If you are a contractor or material supplier on a private construction project, and you have supplied labor and/or materials on credit to either the owner, general contractor, or subcontractor, THE MOST IMPORTANT REMEDY YOU HAVE TO ENSURE PAYMENT IS THE MECHANIC’S LIEN LAW.  Being familiar with these laws and procedures should be part of the business activities of ALL contractors and suppliers, particularly in an economic environment that is highly subject to foreclosures, bankruptcies, and general insolvency.  After over 20 years of representing construction professions, I am amazed at how many contractors and suppliers do not take advance of the mechanic’s lien law. (Civil Code, Section 3082 et seq.)

A mechanic’s lien in the context of a construction project is a lien that the contractor or supplier has against the property improved by labor and/or materials.  Thus, it is not against any individual person or entity, and is not based upon contract rights.  To enforce a mechanic’s lien, all of the procedures provided in the statute must be followed, and a subsequent legal action must be filed to “foreclose the lien.”  The purpose of the legal action is to secure a court order directing that the property to be sold in order to pay the claimant for the improvements made to the property.  As a practical matter, although foreclosure lawsuits are routinely filed, actual foreclosure rarely occurs.  This is because, the mechanic’s lien itself—if valid and enforceable—provides sufficient pressure on the relevant parties to motivate the owner, or another party, to make the required payment.  The main value of the mechanic’s lien law to the contractor or supplier is precisely this incentive-creating pressure to pay the debt that is due.  Without it, there is often no motivation for an owner to pay an unpaid contractor—particularly when the money is owed by a general contractor or subcontractor who may be insolvent.

The broad scope of persons entitled to a mechanic’s lien, as provided in Civil Code section 3110, include:

“Mechanics, materialmen, contractors, subcontractors, lessors of equipment, artisans, architects, registered engineers, licensed land surveyors, machinists, builders, teamsters and draymen, and all persons and laborers of every class performing labor upon or bestowing skill or other necessary services on, or furnishing materials or leasing equipment to be used or consumed in or furnishing appliances, teams, or power, contributing to a work of improvement .  .  .  whether done or furnished at the instance of the owner or of any person acting by his authority or under him as contractor or otherwise.”  [Note: design professions are entitled to a separate lien when performing design work prior to the actual work being performed at the construction site.  [Civil Code, Section 3081]

The amount of the lien is limited to the claimant’s contract price or the reasonable value of the labor, services, equipment, or material furnished, whichever is less.  This means that the lien amount is roughly the contract price less any labor or materials not actually furnished to the project.  The key determination is the amount expended to improve the property, not the amount due under the contract.  This fact could have important implications for the contractor when setting up project scheduling and progress payments.  Consider, for example, the case where the general contractor orders specialty materials from a material supplier to be incorporated into the project.  When ordering such materials, the contractor becomes obligated to the supplier to pay for such materials.  However, the contractor cannot claim such materials as part of a mechanic’s lien claim until such materials are actually incorporated into the project.  This could leave the contractor obligated to pay for expenses that are not recoverable under the mechanic’s lien law.  The remedy for this problem is for the contractor to secure payment for such materials in advance from the owner.  If the project is a home improvement project, this should be done by a separate “materials” contract, in order to avoid a violation of the payment limitations for home improvement contracts.  (Business & Professions Code, Section 7159(c)(8))

The mechanic’s lien law has specific requirements in order for the lien to be valid.  One of these requirements is the Preliminary 20-day notice.  This notice is required to be served by all claimants—except those having a direct contract with the owner.  (Civil Code, Section 3097(a)) The notice is served on the owner, the general contractor, and the construction lender.  Information as to the identity of these parties should be included on the prime contract, and all subcontracts.  However, as a practical matter, such information is often missing, or incorrect in one way or another.  This makes the preliminary notice sometimes difficult, and care must be taken to make sure it is complete and accurate.  (20-day Preliminary Notice forms, with instructions, are readily available through office supply stores, and construction trade organizations)

The 20-day Preliminary Notice must contain a general description of the labor and/or materials to be furnished, an estimate of the total price, and the location where the labor and materials will be furnished.  (Typically the address of the construction site).  (See Civil Code, Section 3097(c)(1) through (5) for a description of additional requirements) If the project is new construction in a new development, the actual address is sometimes not available.  In such cases, the contractor should use the APN (Assessors Parcel Number) for the location description, and should also include identification of the closest cross-streets, or main service roads.

The 20-day Preliminary Notice must be served within 20 days after the date the claimant first provided labor and/or materials to the jobsite.  Late notice does not invalidate the claim, but limits the lien to labor and materials furnished within the 20 day period prior to such service.  The 20-day Preliminary Notice must be served by one of three methods: (1) Personal delivery on the party to be noticed; (2) Left with a responsible person at the residence or business of the person to be served, or (3) Certified or registered mail, postage prepaid.  However, the contractor or supplier should avoid personal service, unless done by a professional process server.  Instead, the contractor or supplier should use certified mail, return receipt requested (greed card).  In addition to certified mail, the contractor or supplier should mail a copy of the preliminary notice by regular mail.  Make a note of all such mailings with copies.  Make sure the “proof of service” on the preliminary notice form is completed correctly.  When the green card is returned—whether successful delivery or not—it should be stapled to the contractor’s copy of the preliminary notice and saved.  If the preliminary notice is returned as undeliverable, the contractor should make an effort to determine why it was not delivered, and correct any failure of actual notice—even if it wasn’t the contractor’s fault.
Here are some additional hints in dealing with the uncertainties regarding the preliminary notice:

(1) Make sure the any contract you sign includes the name, address and phone number of the owner, general contractor, and construction lender, if any.  If it is represented that there is no construction lender, confirm this directly with the owner in writing.

