CALIFORNIA NEW MANDATORY NOTICE REQUIREMENTS FOR ENFORCEMENT OF MECHANIC S LIEN RIGHTS

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1 CALIFORNIA NEW MANDATORY NOTICE REQUIREMENTS FOR ENFORCEMENT OF MECHANIC S LIEN RIGHTS Lisa Dal Gallo, Partner, LEED AP Hanson Bridgett, LLP John T. Lettieri, Managing Director Aon Construction Services Group 1

2 On January 1, 2011, California State Assembly Bill 457 was codified amending Civil Code sections 3084 ( Claim of Lien ) and 3146 ( Time and Place for Recording Notice of Lis Pendens ) by: (1) Requiring a lien claimant to provide notice to owners or reputed owners of its claim of lien before recording a mechanic s lien; and (2) Making the recording of a Notice of Lis Pendens within 20 days of filing a civil action to foreclose on the lien mandatory for enforcement of a lien against a bona fide purchaser. These two new requirements are mandatory for proper enforcement of mechanic lien rights and, therefore, should not be taken lightly. Mechanic s Lien Overview and Amended Statutes. Prior to the adoption of AB 457, a lien claimant could record a mechanic s lien in the county where the property is situated if the claimant was not paid for labor, materials, equipment, or services furnished in connection with a work of improvement without providing notice to the owner. The lien would be valid if the claimant properly served a 20-Day Preliminary Notice (if required), and timely recorded and foreclosed upon the lien. 1 A Notice of Lis Pendens was permissible and legally advisable, but not required. Contents of the Lien The mechanic s lien must include a statement of the claimant s demand, the name of the owner or reputed owner (if known), a general description of the type of labor, material, equipment or services furnished, and a description of the site. Timing If the claimant is the original contractor, a preliminary notice is not required. The lien must be recorded within 60 days after a valid notice of completion or cessation of labor is recorded or within 90 days of completion of the work of improvement if a notice of completion or cessation was not recorded. 2 If the lien claimant is not the original contractor (e.g., subcontractor or supplier), a preliminary notice is required, and the lien must be recorded within 30 days after a valid notice of completion or cessation of labor is recorded or within 90 days of completion of the work of improvement if a notice of completion or cessation was not recorded. 3 Unless an 1 Under Civil Code section 3097, a 20-Day Preliminary Notice is a prerequisite for enforcement of both a mechanic s lien and a stop notice on private work if the person or entity performing the services or providing materials or equipment is not in direct contract with the owner (subcontractors, suppliers, etc.). Failure to have properly complied with this prerequisite will render the lien or stop notice invalid. See, Civil Code section 3097 for all requirements. 2 Civil Code section Civil Code section

3 extension of credit is recorded in the county where the property is situated, a civil action to enforce the lien must be filed within 90 days after recording a claim of lien. 4 Amended Civil Code Section The 20-Day Preliminary Notice requirements, timing requirements, and general contents of the mechanic s lien remain the same. However, under the new law, the county recorder s office will not record a mechanic s lien unless it is accompanied by the Notice of Mechanic s Lien and a Proof of Service Affidavit signed by the person serving the Notice of Mechanic s Lien demonstrating that service was properly made upon the owner or reputed owner. Failure to comply with each of the new requirements set forth in Civil Code section 3084 is fatal, and the mechanic s lien will be unenforceable as a matter of law. 5 The following language is required in the notice in at least 10 point, bold face type. 6 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 WEBSITE AT The Proof of Service Affidavit must be signed by the person serving the Notice of Mechanic s Lien and must include the date, place, manner of service and facts establishing that the service was made in accordance with the requirements, and 4 Civil Code section Civil Code section 3084 (d). 6 Civil Code section 3084 (a)(7). 3

