Construction Payments And Mechanics Liens: When To Be Concerned And What To Do?

A mechanics lien is a legal claim against a property by an unpaid contractor, subcontractor, laborer, or supplier for work or materials they provided for improvements to the property.  A mechanics lien can result in significant financial loss for a property owner if the unpaid claimant forecloses on the property subject to the lien.  It can also affect the owner’s ability to borrow against, refinance, or sell the property, implicate the owner’s creditworthiness and ability to engage in future property transactions, and result in substantial legal cost and disruption.

Given the serious consequences of mechanics liens, property owners must understand the process for creating mechanics liens, learn to recognize when to be concerned, and take strategic action to mitigate risk associated with them.

In California, before recording a claim of lien, a claimant must first serve the property owner a preliminary 20-day notice, to notify the owner that the claimant will be working on the project.  (Cal. Civ. Code sections 8400, 8202, 8204.)  Claimants who have a direct contract with the property owner and laborers on the project do not need to file a preliminary notice.  (Cal. Civ. Code section 8200, subd. (e).)  This preliminary notice is NOT cause for concern: it is merely a notification of the claimant’s right to file a lien.

Owners should be aware of issues that may arise on a construction project that could trigger a claimant’s filing of a mechanics lien.  The most common reason is when a contractor, subcontractor, laborer, or supplier is not paid as agreed.  Other reasons claimants may file mechanics liens to protect their rights include disagreements over contract terms, scope of work, change orders, project cessation or delays, allegations of faulty or incomplete work, or the financial distress or bankruptcy of a party involved in the project.

Once a claimant files and serves a claim of lien, property owners should immediately contact the contractor involved to facilitate payment, as well as an attorney to assist with defense against the lien.  Among other things, an attorney will assist the owner with evaluating whether the claim of lien meets certain statutory requirements.  Notably, the claim must include a statement of the claimant’s demand, and a clear “NOTICE OF MECHANICS LIEN, ATTENTION!” statement in bold font, with several paragraphs of specific statutory language clearly describing the implications of the lien for the property.  (Cal. Civ. Code section 8416.)  The claimant must also record the claim of lien with the county recorder’s office of the county where the subject property is located.  (Cal. Civ. Code section 8416.)  Failure to comply with these requirements will render the lien invalid and unenforceable.

Property owners can help proactively manage mechanics lien risk by taking the following steps:

• Carefully Choose General Contractors and Ensure Transparency Regarding Subcontractors and Suppliers: Owners should hire licensed contractors, check their licenses and references, and research any prior lawsuits against or filed by them.  Owners should also request a list of all subcontractors, suppliers, and others working on or for the project to ensure they know the full universe of potential lien claimants from the outset of the project.
• Negotiate Contractual Payment Terms: Property owners should clearly detail payment terms at the outset of a project in the construction contract, and include a payment schedule that states when specific phases of work start and end, as well as costs for each phase.  Owners should also consider the use of joint check arrangements whereby the owner can make checks out to both the contractor and supplier or subcontractor to make sure potential lien claimants have been paid.  However, such arrangements present additional challenges that may increase the risk of mechanics liens and should be carefully evaluated in light of the nature of the project and contractors involved.
• Require Contractors to Secure a Payment Bond: Owners can also require that their construction contractor secure a payment bond to assure that the various contractors and suppliers working on the project will be paid.  This will not prohibit a claimant from filing a mechanics lien, but will give the claimant the option to assert a claim with the payment bond surety instead of filing a lien on the property.
• Utilize Indemnification and Release Clauses: Owners can also negotiate lien indemnification clauses that require general contractors to indemnify the owner for any amounts the owner has to pay subcontractors and suppliers who file and record a lien or other damages suffered as a result of the lien.  Construction contracts can also include release provisions requiring the contractor to promptly obtain the release of any mechanics lien filed against the property.
• Secure Lien Waivers and Releases: In California, four statutory forms may be used to waive and release mechanics liens.  Owners can seek conditional releases from possible lien claimants before making a payment, and unconditional releases from possible lien claimants following payment.
• File Notices of Completion and Cessation: Owners can reduce the amount of time a contractor or supplier has to record a lien claim by filing a Notice of Completion after work is completed, or a Notice of Cessation if there has been a complete cessation of work for more than 30 continuous days.
• File, Post, and Record Notices of Non-responsibility: Where a property owner receives a claim of lien, and has not contracted for the work being performed, it can use a notice of non-responsibility to avoid attachment of a mechanics lien to the property.

With the foregoing precautions and tools, owners can more effectively ensure timely payment for work performed and supplies rendered on their projects, and can help minimize the legal, financial, and operational challenges associated with mechanics liens.