COLLECTING YOUR MONEY THROUGH MECHANIC S LIENS, STOP NOTICES & BONDS

Transcription

1 COLLECTING YOUR MONEY THROUGH MECHANIC S LIENS, STOP NOTICES & BONDS A Presentation for THE HUMBOLDT BUILDERS EXCHANGE, INC. April 22, 2015 By: Kenneth S. Grossbart Abdulaziz, Grossbart & Rudman P.O. Box North Hollywood, CA (818) info@agrlaw.com website: Abdulaziz, Grossbart & Rudman has been practicing construction law for 30 years. The California Construction Law book is published and updated annually. They represent numerous construction trade associations and contractors. Abdulaziz, Grossbart & Rudman appears at Contractors State License Board meetings and has argued a number of cases before the appellate courts, including the California Supreme Court dealing with the "Pay-If-Paid Clause." Abdulaziz, Grossbart & Rudman provides this information as a service to its friends & clients. The documents are of a general nature and are intended to highlight areas of the subject matter and should not be used as a substitute for specific legal advice. You should seek the aid and advice of a competent attorney and/or accountant instead of relying on the presentation and/or documents. Abdulaziz, Grossbart & Rudman can be reached at, P.O. Box 15458, North Hollywood, CA ; (818) , Facsimile (818) ; or by at info@agrlaw.com. On the Internet, visit our Website at

2 Collecting Your Money -- Mechanic s Liens, PRIVATE WORKS MECHANIC S LIEN, STOP PAYMENT NOTICE AND BOND CHECKLIST I. WHAT IS A MECHANIC S LIEN? A. A Mechanic s Lien is a lien on real estate that has been improved. B. It is fairly well accepted that the right to a Mechanic s Lien is protected by the California Constitution. The California Law Revision Commission completed an extensive study where the right to a lien was left untouched, but the procedural requirements were all streamlined. SB 189 addressed these minimal changes. C. A Mechanic s Lien cannot be used on public works of improvement, and as a result, the Legislature created Stop Payment Notice and Bond rights. II. WHO IS ENTITLED TO A LIEN? A. Essentially, anyone who contributes to a private work of improvement is entitled to a lien. For example, licensed contractors, subcontractors, workers working for contractors or subcontractors, people who supply material to a contractor or subcontractor, as well as people who rent equipment. B. There are times where there may be no entitlement to a Mechanic s Lien. For instance, supplied materials that were not consumed on the project or do not become a part of the permanent structure cannot be included in a Mechanic s Lien. A contractor who was required to be licensed but was unlicensed at any time during the project, may not be able to collect utilizing the Mechanic s Lien process. Others not entitled to record a Mechanic s Lien include suppliers to material suppliers, but even there, the courts have created limited exceptions. III. WHAT IS A STOP PAYMENT NOTICE ON PRIVATE WORKS? A. While a Mechanic s Lien is a lien on real estate, a Stop Payment Notice is a lien on construction funds. A Stop Payment Notice is also called a Notice to Withhold. Instead of encumbering real property, it ties up the construction funds for a project. Page 1

3 Collecting Your Money -- Mechanic s Liens, B. One court has held that a Stop Payment Notice is a substitute for a Mechanic s Lien and therefore also constitutionally protected. IV. BENEFITS AND DETRIMENTS OF A STOP PAYMENT NOTICE: A. While a Mechanic s Lien attaches to real estate, it does not physically affect the work of improvement. A Stop Payment Notice has an immediate effect in that it keeps money designated for construction from being paid to anyone. This is even before a suit is filed. B. A bonded Stop Payment Notice allows for attorneys fees to the prevailing party. A Mechanic s Lien does not. C. A Stop Payment Notice will survive a foreclosure and is an important tool in a tough economy. D. If the holder of the construction funds is a lender, you will have to put up a bond with the lender. A construction lender on private works may ignore an unbonded Stop Payment Notice. E. Any person who fails to serve a Stop Payment Notice after the owner makes a written demand therefore will forfeit its right to a Mechanic s Lien. V. WHO IS ENTITLED TO A STOP PAYMENT NOTICE? A. If the holder of the construction funds is a construction lender, which includes an escrow and others as set forth in the statutes defining a construction lender, then everyone who is entitled to enforce a Mechanic s Lien is also entitled to enforce a Bonded Stop Payment Notice. B. If the holder of the construction funds is the owner, then everyone who is entitled to enforce a Mechanic s Lien, other than the direct contractor, is entitled to enforce a Stop Payment Notice. C. There are instances where there may be no entitlement to a Stop Payment Notice. For instance, supplied materials that were not consumed on the project or become a part of the permanent structure cannot be included in a Stop Payment Notice. A contractor who was required to be licensed but was unlicensed at any time during the project, may not be able to collect utilizing a Stop Payment Notice. Others not entitled to enforce a Stop Payment Notice usually include suppliers to material suppliers. Page 2

