July 19, 2018

• Who Is Entitled to Record a Mechanic’s Lien?

– All persons who, at the request of an owner/owner’s agent, furnish labor, materials, equipment or services for the construction of a private work of improvement on real property.
– Only a licensed contractor or subcontractor may seek compensation or attempt to foreclose on a mechanic’s lien.
– Specific classes defined within the Civil Code, for example, material supplier (section 8028), laborer (section 8024), subcontractor (section 8046).
–Specific persons described in Civil Code section 8400: A person that provides work authorized for a work of improvement, including, but not limited to, the following persons, has a lien right under this chapter:
(a) Direct contractor (one who has a direct contract with the owner);
(b) Subcontractor (any tier);
(c) Material supplier (if contract with the direct contractor or a subcontractor);
(d) Equipment lessor (if contract with the direct contractor or a subcontractor);
(e) Laborer (if contract with the direct contractor or a subcontractor);
(f) Design professional.

• What Work is Subject to a Mechanic’s Lien?
– Work of improvement: Broadly defined in Civil Code section 8050; non-exhaustive list. Includes:

• Construction, alteration, repair, demolition, or removal, in whole or in part, of, or addition to, a building, wharf, bridge, ditch, flume, aqueduct, well, tunnel, fence, machinery, railroad, or road.

• Seeding, sodding, or planting of real property for landscaping purposes.

• Filling, leveling, or grading of real property.
– Improvement of Part of a Property vs. Entire Real Property.
– Tenant improvements: Work undertaken at the direction of one other than the “owner”. May be limited to liening only the improvements.

• What Sums May Appropriately Be Included in a Mechanic’s Lien?
– The LESSER of the amount of the claimant’s contract or the “reasonable value” of the labor, materials, equipment, or services actually furnished (Civil Code section 8430(a)).

• What about inclusion of defect or delay claims in a mechanic’s lien? BE WARY!
– Multiple improvements undertaken though a single contract (subdivision development, condominium project, etc.): claimant must “apportion” its claim among each work of improvement (Civil Code section 8446).
– What if the lien claim is overstated? Erroneous information in a claim of lien does not invalidate the lien except:

• if the claim of lien was made with the intent to defraud;

• an innocent third party, without notice, becomes a bona fide owner of the property after the lien is recorded, and the lien was so deficient that it did not put the party on further inquiry; or • willful inclusion of labor, material, equipment, or services not provided may result in the forfeiture of the entire claim of lien (Civil Code section 8422).

• Do your homework before starting work!

– Determine who is the owner of the property.
– Determine whether there is a construction lender for the project.
– Determine whether there are any existing deeds of trust or other encumbrances recorded against the property.

• Prerequisites to Recording the Mechanic’s Lien

– Importance of the Preliminary Notice

• A preliminary notice alerts owners, contractors, and lenders to secured claims arising from contracts to which they were not parties and of which they would otherwise have no knowledge. Romak Iron Works v. Prudential Ins. Co. (1980) 104 Cal.App. 3d 767, 778.
• Unless you are a general/prime contractor, a laborer, or a person/entity to whom a portion of a laborer’s compensation is paid, you must serve a preliminary notice or you are generally barred from recording a mechanic’s lien.

– Preliminary Notice

• Changes beginning July 1, 2012:

• 20-Day Preliminary Notice now just called Preliminary Notice

• Preliminary notices different for private works and public works but you can use one form as long as it covers the requirements for both.

• Civil Code section 8200: Preliminary notices must be given to
– the owner or reputed owner.
– the direct contractor or reputed direct contractor.
– the construction lender or reputed construction lender.
• Direct contractors must now provide preliminary notices to construction lender or reputed construction lender. Prior to July 1, 2012, direct contractors were not required to give a preliminary notice.
• For loans obtained after commencement of start of project, Civil Code section 8210 requires owners to provide notice and address of lenders to each person who provided a preliminary notice.

• Prerequisites to Recording the Mechanic’s Lien (cont’d)

– Completion

• Definition: Beginning July 1, 2012, completion no longer includes “acceptance by owner” unless the Project is subject to acceptance by a public entity. Per Civil Code section 8180, completion is limited to actual completion; occupation or use by the owner accompanied by cessation of labor; cessation of labor for a continuous period of 60 days; or recordation of notice of cessation after cessation of 30 days.

• A direct contractor may not enforce a lien unless the contractor records the lien after it completes the direct contract and before the earlier of:
– 90 days after completion of the work of improvement
– 60 days after the owner records a notice of completion or cessation.

