July 16, 2018
I. OVERVIEW OF CALIFORNIA’S SCHEME OF PROTECTION
A. Purpose of Mechanic’s Lien Law:
1. The basic purpose of the California mechanic’s lien law is to afford security for those who enhance the property of others. The mechanic’s lien law is a remedial statute that is liberally construed in favor of the claimant. It is based on express provisions of the original California Constitution (1879).
2. Article 14, § 3 of the California Constitution now provides: “Mechanics, persons furnishing materials, artisans, and laborers of every class, shall have a lien upon the property upon which they have bestowed labor or furnished material for the value of such labor done and material furnished; and the Legislature shall provide, by law, for the speedy and efficient enforcement of such liens.”
3. “The mechanics’ lien is the only creditor’s remedy stemming from the constitutional command and our courts ‘have uniformly classified the mechanics’ lien laws as remedial legislation, to be liberally construed for the protection of laborers and materialmen.’ . . . . . ‘[s]tate policy strongly supports the preservation of laws which give the laborer and materialman security for their claims.’” Coast Central Credit Union v. Superior Court (1989) 209 Cal.App.3d 703, 708. “No other ‘creditor remedy’ in this state enjoys such a constitutionally enshrined status.” Connolly Development, Inc. v. Superior Court (1976) 17 Cal.3d 803, 808.
B. Basic tools of protection under California Mechanic’s Lien Law (Cal. Civ. Code §§ 8000, et seq.). Note: remedies are cumulative.
1. Design Professionals Lien (§§8300, et seq.) Now includes landscape architects.
2. Mechanics’ Lien on Private Work (§§ 8400, et seq.)
3. Stop Payment Notice on Private Work (§§ 8500, et seq.)
4. Stop Payment Notice on Public Work (§§ 9350, et seq.)
5. Payment Bond on Private Work (§§ 8600, et seq.)
6. Payment Bond on Public Work (§§ 9550, et seq.)
7. Owner Security for Payment to Contractor (§§ 8700, et seq.)
8. Statutory Stop Work Order (§§ 8300, et seq.)
9. Prompt payment (§§ 8800, et seq.)
II. THE MECHANICS’ LIENS
A. Construction Documents (§§ 8170, et seq.):
1. Prime and subcontracts must identify name/address of owner and construction lender.
2. Building permit application shall identify lender.
3. Trust deed to be prominently labeled “Construction Trust Deed” (§8174.)
B. Prerequisites to Maintaining a Lien Claim
1. Persons entitled to lien (Cal. Civ. Code §§ 8400, 8404, 8430, 9100):
a. Includes mechanics, material suppliers, direct contractors, subcontractors, union trust funds, lessors of equipment, architects, registered engineers, builders, and all persons and laborers performing labor on, or furnishing materials or leasing equipment to be used or consumed in a work of improvement.
b. Does not include suppliers to material suppliers, vendors of equipment to subcontractors, and lenders.
c. Distinction between subcontractor and material suppliers is key.
2. Work of Improvement (Cal. Civ. Code § 8050)
a. Includes construction, alterations, additions to, or repair, in whole or in part, of any building, bridge, fence, machinery, road, landscaping, grading, demolition of buildings and removal. Means the entire structure or scheme of improvement as a whole.
b. Generally requires a permanent contribution to a work of improvement.
c. Land on which improvement located with convenient space about the same or so much as may be required for the convenient use and occupation thereof. (Usually means entire legal parcel.) If owner holds less than a “fee” interest, mechanic’s lien can still attach to owner’s interest (e.g., leasehold).
3. Preliminary Notice (Cal. Civ. Code §§ 8034, 8200 and 9300)
a. All claimants except the direct contractor (direct contractual relationship with owner), individual laborers, and union trust funds, must give preliminary lien notice no later than 20 days after they first furnished labor, services, equipment or materials to the project. Can give notice late, but lien rights extend “back” only 20 days. Contractor must give preliminary notice to construction lender to enforce rights.
b. Preliminary notice contents:
(i) General description of labor, services, equipment or materials and estimated total price – must be a rational estimate, not a guess.