4 Collecting Your Money -- Mechanic s Liens, VI. PRELIMINARY TO STARTING: Get as much information as possible!!! These determinations will save you money in the long run, should a dispute arise. A. Obtain the address, legal description of the property (map book and page number, etc.) and assessor s parcel number. B. Obtain the home and business address of the owner and the customer if the customer is not the owner. C. Determine the name of the owner and the extent of the owner s interest in the property. D. Determine whether the owner is the one who is requesting the improvement. If not, what is the interest of the person requesting it and are there any others who claim an interest in the property (lenders, etc.)? E. Determine whether you are a direct contractor, subcontractor, laborer or material supplier. F. Ascertain the name of the construction lender, holder of construction funds, and payment bond surety (if any). Do a public records check if told there is no lender on a larger project, or to confirm the identity on a larger project. G. Consider the effect of a bond or joint control. H. When entering into a Home Improvement Contract or a New Residential Contract, a Mechanic s Lien Warning is required to be either a part of the contract or incorporated into the contract as an attachment. Make sure you include this as well as comply with other contract requirements so that you do not lose your rights. VII. ONCE WORK STARTS: A. Within twenty (20) days of first furnishing labor or materials: 1. Preliminary Notice: A Preliminary Notice is intended to notify owners, lenders, and contractors that someone has a right to enforce a Mechanic s Lien or Stop Payment Notice and allows the owner to protect itself from the possible collection remedy. Subcontractors and material suppliers need to send out a Preliminary Notice to the owner, direct contractor, and construction lender or holder of construction funds (if any). Contractors working for an owner/builder shall send out a Preliminary Notice to the construction lender or holder of construction funds (if any). This is so important that if Page 3

5 Collecting Your Money -- Mechanic s Liens, you are told there is no lender, you should check public records and the building permit for the existence of a lender. For purposes of collecting on a payment bond, all parties should serve the bonding company as well. No matter how many deliveries you make, or the time span over which you furnish labor or materials, only one Preliminary Notice is required, unless the project is suspended. However, if you furnish materials or services under separate contracts or with more than one contractor or subcontractor, you must furnish a separate Notice for each subcontractor. Please note that SB 189 made changes to the Preliminary Notice form, specifically to the Notice To Owner language that is required on the Preliminary Notice of private works of improvements. For the specific text of the new language required in the Notice To Owner please see the sample Preliminary Notices at the back of your handout. We have also included some other forms that may be of interest to you. If a preliminary notice is given by a subcontractor that has not paid all compensation due to a laborer, the notice shall include the name and address of the laborer and any person or entity described in Civil Code Section 8202(b) to which payments are due. 2. Service: The most common method of service is by first-class certified or registered mail, return receipt requested, postage prepaid, addressed to the residence or place of business of the person being served, or at the address shown by the building permit, or at an address contained on a recorded mortgage or trust deed. Be sure to keep post office receipts for later use if you need to file a claim and prove it in court. A Preliminary Notice also may be served by personal delivery or by leaving it with some person in charge at the residence or place of business of the person you wish to serve (must be an adult). We strongly recommend serving a Preliminary Notice at the time that the contract for work on a project is entered into. There can never be an argument that a Preliminary Notice was served too early. On the other hand, a Preliminary Notice never relates back more than twenty (20) days and due to the changes in the legislation of SB 189 (effective July 1, 2012), there are some fears with respect to Civil Code section 8116(b), which refers to a Code of Civil Procedure section pertaining to service by mail. At least one recognized source believes the Code section suggests that you must give an additional five (5) days notice due to the fact that the notice is being served by mail. The section in question pertains to litigation matters and gives additional time for a response when something is mailed rather than hand delivered. At least one other commentator has suggested that the effect of the legislation including a reference to Section 1013 of the Code of Civil Procedure, means that a Preliminary Notice must be served no more than fifteen (15) days after material is first delivered, or else it will only relate back fifteen (15) days when served by mail. While we are not sure that this necessarily applies, good business practice is to serve the Notice as quickly as possible to avoid any such argument. Page 4

6 Collecting Your Money -- Mechanic s Liens, 3. County Recorder: You may file/record a copy of the Preliminary Notice with the County Recorder so that they will notify you if a Notice of Completion or Notice of Cessation is recorded. Note that the County has no liability if they fail to notify you, which is highly possible since many County Recorders are very backlogged. VIII. IF YOU ARE A SUBCONTRACTOR OR MATERIAL SUPPLIER: If you are a contractor working for an owner/builder go to the section below called IF YOU ARE A DIRECT CONTRACTOR, otherwise follow the procedure below. A. After work is completed or work ceases: 1. Notice of Completion: a. The Notice of Completion shortens the time limit for recording a Mechanic s Lien and Stop Payment Notice to thirty (30) days after recordation of the Notice of Completion (for subcontractors and material suppliers). b. After completion of the work of improvement you should not do additional work under the contract. Warranty and punch list work can be performed. c. Within fifteen (15) days after completion an owner can record a Notice of Completion. (This changed on July 1, 2012, from 10 days). d. A Notice of Completion must be signed and verified by the owner or the owner s agent as well as be served per Civil Code sections and then be recorded. e. While this Notice provision is designed to primarily protect the owner, it might serve to increase the funds accessible to satisfy your claim, and indicate that you performed your contractual obligations. f. Except for residential home owners of dwellings fewer than five units, when an owner records a Notice of Completion, the owner must serve the direct contractor and all subcontractors or material suppliers who provided a Preliminary Notice, with Notice that it has recorded a Notice of Completion. Service of the owner s Notice must include a Proof of Service Affidavit in accordance with Civil Code section 8118 and be sent within ten (10) days of recordation, by registered or certified mail, return receipt requested, or by express mail, overnight delivery by an express service carrier, personally delivering copies or by leaving the notice and mailing a copy per Code of Civil Procedures section for the service of a Summons and Complaint in a civil action. If the owner fails to send the Notice to the lien claimants, then the normal 90-day period of time in which a Mechanic s Lien may be recorded will apply as discussed below. Again, this mailing requirement does not apply on typical residential projects. Page 5

