Woods, Fuller, Shultz & Smith P.C.
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South Dakota provides statutory protection to parties that supply skill, labor, services, equipment, or materials for the improvement of real property as a means of collection for services rendered. [1] The protection provided by the statutes is in the form of a mechanic's lien, which can either attach directly to the real estate or to the funds available for payment of construction services, depending upon the specific circumstances as discussed in greater detail in this text. The rights and obligations of parties entitled to “lien rights” are very specific and are set out in South Dakota Codified Law Ch. 44 et seq. Lien rights are not in lieu of but are in addition to a claimant's usual common law remedies, such as the right to sue on a contract to recover a money judgment against the debtor.[2]
South Dakota's lien laws were amended in 1999 by the South Dakota Legislature, and the revised statutes require specific actions to be taken by prime (general) contractors, subcontractors, sub-subcontractors, and suppliers to subcontractors to protect their respective interests on construction projects. To determine the actions required, each party must know their exact position within the contractual relationships between all parties involved in the project.
A Prime Contractor must be “in privity” (in direct contract) with the owner to claim a lien on the owner's real property.
Construction prFederal projects are governed by The Miller Act.[4] The Act requires a Prime Contractor to furnish a payment and performance bond for contracts that exceed $25,000.00.[5] Private contracts comprise all projects other than those owned by governmental agencies. Individuals and businesses comprise most private projects, but note that nonprofit organizations are also private projects if they are not part of a government agency.
A mechanic’s lien can be created for skill, labor, services, equipment, or materials used:
(1) For the erection, alteration, repair, or removal of any building, fixture, bridge, fence, or other structure or for grading, filling in, or excavating the same, or for digging or repairing any ditch, drain, well, cistern, reservoir, or vault thereon or for laying, altering, or repairing any sidewalk, curb, gutter, paving, sewer, pipe, or conduit in or upon the same or in or upon the adjoining half of any highway, street, or alley upon which the property abuts, a lien upon the said improvement and the land on which it is situated, or to which it may be removed;
(2) For the construction, alteration, or repair of any line of railway or of any telegraph, telephone, electric light, or power line, or of any line of pipe, conduit, or subway or any structure, appliance, or fixture upon or appertaining to any of them, a lien upon the public utility so constructed, altered, or repaired and upon the line, plants, and property thereof and upon all the rights, franchises, and privileges of the owner appertaining thereto;
(3) Upon any mine or mining claim, oil or gas well or spring, a lien upon the same and any rights, privileges, franchises, easements, and tangible property and other property or appliances appurtenant thereto, for any of the items hereinbefore specified or referred to as giving right to a lien.[6]
Any party that furnishes skill, labor, services, including light, power, water, equipment, or materials for the improvement, development, or operation of property, is entitled to lien rights.[7]
A Prime Contractor is any contractor who contracts directly with the owner for the furnishing of construction services. A Prime Contractor is entitled to a lien that attaches directly against the real estate of an owner. South Dakota law allows a Prime Contractor to waive its lien rights at any time after entering into a contract.[8] It is important that a Prime Contractor not inadvertently waive its lien rights by signing separate documents that contain waiver of lien language.
South Dakota Codified Law also provides a mechanism for contractors to protect themselves from sub-subcontractors and suppliers of subcontractors by filing a Notice of Project Commencement.[9] If a Notice of Project Commencement is properly filed, a Prime Contractor is protected from liens against the real estate by sub-subcontractors or suppliers to subcontractors provided the requirements of SDCL § 44-9-50 and 44-9-51 are strictly followed.
A Prime Contractor can protect itself from claims by subcontractors, sub-subcontractors, and suppliers to subcontractors by filing a Notice of Project Commencement with the Register of Deeds of the county in which the improved premises are situated.[10] The Notice of Project Commencement must be filed within thirty days of the commencement of work.[11] In addition to filing the Notice of Project Commencement, a Location Notice must be posted at the job site indicating that the Prime Contractor has filed a Notice of Project Commencement with the Register of Deeds.[12] If these steps are taken properly, sub-subcontractors and suppliers to subcontractors are deemed to be “on notice” that Notice of Project Commencement is in existence and must, therefore, take an additional step of filing a Notice of Furnishing Labor or Materials to protect their interests.[13]
If a Prime Contractor is not paid for services provided, the Prime Contractor is entitled to a lien that attaches directly to the real estate of the owner.[14] The following two steps must be followed by the Prime Contractor to effect a lien against the real estate:
The statutes provide for strict time limitations to file a lien, as well as other necessary information to be included in the lien statement by lien claimant. If either the time limitations or the information required in these statutes are not adhered to, a lien against the real estate could be deemed defective and thus unenforceable.
