Mechanics Liens in Eight Easy Steps (and one more)

Step Nine: The Extra Step
These postings on Mechanics Liens were supposed to be completed in 8 steps but there is another point that needs to be made. If you are paid for some but not all of your outstanding balance, you should reduce the amount of your Mechanics Lien. How do you do that?

You do it cautiously and carefully.

There are a number of Release of Mechanics Lien forms and for the most part they all say the same thing- you have been paid and you are therefore filing the Release and are releasing the property and Owner from any further obligations. Be careful when you do this. The language on the Release will say that you are surrendering, discharging, releasing, and are fully and finally paid for all of the amount in the Mechanics Lien. If you have not been fully paid, you need to cross out that language that says you are fully and finally paid. You do not want to give a Release with this type of language intact if you have not been paid in full.

You may need to record an amended Mechanics Lien that shows the reduced amount and indicates that the release is only for the paid portion, not all of the Lien amount. Be especially careful if you Release the entire Lien and then record another Lien for the reduced amount. Is there still time to do this? Recall from the earlier posts that there are statute of limitations issues that come into play.

For example, assume that you are a subcontractor that has not been paid. The owner has recorded a Notice of Completion. You have 30 days from the date of the Notice of Completion to record your Mechanics Lien. Assume that you have but then the Owner or contractor pays you some but not all of the money you are owed. They make this payment on day 29 after the Notice of Completion. You take the check, cash it, get the funds and are then asked to Release the Mechanics Lien for that amount. You don’t want to Release the existing Lien and re-record a new one though because you are beyond the 30-day limit. You can amend the Mechanics Lien, but you don’t want to record a new one. It will likely be untimely and invalid. Be careful.

One way around this whole issue is the Conditional Lien Release and Final Lien Release. These are statutorily required releases for payments that are made. The General who makes payment to a subcontractor will want these Releases every time he/she makes payment. The language in the Release needs to be the same or substantially the same as what is required by the Code. The Conditional Release and Final Release are the only way that a contractor can release its rights. If you are being paid, or if you are doing the paying, using the Conditional/Final Lien Release forms can be a way to assure that payment is counted against the Mechanics Lien amount.

The long and short of this is, be careful if you have recorded your Lien but then get paid. Don’t just Release and re-Record another Lien. If there is time to do so, then fine; if there is not time then modify the Lien and/or use the Conditional/Final Lien Release documents.

Mechanics Liens in Eight Easy Steps

Step Eight: After You File The Lawsuit

After you file your lawsuit, things will slow down considerably. If you are thinking that by filing the lawsuit you will soon be getting a check in the mail, think again! For one thing, once you file the litigation, the other side will have 30 days to answer. They will undoubtedly ask for more time to do so, and you will likely agree.

You may also be surprised to find out that the work you performed on the project was not very good after all and you are being sued for defective construction. If you have a direct contract with the Owner then you may be sued on a cross complaint by the Owner. If you are a subcontractor, then the General may sue you, if he/she is sued by the Owner, or the Owner may sue you directly, just not for breach of contract. When these cross complaints are filed, the process goes through another minimum 30 day cycle.

The point is that lawsuits are not to be taken lightly; if you are going to start litigation, be prepared to finish it, and be patient. And be prepared to be named as a party in the litigation too.

There are a couple of things to consider before filing your lawsuit.

First, how much money is at stake? Litigation is expensive and time consuming. If the amount is $10,000 or less, you should consider taking the matter to small claims court. It’s sometimes a crap shoot in the small claims arena but it is inexpensive and it could get you your money a lot faster than filing in the Superior Court. Keep in mind though that if you are the plaintiff in a small claims action and you lose, the case is over. If you win, the other side can appeal the decision to the Superior Court and have a judge hear the appeal.

