Bookmark & Share


  • Email This Page Email This Page
  • Print This Page Print this page

RSS FEED

SUBSCRIBE TO OUR NEWSLETTER

United States of America > California > Construction > Suppliers > Overview

Overview: Construction, Suppliers

For construction suppliers, contractors, and everyone else concerned with a project, you need to “follow the money!”

SECURITY FOR GETTING PAID

1. Mechanic’s Liens

California’s mechanic’s lien statutes give a sub-contractor or supplier meaningful and relatively low-cost security, IF you follow certain procedures to perfect and enforce the lien. When you protect your lien rights, you have a legal interest in the property that you have improved, and those rights have priority in time because they extend back to the start of any work on the project in question. The specifics are set out below, but lien rights are not exclusive, you can exercise your rights under your construction contract or purchase order by going to court or filing for arbitration.

2. Private Payment Bonds

A separate source of security on many California projects is the payment bond, which as its name implies is meant to protect such parties as suppliers and subcontractors against not being paid. Many owners require their contractors to post a payment bond. This should protect owners from the time and expense of defending mechanic’s lien suits, and protect their property from liens that violate covenants in their loan documents. Additionally, many owners require general contractors to bond off any liens. The cost of the payment usually falls on the person requiring the bond to be posted, and the cost of bonding off a lien usually rests upon the person who failed to make payment.

Most bonding companies require that the principals of a contracting firm personally guarantee a bond before it will issue one. Because they may become individually liable for the claim, those principals tend to concentrate their attention on the claim, and to treat it preferentially. Some general contractors also require their subcontractors to obtain private payment bonds to protect them from claims made by sub-subcontractors and suppliers. Because these bond costs usually increase the subcontract price, the parties may bargain for some other form of security to protect them from liability. Suppliers cannot require that the higher-up parties post bonds, but they should find out whether bonds are available and, if not, they could bargain for joint checks or take other steps to secure payment.

3. California’s Little Miller Act

You cannot enforce a mechanic’s lien against property owned by state or local governments. Therefore, payment bonds are required by statute on public works projects. Suppliers of any tier may sue on these bonds, unless a subcontractor between the general contractor and claimant has posted a separate bond.

INFORMATION IS KEY

You can collect information more easily at the start of a job. And, having it in your files before you call your lawyer will save you time and fees. What should be in the project file?

1. A Legal Description of the Property

Accurate and complete property descriptions are crucial. The description should come from recorded documents filed in the County Recorder’s Office where the project is located. Obviously, this will take time, so get it well before the deadline for filing the lien.

Under such an industry standard contract between an owner and general contractor as the AIA A201 General Conditions, the owner must provide the contractor with an adequate legal property description of the site (A201 ¶ 2.2.3 (2007 ed.)). Also, the general contractor should receive within fifteen days of written request, an accurate statement of the recorded legal title to the project and the Owner’s interest in the property (A201 ¶ 2.1.2 (2007 ed.)). Double check what you get because even tiny errors can cause large losses.

2. Copies of Bonds

If you are supplier contracting to work on a particular project, ask about applicable bonds when you sign a purchase order. It is helpful to have this information up front in case there are conditions in the bond you must satisfy. Under the AIA A201 General Conditions, a bond obtained by the general must be made available to any potential beneficiary upon request. (A201, ¶ 11.4.2 (2007 ed.).)

3. Names of Other Parties

Find out who else is involved because the names of other parties may reveal what bonds exist and will be necessary when filing a lien (giving others proper notice). Knowing names is also helps in the event of a payment problem so that you can discover who else has similar problems and who may be the source of the problem.

4. Contract Completion Dates

Ask for the project’s completion date (not just your scope of work). California’s statutory limitation period for mechanic’s lien claims or claims under surety bonds are triggered by the date on which work is completed on the whole project. As a supplier, providing only a portion of the materials or equipment on a large project, you may be done long before the work is completed. When payment is slow in coming, the project completion dates tell you the “drop-dead dates” for taking action and for ignoring excuses.

