Mechanics’ liens — powerful,
but not always efficient
There is no denying that a mechanics lien is a powerful
tool for getting paid, but, procedurally, it sometimes isn’t
very helpful to expedite progress payments during the course
of construction. Unless a property owner needs the title
to its property clear of liens for refinancing or selling,
the mechanics’ lien procedure may not help you get
paid promptly or inexpensively.
Here’s why:
1. As a general or “original” contractor (one
who contracts directly with the property owner), you aren’t
supposed to record your lien until your work is completed
or stopped. So, you can’t use a mechanic’s lien
to enforce progress payments while you are still actively
providing service under your contract.
2. You must file a lawsuit in Superior Court to perfect
(or foreclose) your lien within 90 days of recording your
lien, otherwise the lien is null and void. After 90 days,
if you refuse to release your “stale” lien,
it is relatively easy for the owner to file a petition for
the court to release the lien. If that happens, you end
up having a judgment against you to pay up to $2,000 in
attorneys’ fees incurred by the owner for having to
file the petition. If you don’t pay the judgment within
90 days, your contractor’s license is suspended.
3. A lawsuit to foreclose on your lien often results in
a cross-complaint against you by the owner or general alleging
all sorts of breaches, delays, negligence, etc.
4. Even if you are entitled to attorneys fees by the term
of your contract, subcontract or — if you are a supplier
— the credit application from whoever you sold the
materials to, you are not entitle to reimbursement of attorney
fees incurred in the lawsuit to foreclose on the mechanic’s
lien.
5. Even if you win the lawsuit, procedures for foreclosing
on the property are complicated and expensive. And, your
lien may be “junior” to the original mortgage
holder or project construction lender. If either of them
forecloses, then your lien may be worthless depending on
the property equity and how many other liens are have been
recorded. So, taking advantage of your mechanics’
lien rights may not get you paid promptly. The easiest way
to enforce your right to payments during the project is
to insist on a clause in your contract or subcontract that
requires payment in a timely manner based on clear procedures
for payment applications. Some things the clause should
include are:
• a guarantee that you will be paid the value of any
work that isn’t in dispute;
• immediate notice to you for reasons why any amount
is withheld and;
• most importantly, the power to stop work if you
are not getting paid.
For a subcontractor, don’t let your payments depend
on the general getting paid from the owner (known as “pay
when paid” or “pay if paid” clauses).
Even though the law usually finds these types of clauses
unenforceable, that does not help you much during the course
of construction. If you don’t have an express provision
in the contract that allows you to stop work if a payment
is late, then you are at risk of breaching the contract
if you stop work. This is because a late payment may not
be considered by the court to be such a significant breach
of the contract to justify the extreme repercussion of stopping
work.
It all depends on the value of the contract, how much is
owed, and how late the payment is. There is no set rule
for figuring this out. For example, if your contract is
worth $1.2 million, and about halfway through the project,
the owner is 30 days late on a progress payments worth $50,000,
but you have been paid $700,000 to date, what you are currently
owed may or may not be a significant enough amount of money
to justify you to stop the project.
But, if you have an express contract term that allows you
to stop work if the owner is, for example, more than 30
days late on any progress payment, then you are allowed
to stop work without having to analyze and take the risk
of whether or not the late payment would be considered a
significant (or “material”) breach. Even if
you do not have such a clause in your contract, all is not
lost if you are a general (or “original”) contractor.
You have some ammunition under the law to demand timely
payments and you need to familiarize yourself with your
rights under various prompt payment statutes. For example,
a little known code section that provides a big hammer for
a general contractor is found under Civil Code section 3260.2.
This section allows you to stop work if a progress payment
is more than 35 days past due, as long as you follow the
proper procedure. The procedure includes serving a “10-day
stop work order” on the owner and — five days
before serving the owner — posting at a conspicuous
place on the jobsite and at the job site main office, if
one exists, a notice that you intend to serve the “10-day
stop-work order” on the owner.
The procedure has some other very specific requirements
that you must fully understand before pursuing this remedy.
If the procedure is followed precisely, you and your subs
and suppliers cannot be held responsible for delays to the
project, even if you were in the wrong about being owed
the money for some reason. There are other weapons you can
add to your “prompt payment” arsenal, but those
will have to be covered in future articles. In the meantime
— learn your rights so you can stand strong and demand
that you be paid promptly and fairly for your work.
If you have a construction question,
submit it to: info@construction-laws. com. General disclaimer
The information in this article is based upon California
law and is for general information only. Any information
or analysis presented here is intended solely to inform
and educate the reader on general issues. Nothing presented
or referenced to, regarding facts, documents or applicable
laws, constitutes legal advice. Before acting or relying
on any information, including any information presented
here, consult with a qualified attorney for your specific
situation. Scholefield, Esq., holds an active PE license
in Colorado, an undergraduate engineering degree from the
University of Florida, and received her JD from the University
of San Diego. Source Code: 20080306tcd
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