In small claims you have a judge pro tem, usually an attorney who is volunteering. Be aware too that in small claims you cannot have an attorney represent you; if there is an appeal, you can, but not for the small claims hearing. You will represent yourself and present your own case. Attorneys though can assist in preparing you for the hearing and it may be worthwhile to talk to one before you go to the small claims hearing.

If the amount in dispute is more than $10,000 but perhaps less than $100,000, you have some serious decisions to make. Litigation costs- attorney’s fees and other costs- for a small construction dispute might still run upwards of $50,000 or more if the matter proceeds through trial. It might cost more, it might cost less, but it will cost something and it will come out of the recovery that you obtain.

It could cost you even more if there is an attorney fees provision in your contract (more on these types of provisions in future postings, but so you know, I recommend taking them out and never having a fee provision). If you lost at trial you would be required to pay the other side’s attorney, which would be the icing on the cake for sure.

Recall at the beginning of this post that I said you might be sued for construction defects? This could be one of those situations where you can make lemonade from the lemons you get. If you are sued, you should tender the claim to your insurance company. If they agree to defend, then you will have an attorney appointed and paid for by your carrier. The attorney may not be able to prosecute your Mechanics Lien claim, but he can certainly assist you by obtaining documents that you might need or want and save you that expense. Similarly, the costs of other discovery and other aspects of the litigation might be taken up by the defense of the defect claim. It is something to think about if the issue comes up

One caveat though: do not let the carrier negotiate your disputed payments against the defects alleged. In other words, if you are owed $100,000 and the other side wants $150,000 in damages for defective construction, don’t agree to give up the $100,000 so that the carrier only pays $50,000. Most defense attorneys would not do this sort of thing, but some inexperienced counsel may, or if you are representing yourself you might, and if you do you may lose out on the money you are owed.

So the bottom line is still the bottom line. It is a business decision that you will need to make whether or not to pursue a claim for unpaid billings. Litigation is not a “get even” type of thing and you should not think of it as a way to retaliate. This is not to say that you should simply roll over and give up on a valid claim, but the process is expensive. If you are going to pursue the Mechanics Lien be sure it is worth it for you in the long run. As distasteful as it may be to simply walk away, that may be your best option.

Mechanics Liens in Eight Easy Steps

Step Seven: Filing the Lawsuit
Once you have recorded the Lien you will have 90 days to file your lawsuit to perfect the Lien right. Up until now you have had the right to record the Lien, but having the right does not get you paid. In order to obtain the benefit of the Lien you have to file a Complaint and that’s when the ‘fun’ starts.

Just as you had to record the Lien in the County or City where the property was located, when you file the lawsuit, you file in the Superior Court of the County where the property is located. It does not matter where the Owner resides or where you reside, you file where the property is located.

If you are a sole proprietor or your company is a partnership, you can file the Complaint yourself. If you are a corporation, you need to hire an attorney to represent you. In California, corporations can only be represented by an attorney not by an individual that is not an attorney; i.e.- a director, officer or employee of the company.

The Complaint will likely include a number of other causes of action beside the foreclosure of the Mechanics Lien, and perhaps those other causes of action (breach of contract, account stated, quantum meruit etc) will only involve the Owner of the project; the guy you contracted with for the work. For the Mechanics Lien part of the lawsuit though you need to name anyone with an ownership interest in the property. This could be a second deed of trust holder, a lender, a spouse, a relative of the owner- any number of other parties that might be on the title.

In order to make sure that you name all the proper parties you will want to purchase a Mechanics Lien litigation package from a Title Company. The litigation package contains information that will identify all of the ownership interests in the property and the Title Company will guarantee that these are all of the owners. If you just do a Title search of the property you may get most but not all of the owners. You need all owners, so it is a good idea to get the package; it is not usually very expensive.

If you do not name everyone with an ownership interest in your litigation, and assuming you win so that the court orders the property sold and you get paid, then anyone that you did not name can come along afterward and undo the sale. You will have done a lot of work and paid a lot of money for nothing.