7 Collecting Your Money -- Mechanic s Liens, 2. Notice of Cessation of Labor: a. Note that labor must have ceased for at least thirty (30) days before the owner is entitled to record the Notice of Cessation. b. The Notice of Cessation shortens the time limit for recording a Mechanic s Lien and Stop Payment Notice to thirty (30) days after recordation of the Notice of Cessation for subcontractors and material suppliers. c. A Notice of Cessation must be signed and verified by the owner or the owners agent as well as be served per Civil Code sections and then be recorded. d. While this Notice provision is designed to primarily protect the owner, it might serve to increase the funds accessible to satisfy your claim. e. Except for residential home owners of dwellings fewer than five units, when an owner records a Notice of Cessation of Labor, the owner must serve the direct contractor and all subcontractors or material suppliers who provided a Preliminary Notice, with Notice that it has recorded a Notice of Cessation of Labor. Service of the owner s Notice must include a Proof of Service Affidavit in accordance with Civil Code section 8118 and be sent within ten (10) days of recordation, by registered or certified mail, return receipt requested, or by express mail, overnight delivery by an express service carrier, personally delivering copies or by leaving the notice and mailing a copy per Code of Civil Procedures section for the service of a Summons and Complaint in a civil action. If the owner fails to send the Notice to the lien claimants, then the normal 90-day period of time in which a Mechanic s Lien may be recorded will apply as discussed below. Again, this mailing requirement does not apply on typical residential projects. 3. If the owner records either the Notice of Cessation or a Notice of Completion, the subcontractor or material supplier must: a. Within thirty (30) days of recording the Notices that shorten time: i. Record a Mechanic s Lien (or Claim of Lien) in the office of the County Recorder. (1) Make sure that your Mechanic s Lien form complies with the law. A Mechanic s Lien must include: (a) The amount demanded (the amount that is owed after all credits, off-sets, etc.). If the amount is a good faith demand, the exact accurateness will not invalidate the lien. However, an excessive lien (one that is not in good faith), will invalidate the lien. (b) The name of the owner or reputed owner. (c) A general statement of the labor, services, equipment, etc., furnished. Page 6

8 Collecting Your Money -- Mechanic s Liens, (d) A description of the property sufficient for identification. This is very important since it will not bind the property if it is not described specifically. (e) Signature and verification by the claimant. (f) Proof of service affidavit (described below). (g) As of January 1, 2011, a Mechanics Lien is required to have a Notice of Mechanic s Lien. The language of this Notice changed due to AB 456 and the language which is effective as of January 1, 2012, is as follows: NOTICE OF MECHANICS LIEN ATTENTION! Upon the recording of the enclosed MECHANICS 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 courtordered 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 mechanics lien is recorded. The party identified in the mechanics 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 mechanics 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 mechanics 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 MECHANICS LIENS GO TO THE CONTRACTORS STATE LICENSE BOARD WEB SITE AT ii. Serve the owner: The Mechanic s Lien is also required to include a proof of service affidavit showing that the Mechanic s Lien has been mailed, by registered, certified, or first-class mail, with proof of mailing to: (1) The owner s residence or place of business; Page 7

