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Now is a good time to be a building contractor in California. A steadily increasing population that may reach 50 million by 2050 means a steady stream of new construction and renovation work in the residential, commercial, and government sectors. That large population also means that there is a large pool of both skilled and semi-skilled workers. Finally, the Golden State’s economy is very diverse, so a downturn in one area often has a limited effect on the construction industry as a whole.
However, all builders know that even the most attractive jobs, from both a financial and non-financial standpoint, can go sideways. Customers may have financial problems and be unable, or perhaps unwilling, to pay their bills on time. In other jobs, there are disputes as to the workmanship or quality of the final product. Or, a customer may insist on re-dos and work-arounds that drive the project over schedule and over budget, and the customer might try to withhold payment based on breach of contract.
California’s mechanics’ lien law offers a remedy for contractors who find themselves mired in these situations, as well as other similar quandaries. But, before you go to the mailbox to pick up the check, there are some very important things to know.
Mechanics’ Lien 101
If you are a construction industry attorney or card-carrying know-it-all, feel free to skip this section.
A lien is basically an announcement that there is an outstanding financial claim on the property, whether it be real or personal; there is usually supporting documentation, like an affidavit or promissory note, attached to the lien in the deed records [jra comments – no documents need to be attached to a lien in the recorded document – the last phrase is somewhat misleading]. After filing the lien, the contractor can either wait until the property is sold to negotiate a settlement [this is wrong – you have 90 days – why would the claimant wait longer – the lien is then invalid] or try to foreclose on the lien. More on that in a minute.
Who Can File
Generally, any person or entity that provided materials or services during construction can file a mechanics’ lien. The line is not always clear; for example, a company that erects a security fence is eligible under the statute, but a company that erects a perimeter fence during construction is usually ineligible. [Who reached this last conclusion? What is the legal basis for it?]
The law in California is based upon lengthy legal statutes and is very strict in this area. At a minimum, every mechanics’ lien in California must contain:
- Property Information: The owner’s name and a general description, like a street address, are usually sufficient; a legal description is beneficial but generally not necessary.
- Statement of Demand: The lien must identify the hiring party, briefly describe the work performed, and state a specific monetary demand.
- Proof of Service Affidavit: Personal service is always best; substitute service by mailing or publication may be appropriate in some cases.
- Technical Requirements: There must be a notice statement and verification that meet the statute’s specifications.
The lien must be recorded within between thirty or ninety days of completion of the work of improvement; most county clerks charge a nominal fee between $50 and $75 for the recordation of the lien. Again, the law is very strict and you must comply with each requirement.
Mechanics’ Lien Priority
As a rule of thumb, mechanics’ liens have priority over any liens that attached after work began or were unrecorded when work began. Some otherwise subordinate deeds of trusts and mortgages might take priority in some cases, and most bets are off if a taxing authority files a lien. [JRA comment: I would not address this issue in a general notice – it is a very complicated legal issue]
The Legislature recently changed the law in this area. Within twenty days after first furnishing labor or materials, workers or vendors who did not directly contract with property owners must send preliminary notices to the lender (if any), property owner, and primary contractor by certified mail [even if you have a contract with the owner (and, therefore, there is no need to serve the owner with a preliminary notice, the claimant still has to serve a preliminary notice on a construction lender, if there is one]; a subsequently-filed notice only dates back twenty days. Furthermore, the language in the notice must exactly match the language in the statute, or a judge may throw out the notice and terminate the foreclosure proceeding.
Even if you do not plan to foreclose on the lien, to give the owner additional time to pay or for whatever reason, it is best to go through the entire procedure, because if circumstances change, there are no do-overs. Time is your enemy if you do not follow the rules. If you do plan to foreclose on the lien, because negotiations have broken down or it looks like the customer is borderline insolvent, get ready for a fight. Property owners often do whatever it takes to invalidate these liens, and a large percentage of them are thrown out for failure to comply with the proper procedural steps.
To take some of the stress out of the process, many businesses use a comprehensive service that prepares, files, and perfects the lien. If that is your choice, we are here to serve you.