HOW TO FILE A CALIFORNIA MECHANIC’S LIEN 2018-2019–PART 1
It’s important to know all the “ins and outs” of recording a California mechanic’s lien. Because these liens are extraordinarily technical, National Lien Law has decided to do a number of separate blogs outlining what a contractor can and cannot do. Here are some of the salient points. Remember, anyone can email us and receive a free California Mechanic’s Lien Law Summary that has much more detail.
The effect of the lien: In the United States, mechanic’s lien go back to 1791 and the State of Maryland which were given to contractors to ensure they were paid in building the capital city of Washington DC. From the beginning, they constituted a lien on the property, like a mortgage. The effect is to prevent the sale or refinance, unless you are paid. So it is a very powerful device–but in exchange the courts insist you follow the right procedures and record on time–or lose those rights. For this reason, they are very picky as to the technicalities.
Who-– As far as who may record a mechanic’s lien, the California legislature has opened the doors wide open and allows it for any person or entity who contributes labor, equipment or materials that are used, consumed, or incorporated into the construction project and permanently improves same. Other than the obvious examples of prime contractors, subcontractors and material/equipment suppliers, liens can be filed for and by machinists, house movers, labor pool companies providing labor services, grading, leveling, and filling, demolition, removal of trees and other vegetation, drilling test holes, sewer and utility construction, providers of temporary and permanent power, construction of vaults, sellers, or rooms underground, union fringe benefit payments, and off-site street and other utility work.
New California Civil Code Section 8022 now allows a lien for persons who furnish “supplies, appliances or power”. Sounds pretty expansive, doesn’t?
But by definition there is no lien for building permit expediters, soil preparation work for landscaping services, such as disking, companies that sell as opposed to rent equipment to a contractor, supplying tires on rented equipment, selling materials or equipment (for example selling a compressor), temporary fencing, portable sanitation, lunch wagons, construction payroll services, construction software providers, real estate brokers, and others who do not provide any services or materials consumed in the construction.
As mentioned above, as to who may file, it applies to prime contractors, the various sub trades, and material and equipment suppliers. As a contractor, you have to be currently licensed to file the lien. The California mechanic’s lien form itself does not require that you insert the license number, but you are not allowed to collect money or file a lien without the license and it can be grounds for discipline through the California Contractors’ State License Board. And the general contractor cannot file a lien for a portion of the work that is subbed out to an unlicensed subcontractor. But the reverse is not the case. Subs and suppliers get a mechanic’s lien even if their contract is with an unlicensed general. You should be licensed for all times during the job. But if you inadvertently fail to reregister your license, you can argue there has been substantial compliance. But you never know what the judge will say. Under California Business and Professions Code Section 7031(b), the owner can now sue you to recover back all monies paid if you are an unlicensed contractor. So it is very serious.
You can be an individual doing business under a trade name or a corporation, LLC or partnership. Although it might be good idea to have a corporate resolution, this is not required before recording the California mechanic’s lien.
You have to change or improve something–not just maintenance. In most cases it would not be to prove because the construction services are causing improvements to the project. But assume you are only replacing all the florescent lighting for the hallways of an apartment complex. Replacement alone is not an improvement. But if in the process you are replacing and reinstalling some of the defective lighting boxes, it would be lienable. Or, if you are a landscape company and are simply mowing, watering or fertilizing the plant material, that is not lienable. But you can file a lien for the initial planting, installing an irrigation system or retaining walls. Other examples of lienable work would be the janitorial cleanup of the construction project or trucking services where you are hauling away soil or debris.
Unlike a Federal Miller Act project when only 1st to 2nd tier subcontractors can file a claim, you can literally be a sub, sub, sub, sub etc. and get a mechanic’s lien.
But you cannot be a material supplier to another material supplier. For example, a sawmill supplying lumber to a supply house. The supply house gets a lien because they are providing material to a contractor.
Only against the owner’s interest: The California mechanic’s lien is against the owner’s title to the property. And if you are a sub or supplier, it is not against any of the property owned by the general contractor. For tenant improvement work, your lien is against the long-term tenant’s interest. This consists of the value of the lease and the trade fixtures. Technically, on foreclosure, the trade fixtures can be sold-off and removed from the property as long as it does not cause material damage. The good news is that almost all long-term commercial leases declare there is a default if the tenant allows a mechanic’s lien. This in turn puts pressure on the tenant to pay because the landlord will start screaming at them to make sure the balance is paid.
Written or verbal contract: You can file a lien if your contract is either verbal or in writing. The statute of frauds, which require certain contract to be in writing, does not apply. And the Uniform Commercial Code is also inapplicable because you are providing construction services and not simply “goods.” In other words, you are providing both materials and labor. But if you are solely a material or equipment supplier, the UCC does apply and your contract or purchase order should be in writing. Big exception for residential projects: the California Business and Professions Code requires, as a condition to file your lien, that you have a written home improvement contract with has almost 21 separate provisions. But obviously, it is a real good idea to have all your contracts in writing. Judges do not like oral contracts because of all the uncertainty. If you do have a written contract or purchase order, make sure that both parties sign. National Lien Law has seen so many cases over the years where a signature is missing and therefore the written contract is no longer binding.
Change orders: Include in your mechanic’s lien amount all change orders or extras. Whether signed or not. If you have been directed to do the work and do so, that is sufficient for your lien. As we all know, it is common for architects, construction managers and other representatives to tell you to do the work, promise to sign a change order, but it never comes. In the meantime you have performed the services and relied upon those representations. Many contracts say you do not get change order work unless reduced to writing. However, under the principles of waiver and estoppel, if you are directed to do the work and the other side refuses to sign, you can lien for that amount.
Amount of the lien: You get the amount of the labor, materials and equipment actually furnished, up to the time of the lien. Technically, the code indicates the reasonable value of which you have conferred, but in almost all cases, it is based upon the contract amount furnished to date. But what if you have been terminated or have temporarily demobilized for nonpayment? You don’t get the balance of the contract or future lost profits, but only what you have conferred thus far. So if you have a $100,000 contract and you have been terminated after 80% complete, you only get $80,000 even if the other side has breached the contract. The other $20,000 cannot be in the mechanic’s lien. However, when you bring a lien foreclosure lawsuit, and add to it a causes of action for breach of contract and unjust enrichment, you can add in that $20,000. Include all amounts and do not discount for what the other side is alleging. So if you are a sub and have a $20,000 bill, but the general contractor claims you are only owed $15,000, it’s what you think, not the other side.
As far as punch lists and allegations of deficiencies, the other side can only withhold, under industry standards, 1 and 1/2 times the alleged damages. So again, if you are owed $20,000 and the other side claims it will cost $1,000 to correct the punch list, they can only withhold $1,500. They cannot withhold the whole $20,000. Although there is no statute or case law on this, this is usually the rule applied by arbitrators.
The lien amount can only be for the raw principal owed. But when you go to court with a lien foreclosure lawsuit, you also get finance charges and/or prejudgment interest as well as court costs and attorney’s fees. So your California mechanic’s lien itself should just have the principal amount and have the phrase: “In addition, prejudgment interest, court costs, and attorney’s fees according to proof at trial.”