Mechanics Lien Fundamentals

Mechanics Lien FundamentalsMany people who have remodeled or built there own homes have encountered Mechanics Liens. Usually the encounters are very unpleasant.

The first thing to understand about mechanics liens is that we’re not talking about guys who fix your car. We’re talking instead about an old fashioned meaning of the word mechanic - people who make things and people who provide them with what they need to make them.  In the broadest sense, we are talking about anyone who supplies labor or materials to improve someone else’s property.

Unlike many other things in the legal landscape that appear a bit odd, Mechanics Liens are not an ancient custom from Merry Olde England.  Instead they were created by state legislatures in the nineteenth century to ensure that carpenters and lumber yards and masons and brick makers, among others, got paid for their work on the job and for the things they delivered to the job.

General contractors, subcontractors, individual laborers, and material suppliers are all mechanics for these purposes.  If they follow the statutory rules, but don’t get paid, they are entitled to a claim against the property they improved.  The claim is called a Mechanic’s Lien Claim, and it works like a mini-mortgage in which the mechanic is the lender and the property owner is the borrower.  When the mechanic concludes he’s not to get paid, he records the Lien Claim at the Recorder’s office.

If the owner doesn’t pay before the Claim is recorded, the recorded claim becomes a lien on the property, and the mechanic can file a lawsuit to foreclose the lien.  If the mechanic proves he’s followed the statutory rules and he’s owed the money, the property can be sold at a public auction and the proceeds used to pay the mechanic.

Mechanics Liens show up when anyone in the chain doesn’t get paid.  The owner may run out of money and fail to pay the general contractor.  The general contractor may use payments from the owner for another job (a crime), and shortchange the subcontractors.  The subcontractors may do likewise and shortchange their workers or their suppliers.  Disputes may arise over payment for allegedly faulty work or faulty supplies.

Mechanics Lien Law is technical, with mandatory notices and time frames.  Let’s focus on a plumbing contractor and see how it works.

Our contractor, Perfect Plumbing, is hired as a subcontractor by a general contractor, Heavenly Homes, which was hired by Mr. Blanding to build his dream house.  It’s a big job for Perfect, and Perfect wants to get paid in full.

At the beginning, Perfect should check to make sure its contractors license is valid.  Sometimes license fees or bond premiums are overlooked.  If Perfect isn’t licensed during the whole job, it cannot have lien rights.  After checking on its license, Perfect has to make sure that it gives a vilid preliminary 20 day notice.

The preliminary 20 day notice goes to the owner of the property (Blanding), to the general contractor (Heavenly), and - if there is one - to the lender funding the project.  For simplicity, we’ll assume Blanding didn’t need a construction loan, and we’ll leave out the lender.  The notice has to say what kind of work Perfect will do and approximately what it will cost.

The preliminary 20 day notice must be given on time.  On time is from 20 days before Perfect starts work, through 20 days into the job.  Mechanics Lien rights don’t exist for work done without the notice, or done more than 20 days before the notice is given.  The notice is given by certified mail, return receipt requested, so Perfect can prove it complied with the requirement.

The information on the notice is important for Blanding, who should look at Heavenly’s contract to make sure the approximate cost on Perfect’s preliminary notice matches his expectations for the cost of the plumbing.  If it doesn’t, Heavenly may have a satisfactory answer.  Perhaps the plumbing will cost more, but the framing will cost less.  If Heavenly doesn’t have a satisfactory answer, Blanding may be in trouble and should call his lawyer.

The preliminary notice also alerts Blanding to look for amounts due to Perfect in Heavenly’s requests for progress payments while the plumbing is being done.  Blanding must be certain that when Heavenly gets a progress payment covering work done by Perfect, Heavenly in fact pays Perfect for the progress it made on its subcontract during the pay period, measured by the percentage of the subcontract Perfect completed.

Certainty requires two steps.  First, Blanding must insist on a Lien Release from Perfect before Heavenly gets its payment.  The release will say that upon payment to Perfect of the amount it billed to Heavenly for the pay period, Perfect releases its rights for the work it did during the pay period.   Second, Blanding must pay Heavenly with a joint check payable to both Heavenly and Perfect, to make sure that Perfect in fact gets its money.

Each request by Heavenly for progress payments will include amounts it owes to Perfect and to all other subcontractors working on the job during the pay period, so at the end of each period there will be several lien releases and matching joint checks. Along with its lien release, every subcontractor will also have provided lien releases from all of its workers and suppliers.

There will also be a lien release from Heavenly, and a check to Heavenly for the percentage of its fee corresponding to the overall percentage of the job completed during the pay period, less something called retention.  The standard retention rate is 10%, and the retention from each progress payment isn’t due until 30 days after the job is entirely completed.  Think of retention as a kind of insurance.

Mr. Blanding’s dream house is now finished.  The subcontractors, their workers, and their suppliers have received their last, or final, progress payments and delivered their final lien releases.

Heavenly’s fee has been paid in full, except for the retention.  Now Mr. Blanding records at the Recorder’s Office something called a notice of completion, and gives Heavenly and all the subcontractors notice that he has done so.

Anyone with an unrecorded mechanics lien claim must record it within 30 days following the recordation of the notice of completion, or the claim cannot become a lien on the property.  The claim could still be pursued, but only as a garden variety debt, and only against someone contractually obligated to the claimant.

For example, if Perfect had an unrecorded mechanics lien claim when the house was completed, but failed to record it within 30 days after the recordation of the notice of completion, it could no longer be a mechanics lien claim against Blanding’s house.  It could only be a claim for money against Heavenly, because Perfect’s subcontract was with Heavenly, not with Blanding.  Likewise, if Perfect sued Heavenly and won, its judgment could not be satisfied out of Blanding’s house, but only out of property belonging to Heavenly, and Heavenly might not have any.

If no mechanics lien claims are recorded within 30 days after Mr. Blanding’s recordation of the notice of completion, he can pay the retention to Heavenly and be sure that no construction claims against him or his house will appear in the future.  If mechanic’s lien claims are recorded within the period, Mr. Blanding will hold Heavenly’s retention until they are satisfactorily resolved.

As you can see, the property owner’s challenge is to account for every subcontractor, worker, and supplier, to make sure they are all paid what they are owed, and to make sure they all provide lien releases.  On the other hand, the challenge for contractors, workers, and suppliers is to maintain their licenses at all times (if they are contractors), to give 20 day preliminary notices on time (if they are subcontractors or suppliers), and to record their mechanics lien claims before their claims expire.

San Diego Attorney Stanley D. Prowse is a Civil Litigation Attorney specializing in California Construction Law.

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