California Mechanics' Liens and Stop Notices: Remedies You Can Use to Improve Collections
Notices of Completion:
What Are They and How They Can Affect Your Lien Rights.
When someone who provides labor, services, equipment or materials to a construction project is not fully paid, he can file suit against the person who failed to pay him. However, even if he were to win such a suit, his ability to collect may be limited by the other party's bankruptcy or lack of assets, or even the disappearance of the other party. In order to help alleviate these problems, California Law provides two procedures whereby one who provides services to a constructing project can obtain a more secure position.
A properly filed and foreclosed Mechanics'Lien gives the claimant a security interest in the property itself. If the Mechanics' Lien claimant prevails at trial, the court will order the sale of the property on which the lien claimant performed work or supplied materials, in order to pay off the lien claimant. A properly served and perfected Stop Notice gives the claimant a lien against undisbursed construction funds in the possession of either the owner or the lender. For private works of improvement, the Mechanics' Lien and Stop Notice gives the claimant a lien against undisbursed construction funds in the possession of either the owner or the lender. For private works of improvement, the Mechanics' Lien and Stop Notice are cumulative remedies which can be simultaneously pursued along with a suit for breach of contract on the underlying debt.
Both the Mechanics' Lien and Stop Notice procedures involve three basic steps:
FirstServing a preliminary 20-day notice;
SecondRecording the Mechanics' Lien and serving the Stop Notice; and
ThirdFiling a lawsuit to foreclose the Lien and enforce the Stop Notice.
This article addresses the impact of a Notice of Completion on the second step.
When a dispute arises and a Preliminary Lien Notice is either not required or has already been served, the next step in protecting one's rights is to record a Mechanics' Lien in the office of the County Recorder where the construction project is located. Alternatively, the contractor can serve a timely stop notice on the construction lender. As with the Preliminary 20-Day Notice, there are strict rules to be followed when preparing and recording a Mechanics' Lien.
Perhaps the most critical item with regard to the recording of a Mechanics' Lien is timing. A Notice of Completion can decrease the time for filing a mechanics lien or stop notice. A Mechanics Lien may not be recorded until the claimant has finished furnishing labor, services, equipment or materials to the project. (Civil Code §3116). There are also time limits within which all liens must be recorded on private works and/or stop notices must be served. The deadlines are as follows:
- When the owner records a valid Notice of Completion (i.e., a proper Notice of Completion recorded within ten days after actual completion of work on the project). (Civil Code §3093).
- A prime contractor in direct contract with the owner must record his lien and/or serve stop notice within sixty (60) days of the recording of the Notice of Completion. (Civil Code §3116).
- All others must record their liens and/or serve stop notice within thirty (30) days of the date the Notice of Completion is recorded. (Civil Code §3116).
- Where no Notice of Completion has been recorded, but the project has actually been completed: All claimants must record their liens and/or serve stop notice within ninety (90) days from the date of actual completion. (Civil Code §3115, 3116).
- Any of the following will be deemed to be the equivalent of actual completion with respect to private works), which triggers the ninety (90) day period within which to record lien and/or serve stop notice:
- Occupation or use of the work of improvement by the owner or his agent, accompanied by a cessation of labor thereon;
- Acceptance of the work of improvement by the owner or his agent; or
- A cessation of labor for a continuous period of sixty (60) days, or a cessation of labor for a continuous period of thirty (30) days if the owner files a Notice of Cessation. (Civil Code §3086).
If the owner, after a thirty (30) day continuous cessation of labor, records a Notice of Cessation, this is equivalent to the recording of a Notice of Completion. (Civil Code §3092). In that case, the prime contractor has sixty (60) days, and all other claimants have thirty (30) days, within which to record their liens. (Civil Code §3115, 3116).
By shortening the time within which to record Liens and serve Stop Notices, the Notice of Completion and/or Cessation can be very useful from an owner's or lender's perspective, and from the Lien and Stop Notice claimant's perspective, a fatal trap if the shortened time limits are not met.
A Notice of Cessation is used when work has temporarily halted for more than 30 days. (Civil Code §3092). A Notice of Completion must be recorded in the County Recorder's office after work has actually been completed, as that term is defined in Civil Code §>3086. Listing an erroneous date of completion does not affect the validity of the notice so long as the true date of completion was within 10 days preceding the date of recording of such notice. However, if the Notice of Completion is prematurely filed or filed late it is invalid and the time limits are extended. Thus, if a Notice of Completion is recorded a contractor who is affected by the recordation should determine if the Notice was timely recorded.
Civil Code §2097(O) provides that where a Preliminary 20-day Notice is filed properly with the County Recorder, that the Recorder will be put to a good faith duty to notify the filing party within five (5) days following recording of a notice of completion or notice of cessation. Civil Code §2097 is thus useful to the contractor since the contractor can be alerted to the filing of a notice of completion enabling the contractor to record a timely Mechanics' Lien. However, the County Recorder has no liability if it fails to notify the line claimant.
One little used Code Section which can be potentially fatal to Lien and Stop Notice claimants is Civil Code §3117, which states that where projects are built pursuant to more than one original contract, each covering a particular portion of the work, the owner may record separate notices of completion after work under each contract has been completed. For example, the owner could contract with a general contractor for grading and excavation in a separate contract from other work. After grading and excavation work was completed, a Notice of Completion timely filed would start the statute of limitations running for lien claimants performing grading and excavation work. This would almost certainly be many months before completion of the entire project took place. Thus, if the owner and general contractor break the work into two or more contracts for various portions of the work, it will decrease the time for a lien claimants to record a lien, and in many cases, wiping out lien rights entirely based upon untimely recording of the lien. Lien and Stop Notice claimants should pay particular attention to the contractual arrangement on the project to avoid this potential trap.
In the current construction environment it is not uncommon for a contractor to be involved in litigation with the party with whom he or she has contracted. Mechanics' Lien and Stop Notice claims are time sensitive. It is critical that you learn the date when the work first commenced. Similarly, it is critical to learn when the work stopped or was completed. This information can be obtained from the Building Department or from other contractors. The likelihood in prevailing in litigation increases when you have maintained proper and sufficient project records.
This article, © 1998, was written by William C. Last, Jr. of Last, Harrelson & Faoro. Mr. Last is an attorney who has been specializing in Construction Law for over eighteen years. Mr. Last also holds a California A&B contractors license. If you have any questions Mr. Last can be contacted at 415-764-1990 or 650-696-8350. This bulletin is published periodically to provide general information about current legal issues. If you have a specific legal question or need legal advice, you should contact an attorney.