4 include the name and address of the person who was served (and if appropriate, their title or capacity). 7 Service of the Notice of Mechanic s Lien is effective if served by registered mail, certified mail or first class mail postage prepaid to the owner s residence or place of business, or at the owner s address shown on the building permit. Service is deemed complete at the time of deposit. 8 And, there is no waiting period or timing requirement between service of the Notice of Mechanic s Lien and recordation of the lien. Amended Civil Code Section As noted above, the lien claimant has 90 days to bring a civil action to foreclose on a properly recorded mechanic s lien. Formerly, recording a Notice of Lis Pendens after the civil action was filed was legally recommended but not required. Now, under the amended statute, after the action is filed, the claimant must record a notice of pendency of the proceedings (Notice of Lis Pendens) within 20 days of filing the foreclosure action. Civil Code Section 3143 (Release of Lien). If a mechanic s lien is recorded against the property, the owner of property, or the owner of any interest in the property, may record a release bond in the county recorder s office where the lien was recorded 9. An original contractor or subcontractor who disputes the correctness or validity of any claim of lien may also record a release bond. Id. For example, if the general contractor disputes the amount of the lien of one of its subcontractors, it can record a release lien in place of the amount of the claim. Typically, this is a contractual requirement of the original contractor under the prime contract. In order to be effective, the release bond must be executed by a corporation authorized to issue surety bonds in the State of California, and must be for the penal sum equal to 1 and ½ times the amount of the claim or 1 and ½ times the amount allocated in the claim of lien plus interest. Id. In other words, the bond must be conditioned for the payment of the sum that the lien claimant may recover on its civil action together with the costs of suit, if the claimant were successful. This is because once the release bond is properly recorded, the real property described in the bond is released from the lien and from any action brought to foreclose on the lien. So, the release bond becomes the security on the claim of lien in lieu of the property. 7 Civil Code section 3084 (a)(6). 8 Civil Code section 3084 (c)(1). 9 Civil Code section

5 The principal on the bond may be the owner of the property, any person with an ownership interest in the property, or the original contractor or subcontractor affected by the lien. Id. A release bond may be obtained at any time after a mechanic s lien is recorded and prior to foreclosure on the property. However, the person who obtains the release bond must give notice of the recording to the lienholder under Civil Code section And, if it is recorded after the action to foreclose on the property has already been filed, the lien claimant should amend its cause of action to enforcement of the mechanic s lien release bond rather then a foreclosure action. This is because the bond stands in the place of the released property. Therefore, the civil action is no longer against the property but rather is now against the release bond. Analysis. The new notice requirement in Civil Code section 3084 was adopted by legislature in an attempt to eliminate, or at least limit, double payment by the owner, and to provide the parties involved with an opportunity to resolve the issue of payment prior to expending additional money associated with recording the lien and filing the legal action to enforce the lien. However, it is arguable whether the new legislative requirements were necessary to achieve this goal or will accomplish the goal. First, one of the best ways for property owners to eliminate double payment is to require that the contractor, and its subcontractor and suppliers provide an executed conditional waiver and release under Civil Code section 3262 (d) (1) as part of the back up to their request for payment. In exchange for payment, the owner should require unconditional waivers and releases from the contractor, and its subcontractors and suppliers under Civil Code section 3262 (d) (4). The unconditional waiver and release specifically states that the undersigned has been paid in full for all labor, services, equipment or material furnished, and therefore operates as an affirmative defense against any future liens. Because subcontractors and suppliers are required to serve the owner with a 20-Day Preliminary Notice, the owner should be aware of who is performing work or services on the project and can compare the waivers and releases with the 20-Day Preliminary Notice information. Thus, obtaining waivers and releases in exchange for payment is one of the best ways for the owner to protect itself against double payment and for a general contractor to protect itself from having to record release bonds around frivolous mechanic s liens. Second, because there is not a mandatory wait period between the time the Notice of Mechanic s Lien is served and the time that the mechanic s lien may be recorded, the parties involved could serve the Notice of Mechanic s Lien and record the lien in the same day. Also, there is nothing currently in the statute that requires that a party wait a period of time before foreclosing on the action. The only requirement is that the action be filed within 90 days of recording the lien. So, theoretically, a lien claimant could properly serve a Notice of the Mechanic s Lien on the owner and 5