MECHANIC’S LIENS

More than most areas of the law, the subject of liens illustrates the adage that “a little knowledge is a dangerous thing.” What follows is a basic outline of some of the law, not legal advice and certainly not a lawyer’s analysis. This explanation is meant to de-mystify the subject, not to encourage any supplier to act without competent advice and counsel.

1. Basics

Purpose of Mechanic’s Liens: “to prevent unjust enrichment of a property owner at the expense of … material suppliers.” (as described by the intermediate California court known as the Court of Appeal in Basic Modular Facilities, Inc. v. Ehsanipour, 70 Cal.App.4th 1480, 1483 (1999).) Their effect: “A mechanic’s lien … enforces against the owner of property payment of the debt incurred for the … furnishing of material used in construction.” (Gary C. Tanko Well Drilling, Inc., v. Dodds, 117 Cal.App.3rd 588, 593 (1981).)

History: California’s mechanic’s lien law dates from 1850 and has been part of the state Constitution since 1879. Therefore, these statutes express important public policies and will be read by judges in favor of those intended to be benefitted. Who are the beneficiaries? They are described below, but the Constitution states that “[m]echanics, persons furnishing materials, artisans, and laborers of every class, shall have a lien upon the property upon which they have bestowed labor or furnished material for the value of such labor done and material furnished; and the Legislature shall provide by law, for the speedy and efficient enforcement of such liens.” (Cal. Const., Art. XIV, § 3.) This judicial attitude means that doubts concerning the meaning of the mechanic’s lien statutes are resolved in favor of the claimant. Except under limited, statutory procedures, the protections of the mechanic’s lien law cannot be waived. This is vital because suppliers often lack the upper hand in bargaining power. But remember, the steps to perfect a lien still are enforced strictly.

2. What Property Can Be Liened

Very generally, your lien can attach to the “work of improvement” into which the materials or equipment that you supplied were incorporated. A partial list of the types of projects covered by the Civil Code includes: “construction, alteration, addition to, or repair, in whole or in part, of any building, wharf, bridge, ditch, flume, aqueduct, well, tunnel, fence, machinery, railroad, or road, the seeding, sodding, or planting of any lot or tract of land for landscaping purposes, the filling, leveling, or grading of any lot or tract, the demolition of buildings, and the removal of buildings.” (Civil Code § 8050.) A California mechanic’s lien only affects property in California. If you are supplying materials or equipment out of state, you must follow the lien law of the state where the project is located. Your lien attaches to the improvement and the land it is on. (Civil Code § 8440.) If the person ordering the work owns less than the full legal interest in the property, for example only a long-term lease, the lien covers just that person’s interest. (Civil Code § 8442.) While it can be rebutted, the law presumes that the land’s owner (the holder of a “fee” interest) ordered the work of improvement. To prevent unfairness, the Code requires apportionment if a claim covers two or more parcels, or separate residences in the same project. (Civil Code §§ 8446, 8448.)

3. Eligibility

To qualify, the supplier must satisfy several requirements, not all of which can be listed or discussed below. These are some of the major criteria, but because so many possible contingencies can affect your eligibility, you cannot assume that this list is all that may matter to your specific lien on a particular project.

a. The lien claimant must have directly contributed to a work of improvement. If you supplied materials or equipment that was “identified” with the specific job (such as shipping it directly to the job, or with a purchase order covering the particular project, to give a couple of examples), then the mechanic’s lien laws should apply. Contrariwise, if you shipped your goods to a business for its inventory, and it in turn later filled an order for a particular job that you did not know about until after the fact, then you would not be protected.

b. The materials or equipment must have been “used or consumed.” There is no presumption of use to help the supplier. If your lien includes materials or equipment that you did not provide, or that went to another job, your rights may be lost.

c. Mechanic’s liens do not apply to public works projects, only private jobs.