9 Collecting Your Money -- Mechanic s Liens, (2) The address shown on the building permit on file with the building department; or (3) At any other address allowed under the Preliminary Notice statutes. This affidavit should indicate the name of the owner or reputed owner that is being served. If the owner cannot be served in this manner, then the construction lender or direct contractor can be served. If the lien is not served as required, it will be unenforceable as a matter of law. iii.serve Stop Payment Notices (see the section called STOP PAYMENT NOTICES for more information on Stop Payment Notices and bond requirements). b. File Lien Foreclosure action i. Within ninety (90) days of recording the Mechanic s Lien (Claim of Lien) a lien foreclosure action must be filed. If no suit is filed within that 90 day time period, the lien is void. (1) If you want more than ninety (90) days in which to foreclose, then after recording a lien, but before ninety (90) days elapses, give credit to the owner and record a notice of the fact and terms of credit, usually called a Notice of Extension of Credit. The statute that describes the Notice of Extension of Credit was not clear as to who must execute the Notice of Extension of Credit. At least one prominent construction commentator was of the opinion that a contractor could unilaterally extend credit by recording the Notice. However, effective July 1, 2012, when the revised Civil Code enacted by SB 189 went into effect, Civil Code section 8460 provides explicitly that both the contractor and owner must sign the Notice of Extension of Credit. This makes perfect sense how can one extend credit without agreeing to it? The Notice of Extension of Credit must specify exactly how much additional time to file suit to foreclose is being granted, and all of the signatures of the owner and contractor must be notarized before recording the document. Per Civil Code section 8460, a Notice of Extension of Credit must either be recorded within 90 days of the recording of the original Mechanic s Lien (when that lien would expire), or if recorded later than that time, it must be recorded before any purchaser or encumbrancer for value acquires rights (i.e., the property is transferred or sold, or a loan is recorded against the property). Page 8

10 Collecting Your Money -- Mechanic s Liens, Within ninety (90) days after your Notice of Extension of Credit expires, but no later than one (1) year from completion, you must file suit to foreclose. You can keep granting extensions by the above procedure, but you must file suit to foreclose within one (1) year after work is completed. ii. Record a Lis Pendens within twenty (20) days of filing the action. iii.file an action on the Stop Payment Notice at this time if applicable. (See the section called STOP PAYMENT NOTICES for more information). iv.a Mechanic s Lien action should be brought to trial within two (2) years after commencement or the court may dismiss the action. 4. If no Notice of Completion or Cessation is recorded and: a. The project is actually completed; or, b. Labor ceases and owner or agent uses work of improvement; or, c. Labor ceases for a continuous period of sixty (60) days; Then: i. Within ninety (90) days of any of the above acts, record a Mechanic s Lien (Claim of Lien) and serve Notice as required of the lien. ii. Also, within ninety (90) days of any of the above acts, serve a Stop Payment Notice (see the section called STOP PAYMENT NOTICES for more information). iii. Within ninety (90) days of recording the lien, file a lien foreclosure action. iv. Record a Lis Pendens within twenty (20) days of filing the lien foreclosure action. v. If you want more than ninety (90) days in which to foreclose, then after recording a lien, but before ninety (90) days elapses, give credit to the owner and record a Notice of the fact and terms of credit, usually called a Notice of Extension of Credit. The statute that describes the Notice of Extension of Credit was not clear as to who must execute the Notice of Extension of Credit. At least one prominent construction commentator was of the opinion that a contractor could unilaterally extend credit by recording the Notice. However, effective July 1, 2012, when the revised Civil Code, enacted by SB 189 went into effect, Civil Page 9

11 Collecting Your Money -- Mechanic s Liens, Code section 8460 provides explicitly that both the contractor and owner must sign the Notice of Extension of Credit. This makes perfect sense how can one extend credit without agreeing to it? The Notice of Extension of Credit must specify exactly how much additional time to file suit to foreclose is being granted, and all of the signatures of the owner and contractor must be notarized before recording the document. Per Civil Code section 8460, a Notice of Extension of Credit must either be recorded within 90 days of the recording of the original Mechanic s Lien (when that lien would expire), or if recorded later than that time, it must be recorded before any purchaser or encumbrancer for value acquires rights (i.e., the property is transferred or sold, or a loan is recorded against the property). Within ninety (90) days after your Notice of Extension of Credit expires, but no later than one (1) year from completion, you must file suit to foreclose. You can keep granting extensions by the above procedure, but you must file suit to foreclose within one (1) year after work is completed. IX. IF YOU ARE A DIRECT CONTRACTOR: A. After work is completed or work ceases: 1. Notice of Completion: a. Within fifteen (15) days after completion you may wish to have a Notice of Completion recorded. (This changed on July 1, 2012, from 10 days). b. While this Notice provision is designed to primarily protect the owner, it might serve to increase the funds accessible to satisfy your claim and indicate that you have performed your contractual obligations. c. The Notice of Completion shortens the time limit for recording a Mechanic s Lien and Stop Payment Notice to sixty (60) days after recordation of the Notice of Completion (for direct contractors). d. A Notice of Completion must be signed and verified by the owner or the owner s agent as well as be recorded. e. Do not do additional work under the contract. f. If you are recording the Notice of Completion for the owner of residential housing of four units or less, you must serve a copy of the Notice of Completion on any lien claimants who served a Preliminary Notice by registered or certified first-class mail, return receipt requested. Page 10