After you record your Lien, and perhaps before you file your lawsuit, the Owner, or the General on behalf of the Owner, might obtain a Mechanics Lien Release Bond. This is exactly what it sounds like- a bond that is substituted as the collateral for the property and is issued in the amount of the Mechanics Lien claim(s). If there is a bond posted, then you do NOT file suit against the owner(s) of the property, instead you name the bond surety as a defendant in the lawsuit. If you know about the bond before you file, you don’t need the litigation package from the Title Company. If you don’t know about the bond until after you file, or if the bond is provided after you file the action, then you will need to amend the Complaint to name the surety and you will also need to dismiss the action against the named owner(s).

At the same time you file the lawsuit, you also file and record a Lis Pendens. This is a notice to all the world that the property is involved in litigation so that anyone wanting to buy the property is aware that they are buying it subject to your superior rights that you are perfecting through the litigation. You need to do this too because the owner will not be able to obtain any loans on the property nor will they be able to sell the property, at least not free and clear. It helps to keep the owner very focused on the issues, if nothing else. If the Owner did not know or care about the case before, he or she will care when their property’s title is clouded by a lawsuit.

Mechanics Liens in Eight Easy Steps

Step 6: Where and What to Record

The simplest part of the entire process is recording the lien. After you have the proper form filled out with all of the required information included, you take it to the County or City Recorders Office where the project is located and have it recorded. There may not be a separate Recorders Office for your location so you might want to find the Assessor’s Office. They will either record it there or they can direct you to the Recorders Office.

It’s what you do before you get to the Recorders Office that is important though. Before you can record the Lien, you need to provide the Owner with written notice that you are about to do so. The Notice needs to be mailed return receipt requested or certified mail so that you have proof that you in fact provided it. Keep a copy of the return receipt or the Certified mail receipt because you will need it when you file your lawsuit.

The Notice should be sent prior to recording the Lien. How much before is not specified. If you are planning to record the lien and you have sufficient time, put the Notice in the mail a day or so before you record. The law presumes receipt of the mailing within a reasonable time so whether the Owner gets it before you record is not really the issue. Provided you properly mail the Notice, you have met your obligation.

If you are up against a deadline and the last day to record the lien is the day you will be sending the Notice that is OK as well. Send the Notice before you go to the Recorders Office if you can and that will or should be sufficient.

The Notice needs to have specific language included (see the link at the end of the posting). This is the language that needs to be provided and it needs to be provided in the way that the Code specifies. You also include a copy of the Mechanics Lien document with the Notice. There are some form Mechanics Liens that include the Notice language on the Lien itself. Presumably this is OK but it is probably better practice to have two separate documents- the Notice and the Mechanics Lien itself.

Once you have sent the Notice and after you have recorded the Lien, you should be sure to note the end of the 90 day period from the date of recording. This 90-day period is the time that you have to file your lawsuit otherwise your Lien will expire. If the project is not over or if the time to record a Lien has not expired, then you can re-file the Lien, after giving Notice again, and re-start the 90 day time to file the lawsuit. Be careful with this though- you don’t want to run out of time and lose the Lien right.

Click for Required Mechanics Lien Notice Language http://www.m3-publisher.com/required-mechanics-lien-language.html

Mechanics Liens in Eight Easy Steps

Step 5: When Can You Record Your Lien

Now that you’ve done everything that you were supposed to do as far as Preliminary Liens and being properly licensed, and now that you’ve performed the work that you agreed to perform, and the Owner or the General has decided not to pay you, what do you do and when can you do it.

If you are a subcontractor, you can record a Mechanics Lien as soon as your work is complete. It has to be complete though but you don’t need to wait until the end of the project.

If you are the General Contractor, it’s a little different. You need to wait until the project is complete before you can record your Lien.

There are a couple of critical timing issues that both subcontractors and General contractors need to be concerned with however. The statute of limitations for recording a Mechanics Lien is triggered by the completion date of the project but sometimes it’s not so easy to determine when the project is completed. This is where it gets complicated and interesting.