d. Work must start. Once it does, your lien “relates back” to the day of the first work on the project, regardless of how late in the job your purchase order was signed.

e. The project must create a permanent improvement to the property, even if the equipment supplied by you only stayed on site temporarily. For example, supplying scaffolding or rental equipment suffices. However, supplying equipment to maintain a facility would not qualify. Construction water truck to suppress job site dust: qualified. Tanker to water existing landscaping: not qualified.

f. While suppliers rarely need a license, if one is required for the work, then you cannot exercise your lien rights with an expired, invalid or inapplicable license. However, the owner’s lack of a building permit will not affect your lien rights.

g. You had the right person authorize your contract. “Work is authorized for a work of improvement or for a site improvement in any of the following circumstances: (a) It is provided at the request of or agreed to by the owner, (b) It is provided or authorized by a direct contractor, subcontractor, architect, project manager, or other person having charge of all or part of the work of improvement or site improvement.” (Civil Code § 8404.) “[A] supplier of a [material supplier] is not entitled to a lien, but a supplier of a subcontractor is.” (Piping Specialties Co. v. Kentile, Inc., 229 Cal.App.2nd 586, 588-89 (1964).)

HOW TO “PERFECT” YOUR CALIFORNIA MECHANIC’S LIEN

1. Serving the Preliminary Notice (Private Work)

Unlike many states, California requires a Preliminary Notice before you can enforce a mechanic’s lien. (Civil Code § 8026.) If you have a direct contract with the owner, you would be exempt, but in the usual course of supplying a project, (through a general contractor or a sub.) this statutory prerequisite creates a trap for the unwary. This Notice guards owners from surprise liens, and ordinarily no lien covers any equipment or materials furnished more than 20 days before serving this warning. The statute prescribes the language of the Preliminary Notice, and suppliers should never draft their own form; use the statutory forms and complete all of the information, including: a description of the work or materials to be furnished; an estimate of the price; the name and address of the person furnishing the work or materials; identification of who contracted for the work or materials furnished; and a description of the project site. (Civil Code § 8202.) The wording of the mandatory language for a Preliminary Notice changed on July 1, 2012. So be sure your form is the updated version, not just a copy of what you have used for years.

If you supply materials to more than one subcontractor on the same job, you must give a separate notice for each one. Although the notice must be served “not later than 20 days after furnishing labor, service, equipment or materials to the jobsite,” you may send it sooner, such as after signing a purchase order. (Civil Code § 8204 (a).)

Serve the Notice on the owner, construction lender, if any, and prime contractor, then follow the printed instructions on the commercially available forms as to using certified mail or alternatives. (Civil Code §§ 8106 – 8118 specify the full details for service.)

2. Recording the Lien

The Preliminary Notice gives key parties like the owner and any lender formal notification of your role as a supplier to the project. That is all it does. To take the next step (because you have not been paid, despite making those key parties aware of your status), you must record a Notice and Claim of Lien in the County Recorder’s Office where the job is sited. (Civil Code § 8414.) The Preliminary Notice does not encumber legal title, but the Notice and Claim of Lien does exactly that, for the amount of your dispute that is lienable (not the entire contract amount, unless you have not been paid at all).

All mechanic’s liens on a project relate back to when work on the job began, and therefore all share the same priority. (Civil Code § 8450.) Your lien as a supplier ordinarily will take precedence over any other encumbrance recorded after the start of the work of improvement. The Notice and Claim of Lien must set forth a statement of demand, the name of the owner (or reputed owner), a summary of what the lien is for, the identity of who contracted with you or received your equipment or materials, and a legal description of the site. (Civil Code § 8416.) Use a standard, commercially available form, and at this stage get legal advice. For example, an experienced lawyer can walk you through the best practices for serving the Notice and Claim of Lien. If you do not meet the service requirements, your lien will not be enforced, and you will have missed a prime opportunity to encourage an early resolution of your payment dispute. (Civil Code § 8416 (e).)

