LawPulse

The Illinois Supreme Court reversed the lower courts and affirmed an engineering firm's statutory lien rights under the Mechanics Lien Act.

The Illinois Supreme Court recently clarified whether design can constitute lienable work under the Mechanics Lien Act. It also discussed guiding principles for knowing when a land owner has consented to a contract entered into by a buyer prior to closing.

Burke Engineering, Ltd. v. Heritage Bank of Central Illinois, 2015 IL 118955 centers on a dispute between an engineering firm and a bank. Both asserted the priority of their liens against a specific piece of land.

Both the circuit and appellate court found that the services provided by Burke were not an improvement to the property and that the property's owner did not induce or encourage the provision of services. The unanimous court reversed and remanded the matter for further proceedings on whether the property owner had acquiesced to the services rendered.

In Burke Engineering, the property owner, Carol Schenck, had entered into a contract to sell land to Glen and Carol Harkins. Prior to closing, the Harkinses entered into a contract with Burke Engineering to survey the land and draft and record a plat of subdivision. The work began before the closing between Schenck and the Harkinses.

About a year later, all work on the property stopped, with only one house built. Burke had invoiced Harkins; the invoice was not paid. After Burke filed suit against the Harkinses, the owners of the house, and Heritage Bank, the Harkinses filed bankruptcy and the homeowners settled with Burke. Left at issue in the case was the priority of Heritage Bank's mortgage over Burke's lien.

According to W. Matthew Bryant, a partner at Arnstein & Lehr, the first portion of the court's opinion helps define what is lienable work. "Historically, the mechanics lien was for a mechanic who did tangible work on a property." In this case, the court was presented with a design professional who had done work but had not physically improved the property. Heritage Bank argued that the Mechanics Lien Act requires a tangible, physical improvement to the property, not just design work.

The Burke Engineering court found that drafting and recording a subdivision plat is done for the purpose of improving the property. In response to Heritage Bank's statutory interpretation, the Burke Engineering court stated, "This court…avoids interpreting statutes in a manner that would create absurd results…. Heritage Bank's interpretation is counter to all of those principles." Burke Engineering, 2015 IL 118955, ¶ 17.

Observing that design professionals do not all participate in the raising, lowering, or removing of houses, the court held that "it would be absurd to interpret the statute as providing these professionals with liens only when their services are used for projects that typically do not employ such professionals." Id. ¶ 19.

Lien rights: not subject to owner's whim

According to Bryant, the issue is "pretty straight-forward. Lienable work is defined as including engineering work done for purposes of improving the land." He also points to the policy rationale for including design professionals within the Act's purview. "We don't want design professionals in a bad position where their lien right is based on the whim of the property owner going forward with the work."

The case presents some practical issues on whether a contract is "with one whom the owner has authorized or knowingly permitted to contract" to allow a mechanics lien to attach to a property. Bryant says that work can be done on properties before closing. For example, a purchaser may hire a design professional to conduct a feasibility study prior to closing, including more work to be performed after closing.

Bryant recommends that design professionals protect themselves by having either a contract with the owner of the land or an owner's acknowledgement of the contract for improvement with the buyer, even if the owner is not obligated to pay. Another may be for the design professional to send a notice to the landowner. It is important to have the acknowledgement of the property owner because the owner's "knowing permission" for the contract for improvement is one of the elements necessary to perfect a lien based upon a pre-closing contract with the purchaser.

The Act provides that a contractor has a lien when the owner authorizes or knowingly permits a third-party to contract to improve the land. If the property owner knows of the contract and does not object or if it accepts the benefits of the improvements, then the owner has "knowingly permitted" the contract.

Proving that a property owner knew about the contract can be fact-intensive. In Burke Engineering, the court found that there was insufficient evidence in the record to support granting summary judgment and remanded the case for further proceedings in the circuit court. Bryant recommends that buyers and sellers avoid these issues by having the property owner clearly memorialize that pre-closing work is to be done and the disclosure process for that work.

Burke was represented by Chicago firm Much Shelist.