The Lien Statement By Lien Claimant must be filed no later than one hundred twenty days after the last day that labor and/or materials are furnished for the project.[17] Case history in South Dakota indicates that the last date of furnishing labor and/or materials is the date that labor or materials are furnished to fulfill “the requirements of the contract” and does not typically include replacement items, periodic testing, or service calls.[18] The one hundred twenty day limit has an exception. If the owner of the property serves a written request (Owner’s Demand for Lien Accounts) to any potential lien holders to furnish the owner with an itemized and verified account of any lien claim, the potential lien holder may not commence an action for the enforcement of such lien until ten days after such statement is so furnished by the lien holder.[19] Such owner’s request must be made within fifteen days after the completion of the contract.[20]
The Lien Statement By Lien Claimant must be filed with the Register of Deeds of the county in which the improved premises are situated or of the county to which said county is attached for judicial purposes.[21] If the claim of lien is for construction on railways, telegraph, telephone, electric, light, or power line, the Lien Statement By Lien Claimant should be filed with the Secretary of State.[22]
A lawsuit must be filed in order to “perfect” a lien. Prior to “perfection,” liens are unenforceable.[23] The statutory time frame for filing the lawsuit is six years after the date of the last item of the lien claim as set forth in the filed and entered lien statement.[24] The lien may be enforced by action in the circuit court of the county in which the improved premises, or some part thereof, is situated.[25] The owner of the property can force a lien holder to file suit to forfeit its claim by making a written demand (Notice to Commence Suit to Enforce Mechanic’s Lien) upon the lien holder.[26] Once the lien holder receives the Notice, it must commence its lawsuit within thirty days or forfeit its lien.[27]
No sub-subcontractor or supplier to a subcontractor is entitled to extend a lien on a project on which the prime contractor has filed a Notice of Project Commencement unless the sub-subcontractor/supplier has first provided a Notice of Furnishing Labor or Materials by certified or registered mail to the contractor identified in the Notice of Project Commencement and has provided a copy of the notice to the owner of record.[28] Notice may not be made later than sixty days after doing the last of such work or furnishing the last item of such skill, services, material, or machinery, and the post office receipt for mailing such notice shall be attached to the lien and filed in the office of the Register of Deeds.[29]
A mechanic's lien holder has the first lien on the real property, prior and superior to all other liens except those of South Dakota, the United States, or where there are existing liens, mortgages, or other encumbrances that are recorded or of which the lien claimant has actual notice.[30] Such lien shall take effect from the time the first item of material or labor is furnished upon the premises by the lien claimant.[31] As against a bona fide purchaser, mortgagee, or encumbrancer without notice, however, no lien shall attach prior to the actual and visible beginning of the improvement on the ground unless the person who has a contract to furnish labor, skill, material, or machinery files a Notice of Lien for Improvements/Notice of Contract with the Register of Deeds in the county within which the premises are situated.[32]
Mechanics’ liens can be expressly waived at any time.[33] The endorsement of a joint check wherein the payees include the contractor or subcontractor and the person or corporation furnishing materials, supplies, equipment, and services and by the execution of a separate agreement of waiver between the maker of the joint check and such person or corporation can be used as a full or partial waiver of a mechanic’s lien.[34] Such an endorsement on a separate Waiver of Lien shall constitute an express waiver of all rights and claims under the mechanic’s lien to the extent of, and of the date of, the joint check.[35]
Whenever a lien has been filed with the Register of Deeds and is afterwards satisfied by payment, foreclosure, compromise, or other method, the creditor shall execute and deliver to the owner of the property a Satisfaction of Mechanic’s Lien.[36] Such Satisfaction of Mechanic’s Lien must be executed before two witnesses or acknowledged before a notary public and filed with the Register of Deeds.[37] If any lien holder fails to execute and deliver such Satisfaction of Mechanic’s Lien within ten days after written demand therefore by the owner of the property or other interested person is made, when such lien has been satisfied, the lien holder shall be liable for all damages, costs, and expenses, including attorneys’ fees, and an additional penalty of One Hundred Dollars ($100.00).[38]