(ii) Name and address of claimant
(iii) Name of person contracting with claimant
(iv) Description of job site
(v) Boldface notice to property owner of lien rights (§ 8202)
(vi) New requirement regarding notices of completion.
c. To whom is preliminary notice given:
(i) Owner or reputed owner
(ii) Original contractor or reputed original contractor
(iii) Construction lender or reputed construction lender
d. Proof of service:
(i) Notice contains proof of service affidavit to evidence personal service or service by first class mail, registered or certified.
(ii) If by mail – maintain registered or certified receipt.
e. Effect of deficient preliminary notice – substantial compliance
(i) Does the affected party (owner) have actual knowledge of construction?
(ii) Has the claimant acted reasonably under the circumstances?
C. Claimant Must Timely Record Mechanics’ Lien (Cal. Civ. Code §§ 8412, 8414, 8186)
1. Must be recorded in the county where the work of improvement is located
2. Time to record:
a. If a Notice of Completion (“NOC”) is recorded – 60 days for direct contractor, 30 days for others. Owner must properly serve notice that NOC has been recorded in order for shortened period to apply.
(i) NOC must be recorded within 15 days of completion.
(ii) Separate NOCs may be given for scopes of work under each direct contract.
b. If a Notice of Cessation (cessation for 30 days or more) is recorded – same as for Notice of Completion (60/30 days).
c. To be effective, an NOC or Notice of Cessation must be properly served within 10 days of recordation. (§8190.)
d. If neither Notice is recorded (or notice of recording is not given by Owner) – 90 days after “completion” (as defined in Cal. Civ. Code §§ 8180 and 9200):
(i) Occupation or use of work of improvement by owner accompanied by cessation of labor
(ii) Cessation of labor for a continuous period of 30 days for a private work and 60 days for public works.
(iii) Acceptance by public agency for public works
3. Contents of lien (§8416)
a. Must be signed and verified
b. Statement of the demand after deducting all just credits and offsets
c. Name of owner or reputed owner if known
d. General statement of the kind of labor, services, equipment and/or materials furnished by claimant
e. Name of person by whom claimant was employed or to whom he furnished the labor, services, equipment or materials
f. Description of the site sufficient for identification - Use legal description where possible.
g. Notice of Mechanic’s Lien (part of 2010 amendments)
h. Affidavit of service on owner/reputed owner. If no service, the lien is invalid.
D. Claimant Must Timely File Complaint to Foreclose Lien (Cal. Civ. Code § 8460)
1. Within 90 days after date of recordation of lien
2. In the proper court
3. Extensions – Notice of Credit (no longer than one year from lien date)
4. Multiple or successive liens
5. Contents of complaint:
a. Fictitious defendants -- junior encumbrances
b. Allege compliance with lien prerequisites
c. Licensed (unless a material supplier, union, etc.)
d. Property description
e. Priority over lender?
E. Notice of Pending Action. Claimant must serve a lis pendens w/n 20 days of filing of action. Otherwise, no constructive notice is given to subsequent purchasers/encumbrancers.
F. Lien Release Bond (Cal. Civ. Code § 8424)
1. From an admitted surety - 1¼ times the amount of the claim
2. Claim transfers from property to bond
3. Use of “Personal Sureties” not permitted
4. Must be recorded and served
5. If release bond recorded prior to foreclosure action, statute of limitations extended from date of proper service.
G. Amount Collectible under Mechanics’ Lien (Cal. Civ. Code § 8430)
1. Agreed price or reasonable value, whichever is less
2. Cannot include attorney’s fees or interest
3. Delay damages?
H. Priority – all lien claimants treated the same; liens relate back to commencement of construction
1. Liens have priority over deeds of trust recorded after work commences.
2. Exception - site improvement lien has priority over work of improvement lien. Site improvement considered separate work of improvement if under separate contract from work of improvement.