• Lien claimants other than the direct contractor may not enforce a lien unless the claimant records the lien after it ceases to provide work and before the earlier of:
– 90 days after completion of the work of improvement
– 30 days after the owner records a notice of completion or cessation.

• Prerequisites to Recording the Mechanic’s Lien (cont’d)
• If the claimant records the lien before statutorily allowed, the claim is premature and therefore invalid.
• However, if the owner anticipatorily breaches the contract, e.g., by stating that no further payments will be made, the contractor has completed its contract and recording of its lien claim the next day is not premature. Howard S. Wright Constr. Co. v. BBIC Investors, LLC (2006) 136 Cal.App.4th 228, 241.

• Recording the Mechanic’s Lien

– Timing
• If no notice of completion or cessation recorded – 90 days
• If a notice of completion or cessation is recorded – 60 days for the direct contractor; 30 days for all other claimants

• However, if a notice of completion or cessation was recorded but the contractor (or any claimant who properly served a preliminary notice) was not provided notice of such recording, then the period for recording a mechanic's lien is 90 days from the recording of the notice of completion (Civil Code § 8190).

• Beginning July 1, 2012: – The timing for the owner to record a Notice of Completion is extended from 10 to 15 days after completion of work (Civil Code section 8182). Agent of owner can sign and verify a Notice of Completion.
– Civil Code section 8186 now addresses projects with separate or multiple direct contracts – owner can record a separate Notice of Completion with respect to the scope of work under each direct contract.

• Recording the Mechanic's Lien (cont’d)
– You must send the owner notice of your intent to record a mechanic's lien before it is recorded.
– The notice that must be given is prescribed by Civil Code section 8416 and reads as follows:

NOTICE OF MECHANIC’S LIEN ATTENTION!

Upon the recording of the enclosed MECHANIC’S LIEN with the county recorder’s office of the county where the property is located, your property is subject to the filing of a legal action seeking a court ordered foreclosure sale of the real property on which the lien has been recorded. That legal action must be filed with the court no later than 90 days after the date the mechanic’s lien is recorded.

The party identified in the mechanic’s lien may have provided labor or materials for improvements to your property and may not have been paid for these items. You are receiving this notice because it is a required step in filing a mechanic’s lien foreclosure action against your property. The foreclosure action will seek a sale of your property in order to pay for unpaid labor, materials, or improvements provided to your property. This may affect your ability to borrow against, refinance, or sell the property until the mechanic’s lien is released.

BECAUSE THE LIEN AFFECTS YOUR PROPERTY, YOU MAY WISH TO SPEAK WITH YOUR CONTRACTOR IMMEDIATELY, OR CONTACT AN ATTORNEY, OR FOR MORE INFORMATION ON MECHANIC’S LIENS GO TO THE CONTRACTORS’ STATE LICENSE BOARD WEB SITE AT

• Recording the Mechanic's Lien (cont’d)
– Not only must the Notice of Mechanic’s Lien contain specific language, but it must be in a specific format. The written notice must be in at least 10-point boldface type, and the letters of the last sentence must be printed in all caps, except for the Contractors' State License Board website address.
– Both the proposed Mechanic's Lien and Notice of Mechanic's Lien must be served on the owner as dictated by Civil Code section 8416. Service on the owner must be at the owner’s residence or place of business address, or at the address shown on the building permit. Service shall be by registered, certified or first-class mail. If the owner or reputed owner of the property cannot be served, then both the proposed Mechanic's Lien and Notice of Mechanic's Lien must be served on the construction lender or the original contractor prior to the recording of the Mechanic's Lien.
– Proof of service of the mechanic's lien, including the Notice of Mechanic's lien, is mandatory. The Mechanic's Lien will not be accepted by the county recorder unless it contains the "Notice of Mechanic's Lien” and the proof of service affidavit signed by the person serving the documents on the owner or the lender/contractor. If the proper steps are not taken, the mechanic's lien is deemed to be unenforceable as a matter of law.

• Recording the Mechanic's Lien (cont’d)

– Contents of a mechanic’s lien: A claim of lien is defined in Civil Code section 8416 as a written statement, signed and verified by the claimant or by his or her agent, containing:
• Claimant’s demand after deducting all credits and offsets
• Name of the owner or reputed owner, if known
• General nature of labor, services, equipment or material furnished by claimant
• Name of person who employed claimant or to whom claimant furnished labor, services, equipment, or material
– Record the lien with the “Notice of Mechanic's Lien” and the proof of service affidavit with the county recorder in the county in which the property is located

• Amending the Mechanic’s Lien
– Be wary! A lien should usually only be amended when absolutely necessary and if the time to record liens has not expired. Otherwise, the amendment may be invalid. Bottom line: Get it right the first time.

