Understanding Contractors’ Lien Rights for Unpaid Progress Payments in Commercial Projects
Entering into a construction contract or performing construction work does not automatically allow a contractor to generate a lien on the property or materials to secure payment. The Building and Construction Industry Security of Payment Act 2002 (Vic) (‘SOP Act’) provides that contractors are entitled to be paid in accordance with the progress dates specified within the construction contract or if not specified then due on the last day of the first month of work and the end of each month thereafter.
If the progress payment is not made on the date that is due, within 10 business days of the payment claim being served, then the claimant may exercise a lien over any unfixed plant or materials supplied by the claimant for the construction.
What is a lien?
A lien is the right of an individual or corporation to hold or retain possession of an item as security for the performance of obligations owed by the other party, such as payment of monies owed. An example of this is in construction when a lien may be placed over any unfixed plant and materials as security for the due and payable progress payment under s 12A of the SOP Act. To secure a lien over the goods, the application must be done using the prescribed form pursuant to this section.
What is an Unfixed Material?
Unfixed materials are goods, plants, and equipment that are intended for, delivered to, and placed on the job site and are to be incorporated into the works. These materials may not be removed without the consent of the contractor. Some examples include:
- Bricks;
- Cement;
- Wood;
- Tiles;
- Paint;
- Foam board; and
- Drywall.
Understanding Section 12A of the Security of Payment Act
When a progress payment becomes due and payable under a construction contract, s 12A of the SOP Act describes the requirements and processes for a claimant to exercise a lien on unfixed plant or materials delivered for use in construction work.
- Section 12A (1) provides details regarding the entitlement to lien over any unfixed plant or material that they supplied for use in the construction work for the respondent when a progress payment becomes due and payable.
- Section 12A (2) however states that before exercising a lien a claimant must serve a notice in the prescribed form on the respondent. This form is prescribed in the Building and Construction Industry Security of Payment Regulations 2023 (‘SOP Regulations’).
- Section 12 A (3) states that once the claimant receives the progress payment the lien they have exercised is extinguished.
- Section 12A (4) stipulates that any pre-existing lien or charger over the unfixed plant or materials that existed before the progress payment became due and payable takes priority over the established lien, ensuring the previously established liens are not displaced by the new lien created by the progress payment.
- Section 12A (5) states that there is a limitation of rights to which a claimant’s lien rights only extend to unfixed plants or materials supplied by them and not to third party-owned items.
This Section clarifies and protects both the claimant seeking payment and the respondent making payment by establishing the processes and restrictions surrounding the exercise of liens over unfixed plants or materials in construction contracts.
The SOP Regulations
The first form of the SOP Regulations is the notice of intention to exercise lien governed by section 12A (1) of the SOP Act. This notice is a formal communication between the claimant and the respondent in a construction contract. This form states that a progress payment has become due and payable and thus the claimant may exercise lien. This notice specifies details regarding:
- The construction work;
- Related goods or services to which the payment is owed;
- The date the payment was due and payable; and
- The intent is to exercise a lien over the unfixed plant or materials.
How to serve notice of lien:
You may serve a notice of lien in the following ways:
- In-person delivery – served when the respondent receives it;
- Lodging it at normal business hours at the respondent’s place of business – served once received at the address;
- Post to the respondent’s place of business – served two business days after the date on which it was posted; and
- Fax it to the respondent’s place of business – time it is received, unless after 4 pm then it is taken to be served on the next business day.
- Provide it in any other manner specified in the contract.
Effect of the lien:
The respondent is not permitted to fix, remove, sell, or otherwise deal with the unfixed plant or materials listed in the Notice until you have paid the outstanding progress payment after receiving the Notice of Intention to Exercise Lien.
You become a secured creditor as the claimant. This implies that unfixed plants or materials will not be available for payment of unsecured creditors in any distribution of assets by an external administrator.
The lien does not give you any right against any third party who is or has become, the owner of the unfixed plant or materials.
When does the lien cease?
The lien in respect of the unpaid amount ceases when you receive the progress payment.
Suspend work or the supply of goods and services:
Until the payment is made, the claimant is entitled to cease employment or supplying of goods and services to the respondent. The respondent must receive written notice of the suspension within three business days and the SOP Act must be cited as the reason for the notice’s issuance. If a claimant uses this entitlement in line with the SOP Act, the respondent will not be held responsible for any resulting damages or losses.
Apply for adjudication or go to court to recover the unpaid amount:
You may choose to proceed to adjudication or court if the respondent fails to pay you according to the payment plan. The SOP Act established the adjudication process to settle conflicting claims for payment under a building contract. For any payment disagreement that could ordinarily be resolved under the SOP Act, you may also start legal actions in court. You can accomplish this by paying the filing fee and submitting a complaint to the Magistrates Court or a writ to the County or Supreme Court.
The SOP Regulations – Other Forms
There are four other forms following the notice of intention to exercise lien form. These are:
- Form 2 – Notice of Claim
- Form 3 – Debt Certificate
- Form 4 – Discharge Notice
- Form 5 – Notice of Person From Whom Claimant May Recover
Form 2, the notice of claim is governed by s 32(2) of the SOP Act regards an adjudicated amount owed by the respondent to the claimant under their construction contract. This form also mentions the issuance of a Debt Certificate by the adjudicator and thus Form 2 and Form 3 are to be issued together.
Form 3, the debt certificate is governed by s 33(2) of the SOP Act and certifies the debt owed by the respondent to the claimant.
From 4 is the discharge notice governed by s 40(2) of the SOP Act and acknowledges full or partial payment received from the respondent.
Form 5 notifies the claimant of the party or parties with whom the respondent has a contract specifying the building work completed or goods and services provided. It is the notice of the person from whom the claimant may recover, as governed by the SOP Act s 41(1). It highlights the legal consequences of providing false and misleading information.
How can we help?
Contact us today at Elamine Lawyers and let our team of construction law guide you through understanding your lien rights for unpaid progress payments in your commercial projects. We’ll assist in safeguarding your interests with our legal knowledge and ensuring that your project stays on schedule. Contact us today at 03 8400 0100 or email us at admin@elaminelaw.com.au.
