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Changes to Mechanics Lien laws in 2012 – Part 2

1265719_construction_in_progress-1.jpgTwo of the most commonly used remedies available to contractors are mechanics liens and stop payment notices. The rules and procedures affecting mechanics liens, stop payment notices and bond claims changed on July 1, 2012 (SB 189).

An earlier blog dealt with changes to these laws that took place in 2011. Part 1 of this blog for changes that took place in 2012 can be found here.

The following information is meant as general information only. One should not use this information to calculate the timing deadlines of these procedures. It is essential to take into account the specific facts and circumstances of each situation because they affect the timing, notice, and procedures. If the circumstances in this blog pertain to you or your company, contact our office to obtain advice on how to use them.

Stop Payment Notice – When there is a discrete sum of undisbursed construction funds, a contractor may file a Stop Payment Notice. Upon receipt of a Stop Payment Notice, the owner or construction lender holding the funds is required to sequester “sufficient funds” to pay the claimed amount. This has the effect of tying up those funds pending resolution of the matter. On a private works project, a contractor must obtain and serve a bond to require the lender to withhold the money claimed in a Stop Payment Notice.

Release of Lien/Waiver – During a construction project, it is good practice to use periodic lien releases to account for the sums requested and paid to contractors and subcontractors. This is done through the use of the Conditional and Unconditional Waiver and Release forms. The new language of these forms must be used as of July 1, 2012.

Release Bond – In the event a mechanics lien is recorded against a property, a Release Bond can be obtained. The amount of the release bond was been decreased from 150% of the lien amount to 125%.

Removing an Invalid Mechanics Lien – A contractor that records a mechanics lien may have up to 90 days to file a foreclosure lawsuit. Depending on the particular factual circumstances and whether a Notice of Completion was appropriately recorded, it may be less than 90 days. Failing to institute a timely foreclosure lawsuit results in the mechanics lien (or other similar remedy) becoming invalid. However, even an invalid lien may cause the property owner difficulty when it comes time for refinancing or sale.

A property owner may file a Petition to Expunge to remove an erroneous lien filed against the property. In the past, the amount of attorney’s fees that could be awarded in an action to remove the erroneous lien (a cloud on the property’s title) was capped at $2,000. With the changes in 2012, the cap no longer exists. Now the prevailing party may be awarded reasonable attorney’s fees. However, a demand must first be made by the owner instructing the contractor to remove the erroneous lien.

Notice of Completion – The time period for recording the Notice of Completion has been extended from 10 days to 15 days. Under certain circumstances, multiple Notices of Completion can now be recorded. This means that direct contractors (multiple prime contractors to the owner) have to be particularly careful with regard to when they take action to protect their interests.

The definition of Completion of a private works project has been revised to eliminate an owner “accepting” the work as an act that triggers completion. Completion of a private project now occurs upon:
1) actual completion,
2) occupation or use by the owner together with the cessation of labor,
3) cessation of labor for 60 continuous days, or 4) recordation of a notice of cessation after labor has ceased for 30 days. Completion of a public works project may still include when the public entity “accepts” the work or upon cessation of labor.

Notice of Lender – When a construction lender is involved in a project, contractual notice of the name and address of the lender must be provided to contractors and subcontractors. The owner must also provide this information to everyone that served a Preliminary Notice if the lender came onto the project after commencement.

Notice of Pendency of Action – Once a foreclosure lawsuit has been filed, a Notice of Pendency of Action must now be recorded within 20 days.

Notice of Non-Responsibility – When a tenant contracts for construction services, the owner of the property may wish to notify a contractor working on the project that it disclaims responsibility for the work. It may do so through a Notice of Non-Responsibility.

This information is provided for informational purposes only and should not be construed as legal advice. It should not be acted upon without consulting a licensed California attorney about the facts, particular needs and questions of the person or entity considering these issues. Contact this office for assistance with your mechanics lien, stop payment notice, and bond questions.