• Releasing the Mechanic’s Lien
– Partial v. Complete
– Form

• Civil Code § § 8132-8138.
– Conditional waivers and releases add language that excepts out progress payments covered by prior releases that have not been paid.
– If the release is to be recorded with the county recorder, reference the prior lien and make sure your release is notarized.
– Be careful! If you release a lien by stating that it has been fully satisfied and/or discharged (even if it has not), you cannot record a new lien for the same work and/or materials.
– Also, be wary of billing disputes where work is not billed for when performed.

PERFECTING THE MECHANIC'S LIEN

• Time Limits:
– Mechanic's lien is released by operation of law if the claimant does not file an action to “foreclose” on the lien within 90 days.
– Keep track of your deadlines!

• Effect of a “void” lien on a subsequently recorded lien. See Koudmani v. Ogle Enterprises (1996) 47 Cal. App. 4th 1650.
– Extension of Credit: 90-day period may be extended for an additional period of time; subject to specific requirements set forth at Civil Code section 8460(b), including that the credit extension must be recorded within the original 90-day period.
– 90-day period may be tolled by operation of the automatic stay if the property/improvement comes under the jurisdiction of the Bankruptcy Court (i.e., the owner files a bankruptcy petition).

• Consult with Bankruptcy counsel with respect to effect of automatic stay and orders providing relief from the automatic stay.

• The Foreclosure Lawsuit:
– Investigation/Preliminary Report
• Mechanic's Lien Guaranty.
• Evaluation of senior liens and deeds of trust; is it worthwhile to proceed?
– All parties with an ownership interest in the property need to be included in the lawsuit and served, including beneficiaries under a junior deed of trust.
– Evaluation of competing liens and entities with an interest in foreclosure proceeds (construction lender, judgment lien holders, other mechanic's lien holders, etc.).
– Has a mechanic's lien been properly “bonded around” (i.e., appropriate surety, adequate sum, recorded, etc.)? If so, the lawsuit must name the surety and sue on the bond rather than foreclose on the lien, and the lawsuit on the bond must be commenced within 6 months after notice is given that the bond has been obtained and recorded (Civil Code section 8424).
– Be sure to include all other appropriate causes of action and claims, including, without limitation, breach of contract, common counts, claims against payment bond surety, etc.

• The Foreclosure Lawsuit (cont’d)

– Record a lis pendens CONCURRENTLY with the filing of the complaint (and no later than 20 days after the action is filed per Civil Code section 8461) to ensure that purchasers or others that encumber the property “after the fact” do so subject to the mechanic’s lien.
– Arbitration versus jury trial. What if the contract requires arbitration?
– Bring action to trial within 2 years.

• Defenses to Mechanic’s Lien Foreclosure Actions:
– Defenses generally include, without limitation:
• the failure of the claimant to satisfy all conditions precedent to pursue a lien claim (i.e., service of preliminary notice, if required)
• the untimely recording of the lien in the proper county
• willful overstatement of the lien claim
• failure to file an action timely
• lack of standing (i.e., pleading that the claimant was licensed, if required)
• lack of merit to underlying lien claim
• fraud

• Design Professional Liens
– Design professionals may record liens before construction commences.
– Civil Code section 8014 now includes landscape architects in definition of design professionals.
– For work performed prior to commencement of construction work, designers need to follow Civil Code sections 8300-8318, which are consistent with prior laws.
– Design professional may convert a recorded design professional lien to a mechanic’s lien so long as the time to file an action on the design professional lien has not expired.

• EXPUNGE LIEN/REMOVE LIEN FROM TITLE
– For a petition to expunge a lien, Civil Code section 8488 now allows the prevailing party to recover all reasonable attorneys’ fees (old Civil Code statute limited fees to $2,000.00).
– Amount of a lien release bond has been reduced from 150% to 125% of the amount of the lien.
– Civil Code section 8490 now specifies that a court order or judgment, unless expressly stated to be without prejudice, dismissing a lien foreclosure action is the equivalent of cancellation of the lien and is a recordable instrument.
– Civil Code section 8494 provides that if an action has not been timely filed to enforce a lien, the claim of lien does not constitute notice to any person dealing with the property.