12 Collecting Your Money -- Mechanic s Liens, g. If the owner is recording the Notice of Completion, the direct contractor as well as all subcontractors or material suppliers who provided a Preliminary Notice must provide notice that it has recorded a Notice of Completion. h. Except for residential home owners of dwellings fewer than five units, when an owner records a Notice of Completion, the owner must serve the direct contractor and all subcontractors or material suppliers who provided a Preliminary Notice, with Notice that it has recorded a Notice of Completion. Service of the owner s Notice must include a Proof of Service Affidavit in accordance with Civil Code section 8118 and be sent within ten (10) days of recordation, by registered or certified mail, return receipt requested, or by express mail, overnight delivery by an express service carrier, personally delivering copies or by leaving the notice and mailing a copy per Code of Civil Procedures section for the service of a Summons and Complaint in a civil action. If the owner fails to send the Notice to the lien claimants, then the normal 90-day period of time in which a Mechanic s Lien may be recorded will apply. However, it may be preferable to use the 60-day period so that you do not have to argue with the owner over the validity of their Notice of Completion. 2. Notice of Cessation of Labor: a. Note that labor must have ceased for at least thirty (30) days before the owner is entitled to record the Notice of Cessation. b. The Notice of Cessation shortens the time limit for recording a Mechanic s Lien and Stop Payment Notice to sixty (60) days after recordation of the Notice of Cessation for direct contractors. c. The Notice of Cessation must be signed and verified by the owner or the owner s agent as well as be served per Civil Code sections then be recorded. d. Except for residential home owners of dwellings fewer than five units, when an owner records a Notice of Cessation of Labor, the owner must serve the direct contractor and all subcontractors or material suppliers who provided a Preliminary Notice, with Notice that it has recorded a Notice of Cessation of Labor. Service of the owner s Notice must include a Proof of Service Affidavit in accordance with Civil Code section 8118 and be sent within ten (10) days of recordation, by registered or certified mail, return receipt requested, or by express mail, overnight delivery by an express service carrier, personally delivering copies or by leaving the notice and mailing a copy per Code of Civil Procedures section for the service of a Summons and Complaint in a civil action. If the owner fails to send the Notice to the lien claimants, then the normal 90-day period of time in which a Mechanic s Lien may be recorded will apply. However, it may be preferable to use the 60-day period so that you do not have to argue with the owner over the validity of their Notice of Cessation. Page 11

13 Collecting Your Money -- Mechanic s Liens, 3. If the owner records either the Notice of Cessation of Labor or a Notice of Completion, then: a. Within sixty (60) days of recording the Notices which shorten time: i. Record a Mechanic s Lien (or Claim of Lien) in the office of the County Recorder. (1) Make sure that your Mechanic s Lien form complies with the law. A Mechanic s Lien must include: (a) The amount demanded (the amount that is owed after all credits, off-sets, etc.). If the amount is a good faith demand, the exact accurateness will not invalidate the lien. However, an excessive lien (one that is not in good faith), will invalidate the lien. (b) The name of the owner or reputed owner. (c) A general statement of the labor, services, equipment, etc., furnished. (d) A description of the property sufficient for identification. This is very important since it will not bind the property if it is not described specifically. (e) Signature and verification by the claimant. (f) Proof of service affidavit (described below). (g) As of January 1, 2011, a Mechanic s Lien is required to have a Notice of Mechanics Lien. The language of this Notice changed due to AB 456 and the language which is effective as of January 1, 2012, is as follows: NOTICE OF MECHANICS LIEN ATTENTION! Upon the recording of the enclosed MECHANICS 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 courtordered 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 mechanics lien is recorded. The party identified in the mechanics 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 mechanics lien foreclosure action against your property. The foreclosure action will seek a sale of your Page 12

14 Collecting Your Money -- Mechanic s Liens, 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 mechanics 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 MECHANICS LIENS GO TO THE CONTRACTORS STATE LICENSE BOARD WEB SITE AT ii. Serve the owner: The Mechanic s Lien is also required to include a proof of service affidavit showing that the Mechanic s Lien has been mailed, by registered, certified, or first-class mail, with proof of mailing to: (1) The owner s residence or place of business; (2) The address shown on the building permit on file with the building department; or (3) At any other address allowed under the Preliminary Notice statutes. This affidavit should indicate the name of the owner or reputed owner that is being served. If the owner cannot be served in this manner, then the construction lender or direct contractor can be served. If the lien is not served as required, it will be unenforceable as a matter of law. iii.serve Bonded Stop Payment Notices if there is a construction lender (see the section called STOP PAYMENT NOTICES for more information). iv.file Lien Foreclosure action: (1) Within ninety (90) days of recording the Mechanic s Lien or Claim of Lien, a lien foreclosure action must be filed. If no suit is filed within that 90 day time period, the lien is void. (a) If you want more than ninety (90) days in which to foreclose, then after recording a lien, but before ninety (90) days elapses, give credit to the owner and record a Notice of the fact and terms of credit, usually called a Notice of Extension of Credit. Page 13

