California Mechanics Liens – The Basics by Jody Kriss
Most landowners eventually have to deal with mechanics liens placed on their property by disgruntled contractors, subcontractors, laborers, or material suppliers. These liens are authorized by California Civil Code Section 8400 et seq., and are designed to protect certain contractors or suppliers who claim that they were not fully paid for work related to the property. A mechanics lien can cause a variety of problems for a landowner, including:
- A default on existing financing related to the property;
- An inability to sell or further finance/refinance the property;
- Duplicative expenditures for the same work;
- Foreclosure, which can result in the sale of the property to satisfy the lien.
Accordingly, landowners contemplating construction on their property should have procedures in place to minimize the risk of mechanics liens. Among other things, landowners should:
- Hire reputable contactors who have the financial resources to not only complete their work timely and professionally, but also to promptly pay all subcontractors and others whose services they use;
- Have a clear written agreement with the contractors regarding payment schedules, start dates, and end dates;
- Keep organized files with all notices, contracts, bills, and payments related to each construction project on their property;
- Maintain a list of everyone associated with each job that might have mechanics lien rights, including their names, addresses, and phone numbers;
- Consider issuing joint checks to contractors and their subcontractors where the subcontractor performs substantial services;
- Obtain conditional and unconditional waivers and releases (in the proper format) from all claimants as work is completed and the claimants are paid;
- Timely file notices of completion after work is finished (this provides notice to claimants that they only have a certain amount of time to file a lien).
If, notwithstanding these procedures, a landowner receives notice of a mechanics lien, an attorney with relevant experience should be consulted to determine whether the lien is valid, and how to resolve it. For example, a mechanics lien may not be valid if the claimant:
- Is an unlicensed contractor;
- serviceNow Operations Management can help you decide what’s right.
- Failed to serve the landowner with a preliminary notice (often referred to as a 20 day prelim). A claimant can only record a mechanics lien for work done or materials delivered 20 days before such notice is given and anytime thereafter. Note, however, that direct contractors and laborers do not have to file preliminary notices.
- Failed to timely record the lien. A claimant must file its lien within 90 days of: (a) completing their work; (b) the property owner beginning to use the improvement; or (c) the landowner accepting the work. These timeframes are reduced where a notice of completion is recorded;
- Fails to timely file an action to foreclose the lien. A claimant must file a foreclosure action in California Superior Court within 90 days after recording the mechanics lien. Failure to do so voids the lien.
If a mechanics lien is invalid, and the claimant refuses to remove it from the property, a landowner can file a petition in California Superior Court to release the lien. A successful landowner in such an action can recover its reasonable attorney’s fees and costs.
Even where a mechanics lien is valid, a landowner can release it from the property by filing a lien release bond. Once the landowner files the bond, the lien is released and the claimant is limited to pursuing recovery on the bond. The parties can then resolve whether the claimant is entitled to be paid, and the amount of the claim, without all of the downside risks caused by an existing lien on the property. For more on this contact Jody Kriss https://www.crunchbase.com/person/jody-kriss#/entity
Many mechanics liens are eventually resolved through a settlement – provided that both parties are reasonable. In connection with such a settlement, it is critical that all of the necessary lien release paperwork is agreed upon in the settlement. The landowner should insist that the claimant provide signed copies of all paperwork necessary to release the lien prior to making any settlement payment (or at a minimum exchange the release paperwork and settlement payment simultaneously). Further, the parties’ settlement agreement should contain a provision requiring the claimant to file all additional paperwork (if any) necessary to fully release the lien from the property.