If the Owner records a Notice of Completion, then if you are a subcontractor, you have 30 days from that date to record your Mechanics Lien. If you are the General or a Prime contractor, you have 60 days from the filing of the Notice of Completion to record your Lien.

Sometimes the Owner neglects to file the Notice of Completion. In that case both sub and General/Prime have 90 days from completion. But therein lays the problem- what is completion? The law defines completion as being when the Owner takes possession of the property and/or uses it for its intended purpose. In the residential context this is usually a fairly easy determination. It is sometimes a bit more difficult to determine completion by use in a commercial context, but if the work is done and the Owner is trying to lease the property, that is a pretty good indicator of acceptance. In that situation, and without a Notice of Completion, you have 90 days.

The owner is supposed to file the Notice of Completion within 20 days of the completion of the work. The owner is also required to tell anyone that served a Preliminary Notice on the project that the Notice of Completion is filed. Sometimes they do, sometimes they don’t; if they do not, you have 90 days. It is also possible to file, but not record, your Preliminary Notice at the Recorders Office. If you do, then the Recorder is supposed to let you know when the Owner records the Notice of Completion.

What happens if the Owner does not record a Notice of Completion and does not use the building? In that circumstance, if the work stops- and that means stops completely- for a period of 60 days, then the project is deemed complete. From the end of that 60 day period, all contractors have 90 days to record a Lien. In this situation, if you have not been paid, then at the end of the 60 days you will want to record the Lien. Why wait if you have not been paid?

If the time to record the Lien has not expired and you want to release an existing Lien and re-file another, you can. This is helpful to a sub that may have filed early but wants to postpone filing a lawsuit. If the project is ongoing, then the sub can dismiss and, subject to the time frames discussed above, can record a new Lien. As long as the Lien is timely, it is still valid. If the time to file your Lien has run, and you dismiss and re-file, the new Lien will not be timely or valid. Timing is everything here, so be careful.

Click here for the timeline
http://www.m3-publisher.com/mechanics-lien-and-stop-notice-timeline.html

Mechanics Liens in Eight Easy Steps

Step Four: When The Right Attaches

Mechanics Liens are very much an automatic right. As soon as you start contributing to the work of improvement, your Lien rights begin. Provided you are one of those “mechanics” who are entitled to the right, then when you begin the work, you have the Lien right. For the most part if you are a contractor, supplier, or a worker, you have Mechanics Lien rights on private works projects,

A couple of things to keep in mind though so that you understand what the Lien right means. First, you need to contribute to the work of improvement. This means that your work is incorporated into the project. For the most part this is an easy determination; if you are working on the project then you will have Lien rights as soon as you begin work. In some case though, the Lien right attaches even if what you provide is not permanently made part of the project. For example, the scaffold or the crane rental company has Lien rights even though the scaffold or the crane is not permanently made part of the project.

However, you do not have Lien rights if you only provide material to another contractor or supplier who then converts that material for use on the project. Two examples will demonstrate how this might come about. If you provide steel I-beams to a steel fabricator and the fabricator then cuts them and modifies them for use on a particular job, you, the raw I-beam supplier, have no Lien right, but the fabricator does. Likewise when a quarry provides gravel to a yard and that yard then provides the gravel to a project; the yard has Lien rights but the quarry does not. If the quarry provides the gravel directly to the project, then the quarry would have rights.

The Lien right attaches without any effort or requirement on the contractor’s part provided the necessary prerequisites are satisfied. The Mechanics Lien right is superior to all other rights that are not recorded before it. For example, let’s say you start work on a project but the Owner has not yet secured financing. When the construction loan is obtained, the lender (Bank) will want to record its lien on the project. In this example though, your Mechanic Lien right will be superior and in first position and the Banks lien will be in second position. This is a very good situation for you and probably very short-lived because the Bank will demand that you subordinate your Lien rights to its rights so that it is first position otherwise the loan may not be available, but more on this in future postings.