6 record the lien in the same day, if they walk the paper work into the recorder s office. There is also nothing stopping the claimant from immediately foreclosing on their lien by filing the civil action. Under this scenario, the owner is not really protected from potential double payment and the parties will not have an opportunity to resolve the issue of payment prior to the lien being recorded and/or before foreclosing on the action. As a practical matter, the owner is usually aware of whether or not the contractor is owed money. However, the owner may not be aware of whether the contractor has paid its subcontractors and suppliers unless it requests conditional and unconditional waivers and releases. As stated above, depending on the timing of the Notice of Mechanic s Lien, the recording of the lien and the filing of the action to enforce the lien, the new notice provisions may not have an impact on preventing double payment or resolving the issue of payment short of incurring additional financial and legal expenses. Thus, it is arguable whether the new requirements will accomplish the goal. And, the new notice provisions certainly place an extra procedural requirement on the contracting community allowing for more potential error in enforcement of a lien. Once a lien is successfully recorded, the owner s only recourse to clear title is to pay-off the lien(s), force its general contractor to obtain and record a release bond (if the liens are subcontractor related and the owner has already paid the contractor for this work), or for the owner to obtain and record a release bond for 150% of the claim amount. The new requirements under Civil Code section 3146 are really more of a clarification over formerly conflicting language in the code. The purpose of recording a Notice of Lis Pendens is to place bona fide purchasers of the property on constructive notice of the lien. Currently, there is nothing in the statute stating that a failure to record a Notice of Lis Pendens invalidates the lien. However, the lien will not be enforceable against a party who later purchases the property if a Notice of Lis Pendens is not recorded. Arguably, even under the former statute, a claimant s lien could be held unenforceable against a later purchaser of the property if the claimant did not record a Notice of Lis Pendens or prove that the bona fide purchaser had actual notice. So, even before the statute was amended, it was always legally advisable for a claimant to record a Notice of Lis Pendens upon filing the civil action to foreclose on the lien. 10 In other words, while the initial sentence of the former section made the recording of a Notice of Lis Pendens optional, the very next sentence required the lis pendens to be recorded in order for the lien to have an affect on later purchasers of the property Packard Bell Electronics Corp. v. Theseus, Inc. (1966) 244 Cal.App.2d 355 and Flinktkote Co. v. Lisa Construction Co. (1968) 268 Cal.App.2d Packard Bell Electronics Corp. v. Theseus, Inc. (1966) 244 Cal.App.2d

7 Conclusion. As a result of the current state of the economy, there have been a number of foreclosures that have occurred in the market over the past couple of years. Prior to the downturn in the economy and the banking crisis, parties were more likely to settle their disputes either after the lien was recorded or within a reasonable period of time after the action to enforce the lien was filed. However, with foreclosures becoming more frequent in the marketplace, costly litigation is also becoming more frequent, and the chance of a mortgagor or bona fide purchaser buying the property through a foreclosure sale due to non-payment on a loan is greater. Therefore, prudent contractors, subcontractors and suppliers that have not been paid should start the process sooner and consider engaging legal counsel early. Especially if the contractor or subcontractor are not familiar with mechanic s lien law, which can be complicated and confusing. Taking advantage of the new notice requirements by timely providing the owner with Notice of the Mechanic s Lien could potentially avoid costly litigation by allowing enough time between the notice requirement and the time for recording the lien to determine whether the parties can resolve the issue of payment without recording the lien. If the contractor and/or its subcontractors and suppliers are unsuccessful, or up against the deadline for recording their liens, they can record the lien and use most of the 90 day period to try and resolve the issue of payment without resorting to costly litigation. Also, although failing to record a Notice of Lis Pendens may not prove fatal, a lien claimant is gambling with whether or not its lien will be enforceable because the property could be sold. Therefore, all contractors and suppliers should record a Notice of Lis Pendens upon filing an action to enforce a mechanic s lien. If there are liens against the property for which a property owner believes are invalid or in cases where the construction lender ends up with the property due to default and subject to liens, a properly recorded release bond can be obtained through a surety to clear the property title. Once a release bond is recorded for the proper amount, the property may be sold to a bona fide purchaser and the lien claimants claims will be against the bond rather than the property. Finally, when dealing with mechanic lien actions, the contracting community should keep in mind that failure to comply with the statutory prerequisites for enforcing a mechanic s lien is almost always fatal. And, the new notice requirements under Sections 3084 and 3146 just added another procedural layer that must be properly performed in order for the lien to be enforceable under all circumstances. 7