How Contractor’s Registration affects Construction Liens on Real Property Development

by Thomas L. Dickson, Esq.

Construction liens are an important part of Seattle real estate law and other high-growth areas of Western Washington. The lien, also called a mechanic’s lien, represents a pre-judicial claim against title, and the owner of the land on whom the lien is recorded cannot sell the property or obtain a loan thereon until the lien is satisfied, removed, or otherwise accommodated.

The Effect of a Construction Lien. Under RCW 60.04.021, “any person furnishing labor, professional services, materials, or equipment for the improvement of real property shall have a lien upon the improvement for the contract price of labor, professional services, materials, or equipment furnished at the instance of the owner, or the agent or construction agent of the owner. Effectively, a lien is a written notice recorded on the targeted property in the county auditor’s or recorder’s office and represents an encumbrance on title even though no lawsuit is filed.

Seattle real estate attorneys confront a regular occurrence of construction liens because of the tremendous growth in Seattle and Bellevue. Most are likely legitimate, but a great number are not. Construction companies may record them to leverage an unjustified payment out of a pending closing or to temper an angered developer seeking to sue the contractor for substandard work. Before, however, a contractor or construction company is eligible to record a construction lien or mechanic’s lien, it must be a registered contractor with the state. Under RCW 60.04.011(11), a “potential lien claimant” must be “registered or licensed if required to be licensed or registered by the provisions of the laws of the State of Washington.

Mandatory Contractor’s Registration. Under RCW 18.27.020(1), registration is mandatory through the Department of Labor and Industries, requiring the posting of a surety bond and procuring insurance. The purpose of contractors’ registration is to protect consumers from irresponsible contractors, “to prevent the victimizing of a ‘defenseless’ public.” Northwest Cascade Construction Co. v. Custom Component Structures, Inc., 83 Wn.2d 453, 459-60, 519 P. 2d 1 (1974). See also B.A. Van de Grift, Inc. v. Skagit County, 59 Wn. App. 545, 800 P.2d 375 (1990).

A suit for unjust enrichment will not suffice for a lack of registration. The court in Vedder v. Spellman, 78 Wn.2d 834, 480 P.2d 207 (1971) denied non-registered contractor’s damages notwithstanding the plaintiffs masterful job and a great investment of time. There is no relief for a contractor who unwittingly performs without valid registration regardless of great loss to him or her and unjust enrichment to the customer. Stewart v. Hammond, 78 Wn.2d 216, 471 P.2d 90 (1971).

Penalties for Lack of Registration. There are severe penalties for companies performing work without registration. For example, it is a gross misdemeanor for any contractor to “advertise, offer to do work, submit a bid, or perform any work as a contractor without being registered as required by this chapter.” RCW 18.27.020(1)(2)(a). This applies even if a contractor’s previous registration is suspended or revoked; or if a licensed contractor hires an unregistered subcontractor or allows another entity to falsely use its registration. RCW 18.27.020(2)(d) and (e). It gets worse:

A person is guilty of a separate gross misdemeanor for each day worked if, after the person receives a citation from the department, the person works while unregistered, or while his or her registration is suspended or revoked, or works under a registration issued to another contractor. A person is guilty of a separate gross misdemeanor for each worksite on which he or she violates subsection (2) of this section. RCW 18.27.020(5).

Labor and Industries is serious; it mandates a two-year audit and monitoring program for offending parties after reinstatement with notices to the Departments of Revenue and Employment Security to assist in scrutinizing whether “any taxes or registration, license, or other fees or penalties are owed the state.” RCW 18.27.020(6).

Consumer Protection Violation. Making matters even more critical for the contractor is a violation of the Washington Consumer Protection Act for lack of registration. Under RCW 18.27.350, noncompliance with the Contractor’s Registration Statute may violate the Unfair Business Practices-Consumer Protection Act.

“The fact that a contractor is found to have committed a misdemeanor or infraction under this chapter shall be deemed to affect the public interest and shall constitute a violation of chapter 19.86 RCW,” enabling the plaintiff to “recover the actual damages sustained by him or her, or both, together with the costs of the suit, including a reasonable attorney’s fee.” The court at its discretion can treble the plaintiff’s damages up to a limit of $25,000. RCW 19.86.090.

Importance to Landowners and Developers. Aside from the obvious reasons, i.e., unregistered persons are likely less competent contractors or business people, it is critically important for landowners, developers, and real estate professionals to verify registration because without it, no contractor may record a lien. That means even with a dispute, no lien gets in the way of a sale of property, obtaining title insurance or obtaining a loan secured by the land. When, thus, any lien is threatened or recorded, the effective property owner or developer looks first to verify the contractor’s registration.

Where to Verify a Contractor’s Registration. Washington’s Department of Labor & Industries provides a verification service for the public to investigate the registration status of a contractor or business. The following link, https://secure.lni.wa.gov/verify/, asks the user to conduct a search by name, contractor’s license or UBI number.

A page is displayed showing the contractor’s full name, principals (sole proprietor, corporation or limited liability company), governing persons, UBI number, whether it is registered, expiration date of the license, name of the bonding company (for use in filing suit against the contractor), name of insurance company and policy number, Labor & Industries tax debts, if any, license violations during the six years previous, existing lawsuits against the bond, and more. If the contractor is not registered, no construction lien may be recorded, RCW 60.04.011(11), and the owner or developer may sue for removal of the wrongful lien.