a subcontract on a project includes an enforceable lien subordination clause and funding is lost on that project, then when the project goes into foreclosure, a subcontractor will be forced to wait for the lender to be paid in full before any money will be paid to the subcontractor on its mechanics lien claim. An enforceable lien subordination clause can be disastrous to a subcontractor and it is imperative for subcontractors to be aware of whether a project or a subcontract is subject to a lien subordination clause before bidding the project or signing the subcontract.

The other change made to the Act is the law regarding the right of the owner, lender or any other interested party to demand that the contractor file suit upon its lien. Pursuant to the Act, a lender may make a written demand upon a contractor to file suit upon the contractor's lien within 30 days of receiving of the demand or the contractor's lien would be lost and forfeited, known as a "Demand to Commence Suit". The revision to the Act is that now the Demand to Commence Suit must contain specific language to be effective. The specific language is "Failure to respond to this notice within 30 days after receipt, as required by Section 34 of the Illinois Mechanic's Lien Act, shall result in the forfeiture of the referenced lien."

Previously, lenders have attempted to have the courts interpret a Summons, which is served with a Complaint for foreclosure upon the lender's mortgage, as a Demand to Commence Suit. However, through the efforts of this law firm, the Courts in the Chicago metropolitan area have routinely denied the lender's request and ruled that a Summons is not a Section 34 demand. However, in light of the revisions to the Act providing specific language to be inserted into the Demand to Commence Suit, a lender may take either of the following actions. At the very least, a lender may take advantage of this amendment and place the language in Summons. This action of modifying a Summons, which is a pre-printed legal form provided by the Clerk of the Court, may be legally questionable, but a contractor should diligently read the Summons and confirm whether the required language has been inserted. At most, a lender may have its process server deliver a cover letter with the statutorily required language, along with the Summons and Complaint. If the latter is done, then the lender would have effectively served its Demand to Commence Suit pursuant to the Act.

Therefore, carefully review the information you receive, and if there is any doubt, then you should forward the information directly to your attorney to determine whether you are required to file suit upon your lien claim or just named as a defendant in the case, which just requires an answer.

- For more information please contact Corey B. Stern at Chitkowski Law Offices at 630-824-4808 or at [email protected].