It also does not matter if the project is sold and a new owner takes possession. If you have contributed to the work of improvement, you have the right to assert a Mechanics Lien. You still need to a “perfect” your rights by doing some additional things, but you have the right to take those additional steps as soon as you begin your work.

Mechanics Liens in Eight Easy Steps

Step Three: The Prerequisites- Preliminary Notice

The second essential requirement to preserve your rights to record a Mechanics Lien is that you must send a Preliminary Notice. There is certain precise language that is required for the Preliminary Notice and the Notice must get to all of the correct parties. The parties that need to get the Notice are the Owner, General (aka Direct or Prime) Contractor, and construction lender, all of whom should be listed on the building permit or at the local Building Department.

If you are a subcontractor, the Notice must go to the Owner, the General, and the construction lender, if there is one. The Notice must be sent by registered mail or certified mail, return receipt requested. You must keep the document that shows that the Preliminary Notice was sent. Staple it to a copy of the Preliminary Notice that you send so that you have it in your file. If you can, scan it into your electronic files too.

If you are the General, direct, or Prime contractor, someone with a direct contract with the Owner, you don’t need to send a Notice to the Owner. A General (Prime or Direct) contractor does need to send a Notice to the construction lender though, so don’t forget. This is especially important for Stop Notices, but more on that in future postings.

There are standard forms that can be purchased at local builders exchanges or that are available on line. Make sure they contain the proper language and are acceptable for use in California. The information that will be included in the Preliminary Notice is what you would expect. It identifies the Owner, the General, the construction lender and the location of the project. It identifies you – the contractor. It also, and importantly, contains an estimate of the value of the work that your company will provide.

You must provide a good faith estimate of the value of the work. It does not have to be exact but it cannot be a plug number or a guess with no real basis. In one case a rental company sent out equipment to a jobsite that they estimated would cost about $10,000. They then sent some additional equipment to the site and again estimated that the value would be $10,000. The problem was that at the time they sent the second Notice their billings were nearly $30,000. Ultimately the equipment rental was nearly $200,000. The court determined that the rental company’s Notice was not a real Notice of anything and was just a perfunctory guess. It was therefore deemed ineffective and the Notice was void. Without the proper Notice the supplier lost its rights to Mechanics Liens and all other rights that require Notice; i.e. – Stop Notices and payment bond claims.

The Preliminary Notice secures your rights to Mechanics Liens, Stop Notices, and payment bonds for those services that you provided within the 20 days preceding the Notice and thereafter. If you start work on March 1 but don’t file your Notice until April 30, then you have only secured Lien rights for the work from April 10 forward (twenty days before the 30th). The value of the work you did from March 1 up to April 9th cannot be included in any Mechanics Lien or any Stop Notice though. You have other bases for recovering those payments such as breach of contract actions, but you do not have Mechanics Lien or Stop Notice rights for that work.

Best business practice is to get the Preliminary Notice out as soon as you sign the contract. There is no penalty for getting it out sooner but there is a big downside to getting it out later. Make sure you send the Preliminary Notice by registered or Certified mail to all the required parties and make sure it has a proper and good faith estimate of the cost of your work. You are securing very important rights when you do, so don’t be sloppy with your paperwork.

LINK TO REQUIRED NOTICE LANGUAGE http://www.m3-publisher.com/preliminary-notice-language.html

Mechanics Liens in Eight Easy Steps

Step Two: The Prerequisites- Proper Licensing

In order to secure your right to a Mechanics Lien you, the contractor (General or Sub) need to be sure to do a couple of things. First you need to be a licensed contractor and second you need to file a Preliminary Notice (formerly called the 20-Day Preliminary Notice). If these two prerequisites are not satisfied, you do not have Mechanics Lien rights.

