The Mechanics of Mechanics Liens

[This article appeared in The Wendel Report: Construction and Infrastructure Update, July 2017.]

California has a number of statutory construction payment remedies available to direct contractors, subcontractors, material suppliers and equipment lessors, as well as laborers. Of these, the one most people are familiar with is the mechanics lien.

First conceived by Thomas Jefferson to encourage construction of the then “new” capital city of Washington, D.C., the long history of mechanics liens also extends through California’s history, which is the only state among the 50 to guarantee mechanics lien rights in its constitution.

What is a mechanics lien?

A mechanics lien creates a security interest in real property in which labor and materials are furnished. If a mechanics lien claimant is not paid, the claimant can file a lawsuit to foreclose on the mechanics lien to have the property sold and the proceeds from sale used to satisfy the amount of the mechanics lien.

Analogy: A mechanics lien is like the deed of trust recorded on your home to ensure you pay your mortgage. If you fail to pay your mortgage, the bank can foreclose on the deed of trust to have your house sold, and the proceeds from the sale used to satisfy the amount outstanding on your mortgage. But, there is one big difference. While a deed of trust can only be recorded if the homeowner agrees to it, a mechanics lien can be recorded without the consent of the property owner, which makes it a powerful payment remedy for those who furnish labor, equipment and materials on a project.

On what types of projects can a mechanics lien be recorded?

Private projects only.

Who can record a mechanics lien?

Direct contractors, subcontractors, material suppliers, laborers and trust funds.

Do I need to serve a preliminary notice in order to record a mechanics lien?

It depends.  Laborers are not required to serve a preliminary notice.  Direct contractors are only required to serve a preliminary notice if it’s a lender financed project.  And, subcontractors and material suppliers of all tiers are required to serve a preliminary notice.

Is there a deadline to record a mechanics lien?

Yes, but it depends on whether you are a direct contractor, subcontractor or material supplier.

• Direct Contractors: No earlier than after the direct contractor has completed its work but no later than the earlier of

            (1) 90 days after completion of the project; or

            (2) 60 days after the owner records a notice of completion or cessation.

• Subcontractors and Material Suppliers: No earlier than after the subcontractor or material supplier has ceased work but no later than the earlier of:

            (1) 90 days after completion of the project; or

            (2) 30 days after the owner records a notice of completion or cessation.

How early can I record a mechanics lien?

Again, it depends on whether you are direct contractor, subcontractor or supplier.  If you are a direct contractor, you cannot record a mechanics lien until after you have completed your direct contract.  If you are a subcontractor or supplier, you cannot record a mechanics lien until after you have ceased providing work.

What information is required to be included in a mechanics lien?

You can find a mechanics lien form under the “Toolbox” menu at the California Construction Law Blog. But here’s what information is required:

• The name of the owner or reputed owner;
• A general statement of the work furnished by the mechanics lien claimant;
• The name of the person by whom the mechanics lien claimant was employed or to whom the mechanics lien claimant furnished work;
• The monetary demand of the mechanics lien claimant after deducting all just credits and offsets.

Are there restrictions on the amount I can demand in a mechanics lien?

Yes, the amount demanded in mechanics lien must be the lesser of: (1) the reasonable value of work provided by the mechanics lien claimant; or (2) the price agreed to by the claimant and the person that contracted for the work.

This raises a number of potentially thorny questions, such as whether the amount demanded in the lien may include work performed pursuant to an oral change order or to an unsigned written change order and  if delay, disruption or acceleration claims can be included in the amount demanded.

It is doubtful that work performed pursuant to an oral change order or work performed pursuant to an unsigned written change order can be included in the amount demanded in a mechanics lien since the law provides only that a mechanics lien claimant is not precluded from including in its mechanics lien an amount demanded for “work performed based on a written modification of the contract.”  However, it appears that a mechanics lien claimant may include delay, disruption or acceleration claims, but only if it arises from the rescission, abandonment or breach of the contract.

Where and how do you record a mechanics lien?

A mechanics lien should be recorded in the county recorder’s office of the county where the project is located. The recording fee for recording a mechanics lien varies in each county recorder’s office and is usually between $25.00 and $40.00. You should bring in the original (with your originally-signed signature and verification), and I suggest bringing three copies to get file-endorsed for your records. There are also mechanics lien recording services, which can do all of this for you.

Do you need to do anything after you record a mechanics lien?

Yes, several things. First, you need to serve the mechanics lien on the owner, and if the owner cannot be located, on the original contractor and construction lender (if any). However, I believe it is good practice to serve it on all three, including the person to whom you furnished work.

Second, you must file a lawsuit to foreclose on the mechanics lien within 90 days after the mechanics lien is recorded. You must also record a notice of pendency of action within 20 days after filing a lawsuit.

Third, if a lawsuit to foreclose on a mechanics lien is not brought to trial within two years after the lawsuit is filed, the court may in its discretion dismiss the action for want of prosecution.

Note: You can extend the deadline to foreclose on a mechanics lien if you enter into a notice of extension of credit with the owner. In that event, a mechanics lien claimant must file a lawsuit to foreclose on the mechanics lien within 90 days after the expiration of the notice of credit, but in no case later than one year after completion of the work of improvement.

If you are the property owner is there anything you can do to release property from a mechanic’s lien?

Yes, several things. First, if a lawsuit is not filed to foreclose on a mechanics lien within 90 days after the mechanics lien is recorded, 90 days after the expiration of a notice of credit, or 1 year after the project is completed, the mechanics lien is considered “stale,” and you can file a petition with the court to have the mechanics lien expunged. You can recover all reasonable attorney’s fees incurred in expunging a “stale” mechanics lien.

Second, if a mechanics lien is not “stale,” you can obtain a mechanics lien release bond. A mechanics lien release bond releases the mechanics lien, and the mechanics lien claimant then has to make a claim against the release bond. A mechanics lien release bond must be in an amount equal to 125% of the amount claimed in the mechanics lien and premiums are typically 2-3% of the total bond amount. A mechanics lien claimant has six months from the date notice is given of the recording of the mechanics lien release bond to file suit against the bond.

Third, you can negotiate a settlement with the mechanics lien claimant in exchange for the mechanics lien claimant recording a release of its mechanics lien.

Are attorney’s fees recoverable in a lawsuit seeking to foreclose on a mechanics lien?

No.