15 Collecting Your Money -- Mechanic s Liens, The statute that describes the Notice of Extension of Credit was not clear as to who must execute the Notice of Extension of Credit. At least one prominent construction commentator was of the opinion that a contractor could unilaterally extend credit by recording the notice. However, effective July 1, 2012, when the revised Civil Code enacted by SB 189 went into effect, Civil Code section 8460 provides explicitly that both the contractor and owner must sign the Notice of Extension of Credit. This makes perfect sense how can one extend credit without agreeing to it? The Notice of Extension of Credit must specify exactly how much additional time to file suit to foreclose is being granted, and all of the signatures of the owner and contractor must be notarized before recording the document. Per Civil Code section 8460, a Notice of Extension of Credit must either be recorded within 90 days of the recording of the original Mechanic s Lien (when that lien would expire), or if recorded later than that time, it must be recorded before any purchaser or encumbrancer for value acquires rights (i.e., the property is transferred or sold, or a loan is recorded against the property). Within ninety (90) days after the Notice of Extension of Credit expires, but no later than one (1) year from completion, you must file suit to foreclose. You can keep granting extensions by the above procedure, but you must file suit to foreclose within one (1) year after work is completed. (b) Record a Lis Pendens within twenty (20) days of filing the action. (c) File an action on the Stop Payment Notice at this time, if applicable. (See the section called STOP PAYMENT NOTICES for more information). (d) A Mechanic s Lien action should be brought to trial within two (2) years after commencement or the court may dismiss the action. B. If no Notice of Completion or Cessation is recorded, and: Then: 1. The project is actually completed; or, 2. Labor ceases and owner or agent uses the work of improvement; or, 3. Labor ceases for a continuous period of sixty (60) days, a. Within ninety (90) days of any of the above acts, record a Mechanic s Lien (Claim of Lien) and serve Notice as required of the lien. You can also serve a bonded Stop Payment Notice on the construction lender at the same time, if applicable. Page 14

16 Collecting Your Money -- Mechanic s Liens, b. Within ninety (90) days of recording the lien, file a lien foreclosure action. c. Record a Lis Pendens within twenty (20) days of filing the action. d. You should also include an action to foreclose on the Stop Payment Notice, if applicable. e. If you want more than ninety (90) days in which to foreclose, then after recording a lien, but before ninety (90) days elapses, give credit to the owner and record a Notice of the fact and terms of credit, usually called a Notice of Extension of Credit. The statute that describes the Notice of Extension of Credit was not clear as to who must execute the Notice of Extension of Credit. At least one prominent construction commentator was of the opinion that a contractor could unilaterally extend credit by recording the Notice. However, effective July 1, 2012, when the revised Civil Code enacted by SB 189 went into effect, Civil Code section 8460 provides explicitly that both the contractor and owner must sign the Notice of Extension of Credit. This makes perfect sense how can one extend credit without agreeing to it? The Notice of Extension of Credit must specify exactly how much additional time to file suit to foreclose is being granted, and all of the signatures of the owner and contractor must be notarized before recording the document. Per Civil Code section 8460, a Notice of Extension of Credit must either be recorded within 90 days of the recording of the original Mechanic s Lien (when that lien would expire), or if recorded later than that time, it must be recorded before any purchaser or encumbrancer for value acquires rights (i.e., the property is transferred or sold, or a loan is recorded against the property). Within ninety (90) days after your Notice of Extension of Credit expires, but no later than one (1) year from completion, you must file suit to foreclose. You can keep granting extensions by the above procedure, but you must file suit to foreclose within one (1) year after work is completed. X. STOP PAYMENT NOTICES: A. Preliminary Notice 1. If not a direct contractor, serve the Preliminary Notice as described above in the subsection called Preliminary Notice. 2. In order to protect Stop Payment Notice rights it is a must to give a Preliminary Notice if your contract is with anyone other than the owner of the property and you must always serve a Preliminary Notice on a construction lender. Page 15

17 Collecting Your Money -- Mechanic s Liens, 3. The failure to give the notice on time will not preclude one from asserting Stop Payment Notice rights for the period of twenty (20) days prior to the service of the Preliminary Notice and forward. B. Contents 1. Must be addressed to the directing body of the public entity. 2. Claimant s name, address and capacity. 3. What was furnished. 4. Value of what was agreed to be furnished. 5. Location of public work. 6. Identification of work. 7. How much claimant wants withheld. 8. Verification. C. Serve Stop Payment Notice 1. On anyone who is holding construction funds; the owner, a lender, a fund control company, etc. 2. If it is a construction lender, you must also serve a bond (which makes it a Bonded Stop Payment Notice) in order for it to be effective. 3. If an unbonded Stop Payment Notice is served on the lender, the lender may not withhold the amount claimed and has no obligation to do so. D. If a payment bond was recorded, the owner or lender may refuse to withhold funds pursuant to the Stop Payment Notice. E. File suit on the Stop Payment Notice at the same time that you file a lien foreclosure action or within ninety (90) days after the end of the time when a Stop Payment Notice could be served. F. Any person who fails to serve a Stop Payment Notice after the owner makes a written demand therefore will forfeit its right to a Mechanic s Lien. Page 16