The licensing requirement is an important issue these days and it is one that attorneys are focusing on whenever a contractor is involved in a dispute. In order to have any rights in court, and in order to have any Mechanics Lien rights, you must be properly licensed at all times that you are performing the work. So what exactly does that mean?

It means that you must be licensed to perform the work that you are performing. If you have an electrician’s license you cannot do plumbing work. If you have a low voltage license, you cannot do high voltage work. If you are a plumber you can do plumbing work but you cannot perform the HVAC. You need to be licensed in the trade that you will perform. You must also be licensed at all times that you perform the work.

To demonstrate how this played out in an actual case, a subcontractor bid the work, was the low bid, but was not licensed in the trade. He was in the process of getting the license and the General knew this. It was agreed that the sub would not perform any work until he had his license but in the meantime, the General sent a subcontract and asked for insurance certificates, submittals, and certain other preliminary information. The sub complied but did not perform work on the project until he got his license. As you can guess, at the end of the project there was a dispute over payment and the subcontractor sued. The General defended by arguing that the sub was not properly licensed at all times. The General won.

Why?

Because the subcontractor had provided submittals, actually shop drawings, before he was licensed. The court ruled that the preparation of the shop drawings was performing work on the project because without them the sub could not do any work. Therefore, the sub was not licensed at all times during the performance of the work.

Draconian result? Yes, but it gets even worse for the contractor who performs work without a license. In that event, the contractor can be required to disgorge (give back) all of the money it was paid for the work. It does not matter that the contractor was licensed for some or even most of the time that they performed work and it does not matter that the contractor paid other licensed contractors for some of the work. All of the funds paid to the contractor would need to be disgorged, and of course, there is no Mechanics Lien right.

It is a very bad thing to perform work if you don’t have a license. Be sure you are properly licensed at all times, an don’t rely on any agreement with an Owner or anyone else who tells you it is OK for you to work without a license. It is not and there is no defense that you were mislead or induced to do the work. Be properly licensed or don’t take the job!

Mechanics Liens In Eight Easy Steps

Step One- The Basics

As a contractor you’ve heard about Mechanics Liens and you know that they are a way to get paid if the Owner or the General you are working for will not pay your bills. For many contractors though, it is like the old adage about the weather: everyone talks about it but no one does anything about it. In this case, everyone seems to know about Mechanics Liens but not everyone knows what to do about them. This series of postings will clarify what a Mechanics Lien is and how it is used.

First, understand that a Mechanics Lien is a right that mechanics (i.e. – contractors, suppliers, and workers) have that is provided for in the California Constitution. It is the only such right in our Constitution. Some states allow Mechanics Liens by enacting statutes but California put it in its Constitution, and that means it is a very, very, powerful right. The courts cannot change it and the Legislature cannot change it. Only the people of the State by amendment can change it, and that is not likely anytime soon.

Second, even though the Mechanics Lien is a constitutional right there are a number of statutes that provide who has the right, how the right is obtained, and how the Mechanics Lien is enforced. Just because you show up and do work on a construction project does not mean that you have enforceable Mechanics Lien rights. There is more to it and there are rules that you need to follow to secure your Lien right.

Keep in mind too that Mechanics Liens only apply in private works projects. They are not available for public works projects at all. If public money is funding the project or if the project is in a public building, you will not have Mechanics Lien rights. You have other rights, just not Mechanics Lien rights.

Finally, while the Mechanics Lien is a very powerful and effective weapon in a payment dispute, it is not a contractor’s only weapon. If you fail to comply with the prerequisites or in some way don’t secure your Lien right, you still have other legal rights that you can bring to get paid: i.e.- breach of contract, account stated, quantum meruit among others. More on these rights in later postings.

For now though, this series will go through Mechanics Lien basics and cover

• the prerequisites
• when the right attaches
• what the Lien attaches to
• the forms you need to file
• when to record the Lien
• where to record the Lien
• what happens after you record the Mechanics Lien