3. Lien has priority over non-obligatory advances by lender subsequent to original deed of trust.
4. Lenders whose claims are subordinate to lien claims may obtain priority by recording payment bond. (Cal. Civ. Code §§ 8452, 8458)
I. Owner Protections
1. Notice of Nonresponsibility – where owner has not caused the work of improvement to be performed (Cal. Civ. Code § 8444)
a. Posted and recorded with 10 days of first knowledge that work commenced
b. Posted in conspicuous place on property
c. Is this really an effective protection? Participating owner doctrine exception.
2. Waivers and Releases – must substantially follow statutory forms (Cal. Civ. Code §§ 8132, 8134, 8136 and 8138.) Forms are materially changed effective July 1, 2012.
3. Strong Disbursement Controls - joint checks or written acknowledgment of payment are evidence of payment (§ 8124.)
4. Bonding around liens – 1¼ times claim.
5. Petition to remove “stale” liens. (§§ 8480, et seq.) Limit on recovery of attorney’s fees removed.
6. Recorded contract and Payment Bond. (Cal. Civ. Code § 8600.)
III. STOP PAYMENT NOTICE CLAIMS ON PRIVATE WORKS
A. Stop Payment Notices create claim against undisbursed construction loan funds in
the hands of owner or lender. What are undisbursed construction loan funds? (Familian vs. Steiny cases)
B. Stop Payment Notices do not have the same lien priority problems that are presented with mechanics’ lien claims, i.e., foreclosure wipe out.
C. Basic Principles.
1. Persons entitled to stop payment notice:
a. Any person entitled to mechanics lien other than general may give owner a stop payment notice. (Cal. Civ. Code § 8520). Stop Notice served on owner need not be bonded.
b. Any person entitled to a mechanics’ lien, including the general contractor, may serve a stop payment notice on the construction lender. (Cal. Civ. Code § 8530, et seq.) May be bonded or not bonded, but must be bonded to be mandatory as against Lender.
2. Stop Payment Notices are a cumulative remedy with mechanics’ liens.
3. Preliminary notice required when it would have been required for lien claimant.
4. Contents of stop payment notice:
a. Kind of labor, services, equipment, or materials furnished or agreed to be furnished
b. Name of person to or for whom done or furnished
c. Amount in value of that already done or furnished
d. Name and address of claimant
e. Not required to be verified
5. Bonding the stop payment notice.
a. Stop payment notice to lender must be bonded for mandatory withholding
b. Amount equal to 1¼ times amount of claim
c. Must be adequately bonded to be effective
d. Why bond? – Protects the lender for damages that lender, owner, original contractor may suffer
e. If bonded – lender must withhold from owner/borrower and general contractor amount of the claim.
f. Objecting to bond – personal sureties
6. Timing – Must serve on owner or lender within time period for recording mechanics’ liens.
7. Method of service – must be served personally or by registered or certified mail – on branch servicing the loan.
8. Timing of action to enforce – at least 10 days after service of stop notice, but within 90 days of last date to record mechanic’s lien.
9. Unlike mechanics’ liens, attorney’s fees recoverable on “bonded” stop notices – what about “unbonded” stop payment notices served on owners?
10. Obligations of owner/lender in response to stop notice.
11. Insufficient funds – pro rata distribution without regard to timing of service.
12. Benefits of recording payment bond b/4 construction (Cal. Civ. Code §§ 8536, 8538, 8542, and 8600). Recording of payment bond in amount equal to 50% of the direct contract price may limit aggregate amount of claims to balance due under prime contract, and to amount of bond.
13. Bonding Around Stop Payment Notices
a. Construction lender, owner, original contractor or subcontractor can obtain release by filing with holder a bond 1¼ times amount in disputed stop notice.
IV. STOP PAYMENT NOTICE CLAIMS ON PUBLIC WORKS (CIV. C. §§ 9350, ET SEQ.)
A. Who is entitled to serve stop payment notice?
1. Any person entitled to assert mechanic’s lien claim, other than general contractor
B. Conditions to enforcement of stop payment notice:
1. Service of preliminary lien notice (similar to private works) (§§ 9300, et seq.). Must give general description of work and an estimated total price.