If the owner or interested party of property wishes to remove a lien by filing a bond, the owner or interested party must file an affidavit describing the property, lien, and his interest in the property and stating that the owner or interested party desires a discharge of the lien from the records.[39] Along with the affidavit, the owner or interested party must submit a bond in the amount of not less than twice the amount of the lien executed by at least two sureties, resident freeholders of this state, or a qualified corporate surety, to the effect that the owner or interested party will, on demand, pay the amount that may be recovered by the lien claimant, together with interest and costs.[40] In addition, personal sureties must justify their responsibility by affidavit annexed to the undertaking, stating a sum which each is worth in property in this state over and above all debts and liabilities and property exempt from execution, the aggregate of which shall be double the amount specified in the undertaking.[41]
If a lien holder fails to file suit within thirty days of receiving Notice to Commence Suit to Enforce Mechanic’s Lien, the lien is forfeited.[42] If the lien is forfeited because the lienholder fails to file suit within thirty days after receiving a notice to commence suit, “the register of deeds shall cancel the lien of record, if the [affected party] files no sooner than the fortieth day following service of the written demand: (1) An affidavit stating that the person holding the lien has not commenced suit to enforce the lien within thirty days after the service of the written demand; (2) A copy of the written demand that was served on the person holding the lien; and (3) Proof of service on the person holding the lien.“[43] If the lien is forfeited or satisfied for other reasons and the lien holder fails to file a Satisfaction of Mechanic’s Lien, the owner’s remedy is to pursue a Quiet Title Action.[44]
A lender must file and perfect a mortgage prior to the commencement of work in order for the lender to have priority over the mechanic’s lien holder.[45] If no visible work has begun on the property and the lender files a mortgage, the lender will have priority over any mechanic’s liens arising from the work.[46] However, if a person who supplies labor, skill, material, or machinery for such improvement files a Notice of Lien for Improvements/Notice of Contract with the Register of Deeds prior to any visible work being completed, the mechanic’s lien will have priority over the lender’s mortgage.[47]
If there is a contract between the owner and the lien holder, the lien as against the owner shall be for the sum so agreed upon together with the cost of any additional material or work agreed upon.[48] In all cases as against others than the owner, it shall be for the reasonable value of the work done, and of the skill, material, and machinery furnished.[49] The interest payable on amounts secured by mechanics’ liens is at the maximum rate allowed under SDCL § 54-3-5.1 [currently ten percent (10%)].[50] Interest is payable from and after the date of filing the mechanic’s lien.[51]
Any contractor, subcontractor, or supplier on any improvement of real estate, mines, or public utilities within the purview of this chapter who knowingly uses more than five hundred dollars ($500.00) of the proceeds of any payment made to him on account of such improvement by the owner of such real estate or person having the improvement made, for any other purpose than the payment for labor, skill, materials, and machinery contributed to such improvement while any account for such labor, skill, material, or machinery furnished for such improvement up to the time of such payment remains unpaid and due and owing under the credit terms arranged, is guilty of theft of the proceeds of such payment.[52] It is not a violation to withhold funds from a contractor, subcontractor, or supplier pending the completion and final approval of his work or product.[53]
If a contractor or subcontractor does not have the proper licenses or permits to practice such trade, it is generally considered a Class 2 misdemeanor under South Dakota law.[54]
Notice of Lien for Improvements/Notice of Contract
Notice to Commence Suit to Enforce Mechanic's Lien
Lien Statement By Lien Claimant
Notice of Project Commencement
Notice of Furnishing Labor or Materials
Owner's Demand for Lien Accounts
Satisfaction of Mechanic's Lien
[4] 40 U.S.C. §§ 3131-3134
[5] 40 U.S.C. § 3132
[6] SDCL § 44-9-1
[7] SDCL § 44-9-1
[8] SDCL § 44-9A-1
[9] SDCL § 44-9-50
[10] SDCL § 44-9-50
[11] SDCL § 44-9-50
[12] SDCL § 44-9-51
[13] SDCL § 44-9-53
[14] SDCL § 44-9-1
[15] SDCL § 44-9-15
[16] SDCL § 44-9-23
[17] SDCL § 44-9-15
[18] Barry v. G.L. Wood Farm Mortgage Co., 211 N.W. 688 (S.D. 1927); Thorson v. Pfeifer, 145 N.W.2d 438 (S.D. 1966)
[19] SDCL § 44-9-14
[20] SDCL § 44-9-14
[21] SDCL § 44-9-15
[22] SDCL § 44-9-15
[23] SDCL § 44-9-24
[24] SDCL § 44-9-24
[25] SDCL § 44-9-23
[26] SDCL § 44-9-26
[27] SDCL § 44-9-26
[28] SDCL § 44-9-53
[29] SDCL § 44-9-53
[30] SDCL § 44-9-1
[31] SDCL § 44-9-7
[32] SDCL § 44-9-8
[33] SDCL § 44-9A-1
[34] SDCL § 44-9A-2
[35] SDCL §§ 44-9A-3 and 44-9A-4
[36] SDCL § 44-9-21
[37] SDCL § 44-9-21
[38] SDCL § 44-9-22
[39] SDCL §44-4-2
[40] SDCL §44-4-3
[41] SDCL §44-4-3
[42] SDCL § 44-9-26
[43] SDCL § 44-9-26
[44] SDCL § 21-41-1
[45] SDCL § 44-9-1
[46] SDCL § 44-9-8
[47] SDCL § 44-9-8
[48] SDCL § 44-9-6
[49] SDCL § 44-9-6
[50] SDCL § 44-9-6.1
[51] SDCL § 54-3-5.1
[52] SDCL § 44-9-13
[53] SDCL § 44-9-13
[54] SDCL §§ 36-16-13.1 and 36-25-30