(2) Serve a 20-day Preliminary Notice regardless of whether you have a direct contract with the owner or not.

(3) Make sure the information on the preliminary notice is accurate—and that in each case the information provided is supported by a document that you should be able to rely upon, for example, the contract, subcontract, correspondence, recorded deed of trust, etc.  That way, if there is an issue, or error, you can point to your reliance on information provided to you, directly or indirectly, by the owner, or the public record.

(4) The description of the labor and materials, and the estimate of the price, should be broad and general rather than narrow and specific.  All anticipated labor and/or materials should be included, along with the total estimated contract price.

Sometimes, a subcontractor or supplier will have several different contracts representing all of the labor and/or materials to be furnished to a project.  If the preliminary notice is first served encompassing only one of such contracts, subsequent notices should be sent until ALL labor and materials furnished are represented on properly prepared and served preliminary notices.

Although some courts have adopted the “substantial compliance” doctrine with respect to preliminary notices, DO NOT rely upon the Court to correct deficiencies caused by incomplete or inaccurate information.  If an innocent owner failed to receive actual notice of your claim, the Court may invalidate your lien, regardless of your good faith effort to comply with the law.

Once the 20-day preliminary notice is served, and the labor and materials are actually furnished (the contract is completed), the contractor or supplier then waits for payment.  Thirty days should be the maximum amount of time to wait before being proactive about payment.  If payment is not received within 30 days, the contractor or supplier should immediately prepare and record a mechanic’s lien.  Generally speaking, the following deadlines apply to the recordation of mechanic’s liens:  For a general contractor having a direct contract with the owner, the lien must be recorded within 60 days of the date a notice of completion has been recorded, or within 90 days if no notice of such recordation is provided to the contractor.  If no notice of completion has been recorded, the lien must be recorded within 90 days of completion of the project.  For subcontractors and suppliers the lien must be recorded within 30 days of the date a notice of completion is recorded, or 90 days if no notice is provided to the subcontractor or supplier of the filing of a notice of completion.  If no notice of completion has been recorded, the lien must be recorded within 90 days of completion of the project.  All recording is done at the County Recorder’s Office.
The above time periods can be confusing, and they are NOT all inclusive of every scenario.  They can be affected by other notices, including partial completion and work stoppage.  Moreover, when a project is “completed” is often subjective, unclear, and disputable.  As such, a contractor or supplier recording a mechanic’s lien needs to avoid the subtleties of the law when the recording is too close to applicable time periods.  This is why it is recommended that ALL contractors and suppliers record their liens immediately after the payment is in default.  Get the lien recorded, and then negotiate payment if there is a problem.

Another important deadline is the time required to file a foreclosure lawsuit after the mechanic’s lien has been recorded.  This date is fairly straightforward.  The lawsuit must be filed within 90 days of the date the lien is recorded.  If not, the lien rights are lost.  Although, it may be possible to record to new lien (assuming the project is not yet completed), the contractor or supplier should not get into the habit of recording multiple liens while waiting for payment.  Of course, the problem is that to foreclose the lien, the contractor or supplier must secure legal counsel, causing additional expense.  Moreover, such expense is not compensable as part of the foreclosure action.  If this is an issue, as an alternative to a foreclosure lawsuit, the contractor or supplier can secure a “extension credit” which is a recordable document signed by the owner extending the time to foreclose the lien.  This extension credit is recorded and is effective to extend the lien until 90 days from the date the extension lapses, not to exceed one year from the date the project was completed.  (Civil Code, Section 3144(a))

An extension credit should be drafted by a knowledgeable attorney.  It is essentially a contract between the claimant and the owner.  The extension credit can include not only the term of the extension, but can also include other provisions further protecting the claimant, for example, a term stating that the owner agrees that all of the work was done properly and satisfactory, and agrees that the amount of the mechanic’s lien is the proper amount owed.  Then, if later a foreclosure action becomes necessary, the owner cannot fall back on performance issues in an attempt to avoid payment.

The action to foreclose a mechanic’s lien typically includes a “cause of action” for breach of contract, and perhaps other causes of action to help insure eventual payment.  For example, a construction contract may provide for attorney’s fees to the prevailing party.  Although, the foreclosure action will not encompass recovery for attorney’s fees, the contract action might.  Also, there may be cases where the contract itself is of questionable enforceability, although the labor and materials were in fact furnished to the job site.  In such cases, it may be appropriate to include “equitable” causes of action, for example “unjust enrichment.”  In any event, the foreclosure action needs to be prosecuted by a competent attorney, knowledgeable in construction law and litigation.

The bottom line?  DO NOT IGNORE YOUR MECHANIC’S LIEN RIGHTS.  They are invaluable.  Do not be intimidated by what appears to be a complex procedure.  Assign a competent office worker to handle these procedures, and make it a routine part of your business practice.  Trust me!  Sooner or later, it will pay off.