2. Timely service of stop payment notice on public entity – must serve disbursing officer or board of public agency. Same time periods as for private works. (§ 9500)
3. Government Code claims requirements satisfied.
4. Public works stop payment notice need not be bonded.
C. Contents of stop payment notice same as for private works. Notice shall state general description of work and state estimated total amount of value to be provided. Amount claimed limited as of date of notice. (§ 9352)
D. Timely filing of action to enforce – at least 10 days after service of stop payment notice, but within 90 days of last date to serve stop payment notice (30/90 days after completion). (§ 9502)
E. Owner’s obligations upon receipt of stop payment notice:
1. Must withhold funds from general contractor “sufficient to answer claim,” along with public agency costs of litigation.
2. No priority if insufficient funds held – pro rata distribution
F. Summary procedure for removal of disputed stop payment notices (§§ 9400, et seq.)
G. Bonding around public works stop payment notices
1. Same as for private works – 1¼ times amount of stop payment notice
2. Discretionary – agency may still withhold funds
V. PAYMENT BONDS ON PRIVATE WORKS
A. Payment Bond by General Contractor (Cal. Civ. Code §§ 8600 et seq.)
1. Who are protected parties? What are the benefits? (Cal. Civ. Code. §§ 8536, 8538, 8542, 8600 and 8602).
2. Preliminary 20 day notice requirement – but, lower-tier sub may still make claim if written notice to principal and surety with 15 days after recordation of notice of completion, or if no notice, within 75 days after completion of the work of improvement. Late notice (second bite of the apple) not allowed where direct contractor has made all required progress payments.
3. Not mandatory on private works
4. Time to file action – six months from completion of work of improvement
5. Recording Payment Bond and contract (Cal. Civ. Code §§ 8600.)
VI. PAYMENT BONDS ON PUBLIC WORKS
A. Payment Bond and Performance Bond required on all public works contracts – 100% of contract amount (Cal. Civ. Code §§ 9550 and 9554.)
B. Conditions to enforcement
C. Preliminary notice – but, lower-tier subs may give notice late, as with private work payment bond claims. Late notice (second bite at the apple) not allowed where direct contractor has made all required progress payments.
D. Timely action to enforce – six months after time period to serve stop notices
VII. OWNER SECURITY FOR PAYMENT TO CONTRACTOR ON LARGE PROJECTS
A. Civil Code Section §8700, et seq., requires an owner of property who contracts for a work of improvement to provide security for the owner’s payments obligations under the construction contract.
B. What Owners Must Comply?
1. “Fee Owners”, including a lessee of the property pursuant to a lease with an initial term of at least thirty-five (35) years. A fee owner is not considered to be a holder of less than a fee because there are encumbrances on the property, such as ground leases, mortgages, deeds of
trust, liens, etc.
2. Holders of less than a fee interest in property (i.e. a “tenant”)
3. The statute only applies to the person or entity who actually enters into the contract for the work of improvement.
C. What Projects Are Covered?
1. Projects by Fee Owners: value of the contract is more than $5,000,000
2. Projects by Tenants: value of the contract is more than $1,000,000
D. What Projects are Excluded?
1. Construction of single family residences, including those located within a subdivision;
2. Any public works projects;
3. Any housing developments eligible for a density bonus under Government Code §65915;
4. A contracting owner who is either a “qualified publicly traded company” (as defined) or a wholly-owned subsidiary if parent company guarantees subsidiary’s obligations;
5. A contracting owner who is either a qualified private company (a company that has no equity securities listed for trading on national markets and has a net worth in excess of $50,000,000) or a wholly-owned subsidiary if parent company guarantees the subsidiary’s obligations; or
6. A contracting owner who is the majority owner of the original contractor.
E. It is against public policy for the parties to waive the effect of the Owner security provisions. (§ 8714.)
F. What Must Owners Do?
1. Give original contractor certified copy of recorded construction mortgage or deed of trust. The copy must disclose amount of construction loan.
