Mechanic's Liens

BROKER RISK MANAGEMENT

WEEKLY PRACTICE TIP

MECHANIC'S LIENS

 Q:   I represent a buyer on a property where the seller has just completed a major remodel on the home they are selling.  In fact, we are about to close escrow and the seller will just be able to obtain a Certificate of Occupancy prior to close.  My buyer is concerned about possible mechanic’s liens filed on the property after COE.  What can my buyer do to protect himself from mechanic’s liens after close of escrow?

A:  That is a good question and a common occurrence when there is construction on a property just prior to COE.  First, it is important to understand mechanics liens and how they work.

Background: 

1.  What is a Mechanic’s Lien?  A mechanic's lien is a lien against the property that, if unpaid, allows a foreclosure action, forcing the sale of the home. This is true even if the property has changed hands, essentially making the buyer responsible for the debt, and responsible to try to collect from the seller.  The mechanic’s lien is recorded with the County Recorder's office by the unpaid contractor, subcontractor or supplier (sometimes referred to as a “materialman”). It means that any of these unpaid entities can claim a lien against the property until they are paid.

The prime contractor has a direct contractual agreement with the homeowner. If the contractor isn't paid, he can sue on the contract and record a mechanic's lien. But subcontractors, workers and suppliers don't have a contract with the homeowner. A problem occurs when the homeowner pays the prime contractor for all or some of the work, but the prime contractor fails to pay the laborers, subcontractors and materials suppliers that were hired to do portions of the job. If they are not paid, often their only recourse is to file a mechanic's lien on the home.

2.  The Preliminary 20-Day Notice:  Before a subcontractor or supplier can file a mechanic’s lien, they must properly give a Preliminary 20-Day Notice. The preliminary notice is a notice that a subcontractor or supplier has provided or will be providing goods and services to improve the property and could file a lien claim if they are not paid.  If they don't provide the owner with the preliminary notice, they lose the right to file a lien. 

Don't expect a 20-Day Notice from a prime contractor, however.  Since they have a direct contract with the owner, they aren't required to send a 20-Day Notice.  A subcontractor or supplier can give the owner the Preliminary Notice before delivering supplies or starting work and up to 20 days after delivering supplies or starting work.

3.  What happens when a mechanic’s lien is filed against the property?  A lien can result in a range of problems:

A.  Foreclosure, if the homeowner doesn't pay off the lien or cannot afford to do so;

B.  Double payment for the same job, if the homeowner pays the prime contractor–and then has to pay the sub or supplier who wasn't paid by the prime;

C.  A cloud on the title of the property, which can affect the homeowner's ability to borrow against, refinance, or sell the property.

4.  How Soon Must a Mechanic’s Lien be Filed?  The potential lien clamant must record the mechanic's lien within 90 days of:

A.  Completion of work

B.  When owner began using the improvement, or

C.  When owner accepted the improvement.

However, be aware that there is often a disagreement when any of these criteria have been met.  For example, a contractor may come back after the work is essentially done and do a minor bit of work, solely to claim a longer time to file a mechanic’s lien.

How can a property owner protect against mechanic’s liens? 

5.  Check Out the Prime Contractor:  At the outset, a property owner can protect against unwarranted liens by carefully selecting the prime contractor; investigating the prime contractor with the Contractors’ State License Board at www.cslb.ca.gov; having a written contract with the prime contractor; and getting a list of all subcontractors, laborers, and materials suppliers to be used by the prime contractor.

6.  Check Before Paying the Prime Contractor:

A.  The first step is to keep track of Preliminary 20- Day Notices and make sure who the potential lien claimants are.

B.  Joint Checks:  Joint checks are the simplest method of lien prevention. When the contractor presents a bill for materials or labor, compare it to the schedule of payments in the contract and the Preliminary 20-Day Notices received. Make sure that work was provided as described and then make out the check to both the contractor and the supplier, or the contractor and the subcontractor. Both parties will have to endorse the check, which will ensure that the subcontractors and suppliers get paid.

C.  Lien Releases:  The lien release system is designed to allow property owners to track when potential lien claimants have been paid.  It works like this:

1.) Before making a payment to the prime contractor, the owner should first get a signed conditional release from the possible lien claimants. (One can download a copy of this release from CSLB's Web site at www.cslb.ca.gov. )

2.)  After receiving the conditional releases, the owner should make the appropriate payment for the work that was done.

3.)  After the prime contractor is paid, he/she should get, and give to the owner, an unconditional release signed by each of the claimants paid for the portion of the work being released. Owners should make sure that the actual claimant signs the unconditional release.

4.)  By law, the owner may withhold the next payment until the unconditional releases for the previous payment have been received.