Delivery of Recorded Notice of Completion Required in Order to Preserve Shortened Lien Periods

In 2003, the California legislature enacted California Civil Code Section 3259.5, which requires the owner of a private work of improvement to provide written notification to the "original" contractor, as well as any subcontractors and materials suppliers who have provided the owner with a 20-day preliminary notice, that a notice of completion or cessation has been recorded with the county recorder. If the owner fails to provide proper written notification, as set forth below, then the deadline for filing a mechanic's lien extends to 90 days from the date the notice of completion or cessation was recorded. This is an extension from the 60 day period currently afforded to a general contractor and the 30-day period currently afforded to subcontractors and materials suppliers who have provided the owner with a 20-day preliminary notice. This statute is operative as of January 1, 2004.

Requirements

To avoid extending the mechanic's lien period as contemplated by California Civil Code Section 3259.5, written notification that a notice of completion or cessation has been recorded must be sent within ten (10) days of recording to the general contractor, as well as any subcontractors and materials suppliers who have filed a 20-day preliminary notice. This written notification must be sent by registered or certified mail, or by first-class mail, evidenced by a certificate of mailing.

Exceptions

The notification requirement does not apply to individuals who occupy an improved property of four or fewer units as a personal residence and to individuals who have a security interest in the property or obtain an interest pursuant to a transfer described in subdivisions (b), (c) or (d) of Section 1102.2 (dealing with transfers pursuant to court orders, defaults under mortgages or by fiduciaries in the administration of a decedent's estate, guardianship, conservatorship or trust).

Conclusion

As a result of the enactment of California Civil Code Section 3259.5, it now appears imperative that developers send to the original contractor and each party from whom the developer received a 20 day preliminary notice written notification, meeting the criteria specified above, that a notice of completion or cessation was recorded within 10 days of recording.

Failure to comply will extend the lien period to 90 days from the recording date. Absent unconditional lien waivers from the general contractor and all subcontractors and suppliers, or an indemnity from a sufficiently capitalized entity acceptable to the title company covering any potential mechanic's liens, the extension of the lien period will temporarily cloud title to the real property under development until the end of the extended lien period; title companies will be unable and unwilling to issue title policies covering the subject property without including a mechanic's lien exclusion to the insurance coverage. The inability to deliver a clean title policy until the end of the extended lien period will result in a corresponding inability to close a permanent loan on the subject property, since the delivery of a clean title policy will undoubtedly constitute a condition precedent to closing the permanent loan. The delayed closing of the permanent loan at best, will have cost implications for the developer in terms of increasing the amount of construction period interest and, at worst, result in the maturation of the construction loan and/or expiration of the permanent loan commitment.

To communicate with us regarding protection of your personal information or if you would like to subscribe or unsubscribe to some or all of Bingham McCutchen LLP's electronic and mail communications, please notify our Privacy Administrator at privacyUS@bingham.com or privacyUK@bingham.com. Our privacy policy is available at www.bingham.com. We can also be reached by mail in the U.S. at 150 Federal Street, Boston, MA 02110-1726, ATT: Privacy Administrator, or in the U.K. at 99 Gresham Street, London, England EC2V 7HG, ATT: Privacy Administrator.

This communication is being circulated to Bingham McCutchen LLP's clients and friends and may be considered advertising. It is not intended to provide legal advice addressed to a particular situation.