2. Provide the original contractor with security for owner’s payment obligations, to be used only when owner defaults on its contractual obligations to contractor.
G. How Much Security is Required?
1. Where work is to be completed within six months from commencement – 25% of total amount of the contract
2. For longer projects – 15% of total amount of the contract
3. Where the price under the contract is not a fixed price, the amount of security required is determined by guaranteed maximum price. If no GMP, then the amount is determined with reference to the owner’s and contractor’s “good faith estimate” of the total cost to be incurred.
H. What Type of Security Is Required?
1. Payment Bond
a. From California admitted surety that has an A.M. Best rating of “A” or better and has an underwriting limitation greater than the amount of the bond
b. Must be payable upon the default of the contracting owner where payment of any undisputed amounts have not been made for more than thirty days
2. Letter of Credit
a. Irrevocable letter of credit from a financial institution inuring to the benefit of the original contractor
b. Maturity date and terms determined by agreement between the contracting owner, the original contractor and the issuer of the letter of credit
c. Owner required to maintain letter of credit in effect until all payment obligations to the original contractor have been satisfied
3. Escrow Account
a. “Construction security escrow account” maintained with a licensed escrow agent, or any person exempt from the Escrow Law under Financial Code §17006(a)(1)(3)
b. Must be located in California
c. Owner must deposit funds in the appropriate amount (see above)
d. Contractor need not accept a construction escrow account unless the owner establishes contractor’s perfected, first priority security interest in escrow account. This may be established by a written opinion of legal counsel.
e. Funds in account remain sole property of owner, subject to the security interest in favor of contractor. “Retainage or retention” must be deposited in escrow account concurrently with the payment. Owner not required to maintain funds in account that exceed the total amount of future payments owed to contractor. If amount exceeds total payments remaining, owner and contractor
must authorize disbursement to contractor to pay progress payments.
f. Lenders are not required to deposit proceeds of a construction loan in a construction security account.
I. Penalty for Non-compliance
1. If the contracting owner does not provide security or fails to maintain that security as required, the original contractor may make a written demand on the owner. If the owner still does not provide or maintain the security within ten days after the demand, the original contractor may suspend work until the owner does so.
VIII. STATUTORY STOP WORK ORDER FOR NON-PAYMENT (CAL. CIV. CODE §§ 8830, et seq.)
A. Summary: Procedure allows for prime contractor to stop work for nonpayment, where no dispute exists over payment, and avoid delay damages when a stop work order is served and prescribed procedures are followed.
B. Applies only to Private Works of improvement
C. Timing of stop work order: May give 10-day stop work notice when prime is not paid within 35 days from the date payment is due pursuant to the written contract
D. Posting of notice required: At least 5 days before a 10-day stop work notice is served, the prime shall post in a conspicuous location at the job site and at the main job site office if one exists a notice that the prime intends to file a 10-day stop work order. A copy shall be served on all subs. Owner to provide notice to any lender.
E. Content of stop work order: Unless all amounts then due are paid within 10 days from the date the notice is served, the prime will suspend work.
F. Cancellation of stop work order: Upon resolution of the dispute the prime shall post in a conspicuous place at the job site a notice of the cancellation and serve the notice on its subs.
G. No delay damages: No damages for delays caused by any sub, prime or surety suffered from 10-day stop work order if all posting and notice requirements are met. Lower tier subs and suppliers are limited to damages allowable under lien laws up to date of notice and materials/labor supplied through the 10 day notice period.
H. Right to seek expedited proceeding in court
I. Remedy is cumulative
J. Not waivable
K. Service of stop work order:
1. Personally or by leaving at home or work address; or
2. First class registered or certified mail (request receipt) postage prepaid at work or home address or at address shown on building permit. Service by certified mail is effective on receipt.