18 Collecting Your Money -- Mechanic s Liens, XI. FILING SUIT ON PAYMENT BOND, IF APPLICABLE: This is only applicable to subcontractors and material suppliers. direct contractors, under contract with the owner, cannot file suit to recover on a payment or performance bond. A. If the Preliminary Notice is served as indicated in the subsection called Preliminary Notice, this will be sufficient notice to the bonding company. With respect to a claim against the bond: The safest course of conduct would be to serve the bonding company with the appropriate Bond Notice regardless of whether you have already served the Preliminary Notice. You can never go wrong by providing too much notice, but you can certainly put yourself in potential harm for failure to give proper or timely notice. The statute that discusses the appropriate notices to be given on a private works project indicate that in order to enforce a claim upon any payment bond given in connection with a private work, a claimant needs to give the Private Works Preliminary Bond Notice as provided in Civil Code section Section 8200 does not list the payment bond surety as one of those to be served with the Preliminary Notice. B. If you did not give the Preliminary Notice indicated above, you may still have a possibility of a bond claim but recent legislation limits these claims. To be safe, you must serve written notice on the bonding company within fifteen (15) days after recordation of a Notice of Completion. If no Notice of Completion is recorded, this time is extended to seventy-five (75) days after completion. The Legislature passed another change in the Mechanic s Lien Law scheme at the urging of direct contractors and their sureties, which eliminates the second bite of the apple Bond Notice that applies when someone fails to serve a preliminary notice in certain cases. About twenty years ago, the Legislature created another notice that can be given to a bond surety where a Preliminary Notice was not given, which would allow a claimant to go forward on a bond claim. Indeed, in some cases, using this process, someone may have a bond claim even if they do not have a Stop Payment Notice claim and never served a Preliminary Notice. The 2012 legislation eliminates the ability to serve a Notice to Surety in the instance where the contractor that did not pay the claimant was paid. What is not clarified by the statute is what level of contractor needs to be paid. As an example, if the direct contractor pays the subcontractor, but the subcontractor does not pay its subsubcontractor, can the material supplier to the sub-subcontractor make a bond claim using this process? The direct contractor will certainly argue that he paid for the work. Since it is its bond surety, that argument would likely fly with some courts. The statute is vague, but it was intended to exclude the right where the direct contractor paid is subcontractor for the work in question. Page 17

19 Collecting Your Money -- Mechanic s Liens, C. You should then file your lawsuit on the surety before the expiration of six (6) months after the completion of the project. If you are filing suit on a Stop Payment Notice or Mechanic s Lien, you will likely sue on all claims within the shorter ninety (90) day period. XII. DESIGN PROFESSIONALS LIEN: A. This is a special type of lien for design professionals. The design professionals listed in the statute are, licensed architects, registered professional engineers and licensed land surveyors, and (per SB 189 effective 7/1/12), licensed landscape architects also have the design professional lien available to them. B. Must have a written contract with owner. C. Lien may not be recorded unless a building permit or other governmental approval in furtherance of the work of improvement has been obtained based on the particular design professional s work. D. In order for a design professional to be entitled to a lien, the following conditions must be met: 1. The work of improvement for which the design professional provided services has not commenced. 2. The landowner defaults in a payment required under the contract or refuses to pay the demand of the design professional made under the contract. 3. Not less than 10 days before recording a claim of lien, the design professional gives the landowner notice making a demand for payment, and stating that a default has occurred under the contract and the amount of the default. 4. The claim of lien shall include all of the following information: a. The name of the design professional. b. The amount of the claim of lien. c. The current owner of record of the site. d. A legal description of the site. e. Identification of the building permit or other governmental approval for the work of improvement. Page 18

20 Collecting Your Money -- Mechanic s Liens, E. The lien must be recorded no later than ninety (90) days after the design professional knows that the work of improvement will not commence, if applicable. F. This lien expires when work begins or within ninety (90) days after recording the claim of lien. In the case of commencement of work, the design professionals can then utilize the traditional lien. G. Such a lien is not allowed on single-family residences where construction costs are under $100, in value. H. A design professional may convert a recorded design professional lien to a Mechanic s Lien if all of the following requirements are met (per SB 424, effective 7/1/12): 1. The design professional lien expires according to Civil Code section 8306(b)(1) which states that the lien expires upon the commencement of the work of improvement for which the design professional provided services on. 2. The design professional lien remains fully or partially unpaid. 3. Within thirty (30) days of the expiration of the design professional lien the design professional records a Mechanic s Lien for the amount of the unpaid design professional lien. 4. The recorded Mechanic s Lien states that it is a converted design professional lien but shall be recorded and enforced as a Mechanic s Lien, except that the design professional need not provide a Preliminary Notice to enforce the Mechanic s Lien. 5. Note that this lien conversion will not apply if the design professional lien expires pursuant to Civil Code section 8306(b)(2) which states that the lien expires upon the expiration of ninety (90) days after recording the claim of lien, unless the design professional commences an action to enforce the lien with that ninety (90) day time period. As stated previously, you should become thoroughly familiar with procedures yourself and discuss them with a construction attorney prior to putting the checklist to work in your office. Abdulaziz, Grossbart & Rudman provides this information as a service to its friends & clients. It is of a general nature and should not be used as a substitute for specific research or consultation with construction counsel. The firm can be reached at Abdulaziz, Grossbart & Rudman. P.O. Box 15458, North Hollywood, CA ; (818) ; Facsimile (818) ; at info@agrlaw.com; Website Page 19