Unfortunately, strict time limits apply to the filing of a Notice and Claim of Lien. If your project’s owner records a Notice of Completion (the job is done) or Notice of Cessation (the job has been suspended or abandoned short of completion) suppliers have only 30 days to file their lien claim. (Civil Code § 8414.) To be clear, this tight window of opportunity does not affect your right to sue, or to file for arbitration with, the party that owes you the money, but these alternatives are much slower, more costly, and provides far less leverage. So, be vigilant! Notices of Completion or of Cessation shield project owners by telescoping the time allowed to lien their property. Without one of these notices, you as a supplier have 90 days from “completion” of the entire project to record your lien. (Civil Code § 8414.) “Completion” means any of the following: “(1) Actual completion of the work of improvement. (2) Occupation or use by the owner accompanied by cessation of labor. (3) Cessation of labor for a continuous period of 60 days. (4) Recordation of a notice of cessation after cessation of labor for a continuous period of 30 days.” (Civil Code § 8180.) You can record your lien before the end of the job, provided you finish your own work. (Howard S. Wright Const. Co. v. BBIC Investors LLC, 136 Cal.App.4th 228 (2006).)

You need to keep tabs on your projects and not depend on the owner recording the Notice of Completion or of Cessation. The owner may neglect such notices, or the County Recorder may neglect to notify you of a Notice of Completion (notwithstanding that you properly filed your Preliminary Notice) even if the owner filed one.

3. Foreclose on Your Lien

To take the final step in enforcing a mechanic’s lien, you will need a lawyer; that fateful step involves filing a Complaint to Foreclose Mechanic’s Lien. Your attorney knows that this lawsuit must be filed in the county where the project is sited. (Code of Civ. Proc. § 392.) The legal requirements are several, and it is worth noting that the complaint will be directed against all owners of the property, including those who have just a security interest in it. (Monterey S.P. Partnership v. W.L. Bangham, Inc., 49 Cal.3rd 454, 459 (1989).) Your counsel will know the required allegations to make and how to properly serve the complaint, however you should know that you have relatively little time to engage your lawyer because the foreclosure must be filed within 90 days of when you recorded the Claim of Lien. (Civil Code § 8460.) Your legal strategy may include negotiating for payment over time, or in some similar way delaying the expense of a lawsuit. Fortunately, your time to file suit can be extended (up to a total of one year from finishing the work of improvement), if you record a “Notice of Credit.” (Civil Code § 8460 (b).)

Among the legal tactics to discuss with your lawyer is recording a Notice of Pendency of Action (in Latin: lis pendens) against the property. Recording this Notice enables you to enforce the lien against those holding later-acquired property interests (think a second mortgage to supply additional construction financing). (Civil Code § 8461.) Of course, owners often require that their general contractor clear the property of liens. This reality will get the general contractor to pay more attention to your claim or dispute.

If you prevail on your lien foreclosure action, you should recover the agreed upon price or the reasonable value of the equipment or materials provided, whichever is less. (Civil Code § 8430.) Normally, the pricing in the purchase order is the only evidence submitted on the value of the materials or equipment underlying the lien. Unfortunately, attorneys’ fees are not recoverable under the lien statutes, but, if your contract has a “prevailing party” clause that awards legal fees to the winning side, then you might recover under the contractual right. Note, however, that this works only if your contract is the unusual one directly with the owner (not, the usual supplier agreement with a subcontractor, whose “prevailing party” language does not bind the owner, further up the food chain). Pre-judgment interest, on the other hand, is recoverable on a mechanic’s lien claim. (Meda v. Lawton, 217 Cal. 282, 285-6 (1933).) What does winning mean? Normally, the owner or general contractor arranges for payment, substitutes a payment bond for the lien, or pays any judgment awarded at the successful conclusion of the foreclosure suit. However, if the situation requires it, you may have the property sold to satisfy your judgment (there are important steps to take to record the judgment, which require counsel to again be involved in the process). The end result of a sale will be to pay the various parties with legal interests in the land subject to your mechanic’s lien. Typically, a construction lender has first priority, and the various mechanic’s lien holders all have the same place in line, based on their liens all attaching as of the starting date of the work of improvement. Knowing whether the property subject to your lien is financially “under water” can dictate whether you wish to purse your mechanic’s lien rights all the way to a forced sale of the land.

RELATED ISSUES

1. Lien Waiver Upon Payment

Owners frequently require statutory lien waivers as part of progress payments or final payments they make to general contractors. You should expect the owner and therefore the general contractor to demand a waiver in the form prescribed by statute from all of the subs and suppliers who provided a Preliminary Notice. These documents waive your lien rights to the extent of payment. There are four types of statutory lien waivers: a Conditional Waiver and Release Upon Progress Payment, an Unconditional Waiver and Release Upon Progress Payment, a Conditional Waiver and Release Upon Final Payment, and an Unconditional Waiver and Release Upon Final Payment. (Civil Code §§ 8132-38.) Caution: the mandatory language of these four forms was updated and placed in separate statutes as of July 1, 2012. Use a current form!

The Conditional Waiver and Release Upon Progress Payment is given “where the claimant is required to execute a waiver and release in exchange for, or in order to induce the payment of, a progress payment and the claimant is not, in fact, paid in exchange for the waiver and release or a single payee check or joint payee check is given in exchange for the waiver and release.” (Civil Code § 8132.) The Unconditional Waiver and Release Upon Progress Payment should be use when a progress payment already has been made. (Civil Code § 8134.) You should never supply the Unconditional Waiver without being paid; it means what the title says, your lien rights are gone for the work covered by the waiver. The two other forms cover comparable situations as to final payment. No matter how much an owner or general contractor may insist on some other forms of waiver, only these four forms, in the language taken directly from the lien statutes, are effective. (William R. Clarke Corp. v. Safeco Ins. Co., 15 Cal.4th 882, 889-90 (1997).) Likewise, the subcontractor or general contractor with whom you are dealing may not waive your rights for you! (Civil Code § 8122.)

2. Lien Release

Frequently, your lien amount will be paid, at which point you have a duty to issue a Release of Lien that can then be recorded. Similarly, if you sued, and then reason set in and payment has been received, you also must record a Withdrawal of Notice of Pendency of Action. Remember the statutory forms: a release of lien is not effective unless you actually have been paid in full, or you have signed one of the statutory lien waiver forms.

A lien (and the underlying property in a foreclosure action) also can be automatically released if the owner or general contractor posts a mechanic’s lien release bond, for 150% of the amount of your lien. You should be so lucky as to have this much more liquid security supplied to satisfy your claim. Technically, the bond does not extinguish your lien, it just supplants the land as the property to which your lien attaches.

CONCLUSION

As a supplier, you have relatively few leverage points in protecting against a default in payment. This summary of mechanic’s liens in California hits the high points, and should give you an insight into one of your best mechanisms for recovering what is owed to you. You can follow the money in other ways, including filing a lawsuit or demand for arbitration under your basic contract with the subcontractor, general contractor or owner that ordered the materials or equipment in the first place. Likewise, an experienced lawyer can advise you of various precautions to take, such as a letter of credit, to avoid or lessen the credit risk. However, few remedies surpass the humble, but still effective mechanic’s lien. It has an out-dated name, but it can be your best friend, in a pinch.

04009\3226056.2

Last Update: 2012-Aug-21 Sink - Charles
The contents of this page do not constitute legal advice or create an attorney- client relationship with the contributor. Do not apply anything you read here without contacting a professional.
Author: Sink
Law Firm: Charles
Address: Farella Braun + Martel, LLP
235 Montgomery Street
San Francisco
California
94104
United States of America
Telephone: 1-415-954-4442
Email: csink@fbm.com
Website: www.fbm.com