21 Collecting Your Money -- Mechanic s Liens, PUBLIC WORKS STOP PAYMENT NOTICE AND BOND CHECKLIST Direct contractors have no Stop Payment Notice or Bond Rights on California Public Works of Improvement. This checklist pertains only to material suppliers and subcontractors. I. PRELIMINARY TO STARTING: Get as much information as possible!!! These determinations will save you money in the long run, should a dispute arise. A. Obtain the address, legal description of the property (map book and page number, etc.) and assessor s parcel number. B. Determine the name of the contracting officer. C. Determine whether you are a direct contractor, subcontractor, laborer or material supplier. D. Get all information regarding the Payment Bond (name of bonding company, address of bonding company and bond number), get a copy of the bond if possible. II. PRELIMINARY NOTICE: A. Within twenty (20) days from first furnishing labor or materials: First tier subcontractors on Public Works do not have to send a Preliminary Notice. However, all other subcontractors and material suppliers shall send out a Preliminary Notice to the public entity and direct contractor. It is a good idea for all claimants to serve the bonding company as well. Remember first tier subcontractors are under contract with the direct contractor and therefore do not have to give a Preliminary Notice, except notice should be given to the payment bond surety by either a Preliminary Notice or by a Bond Notice within 15 days of the recording of a Notice of Completion or 75 days of actual completion. No matter how many deliveries you make, or the time span over which you furnish labor or materials, only one Preliminary Notice is required. If you furnish materials or services under separate contracts or with more than one contractor or subcontractor, you must furnish a separate Notice for each subcontractor. However, the amount stated on the Page 20

22 Collecting Your Money -- Mechanic s Liens, Preliminary Notice must have been a reasonable estimate of the labor or materials to be furnished, and must be based upon information provided to you. B. Service: The most common method of service is by first-class certified or registered mail, return receipt requested, postage prepaid, addressed to the residence or place of business of the person being served, or at the address shown by the building permit, or at an address contained on a recorded mortgage or trust deed. Be sure to keep post office receipts for later use if you need to file a claim and prove it in court. A Preliminary Notice also may be served by personal delivery or by leaving it with some person in charge at the residence or place of business of the person you wish to serve (must be an adult). We strongly recommend serving a Preliminary Notice at the time that the contract for work on a project is entered into. There can never be an argument that a Preliminary Notice was served too early. On the other hand, a Preliminary Notice never relates back more than twenty (20) days and due to the changes in the legislation of SB 189 (effective July 1, 2012), there are some fears with respect to Civil Code Section 8116(b), which refers to a Code of Civil Procedure section pertaining to service by mail. At least one recognized source believe the Code section suggests that you must give an additional five (5) days notice due to the fact that the notice is being served by mail. The section in question pertains to litigation matters and gives additional time for a response when something is mailed rather than hand delivered. At least one other commentator has suggested that the effect of the legislation including a reference to Section 1013 of the Code of Civil Procedure, means that a Preliminary Notice must be served no more than fifteen (15) days after material is first delivered, or else it will only relate back fifteen (15) days when served by mail. While we are not sure that this necessarily applies, good business practices are to serve the Notice as quickly as possible to avoid any such argument. The claimant can pay the governmental entity a fee ($10.00, increased by SB 189) at the time that the Stop Payment Notice is filed. This will cause the governmental entity to have to inform the claimant when a Notice of Completion or a Notice of Cessation is recorded. This is cheap insurance for the claimant to know when the Notices are recorded and collection rights begin. III. STOP PAYMENT NOTICE: A. Contents: 1. Must be addressed to the directing body of the public entity. 2. Claimants name, address and capacity. 3. What was furnished. Page 21

23 4. Value of what was agreed to be furnished. Collecting Your Money -- Mechanic s Liens, 5. Location of public work. 6. Identification of work. 7. How much claimant wants withheld. 8. Verification. B. If you are a subcontractor or material supplier: 1. If the owner files a Notice of Cessation of Labor, a Notice of Completion, or a Notice of Acceptance (NOTE: Labor must have ceased for at least thirty (30) days before the owner is entitled to record the Notice of Cessation), Then: Within thirty (30) days of recording of any of these notices, the subcontractor and material supplier must serve a Stop Payment Notice. 2. If no Notice of Completion, Notice of Acceptance, or Notice of Cessation is recorded and: a. The project is actually completed; or b. Labor ceases and owner or agent uses work of improvement; or c. Owner or agent accepts improvement; or d. Labor ceases for a continuous period of thirty (30) days, Then: Within ninety (90) days of any of the above acts, serve a Stop Payment Notice on the public agency. 3. You must file suit on the Stop Payment Notice within ninety (90) days of the time one would have to serve a Stop Payment Notice. 4. A Notice of Commencement of Action must be filed and served within five (5) days after filing the action. Page 22