Are You Ready for the Changes in California's Mechanics Lien Law?
Question: What is “mechanics lien law,” what is it based on and where is it found?
Answer: Mechanics lien law is intended to protect those unpaid for improvements to real property against the owner’s unjust enrichment and consists of a series of statutes that provide remedies with regard to payment for improvements to real property. These remedies include lien rights, a right to attach construction funds, a bond remedy and remedies relating to prompt payment. In California, the mechanics lien is a constitutional right, but the statutory right existed even before the constitutional right. Most recently, it was contained in sections 3082 through 3267 of the Civil Code. Now it is found in sections 8000 through 9566 of the Civil Code.
Q: What prompted the changes in California’s mechanics lien law?
A: Old law is not necessarily good law and it was time for a change. The law, originally enacted by California’s first legislature in 1850, still contained language from 1872 and had been amended more than 150 times. It was last recodified more than 40 years ago and has been amended more than 70 times since. As a result, it became confusing and difficult to use.
Q: What was the process for changing the law?
A: In 1999, the Judiciary Committee of the California Assembly asked the California Law Revision Commission to review and make a recommendation for changes to the law. The commission made its formal recommendation in February 2008 and the new law was enacted in 2010 and 2011. It will be effective on July 1, 2012.
Q: Generally, what types of changes were made to the law?
A: The law is now more user friendly. The entire statute has been reorganized, clarified and made more uniform. Old terminology has been modernized, inconsistencies have been resolved and long provisions have been broken down into shorter, more understandable provisions.
Q: How has the new statute been reorganized?
A: All of the old code sections have been repealed and an entirely new set of statutes was enacted and placed at the end of the Civil Code, starting with section 8000. Other changes were also made. For example, under the old law there was one very long and complicated section addressing preliminary 20-day notices. Now, there is one chapter containing nine sections addressing the topic. As another example, all requirements concerning notice are consistently addressed in one chapter, rather than inconsistently spread throughout the code sections.
Q: What are examples of modernized terminology?
A: Although the new law continues to use the archaic phrase “mechanics lien” because it is an understood term of art in the construction industry, it deletes the apostrophe. The term “original contractor” has been changed to “direct contractor,” but still means one in direct contract with the owner. The term “direct contract” is introduced in the new law and means a contract between a direct contractor and an owner. The term “stop notice” has been changed to “stop payment notice.” The term “materialman” has been changed to “material supplier.”
Q: Does the new mechanics lien law operate differently than the old law?
A: The new law operates much like the old law; however, there are improvements intended to make it easier to administer the process. It is now easier for an owner to learn that a lien will be or has been recorded and easier for contractors to learn the identity of construction lenders.
The content, manner of service and proof of required notices is now more standardized. Notice must be given in writing, which “includes printing and typewriting” but does not include electronic notice. The owner now has 15 days to record a Notice of Completion rather than the previous 10-day period. Also, mechanics lien release bonds are now required to be 125% of the amount of the lien rather than 150% under the previous law.
On private works of improvement, the right to record a lien now begins at actual completion of the work of improvement, rather than the owner’s acceptance of the work. A lien claimant must now give notice to the property owner that it intends to record a lien and must record a Notice of Pendency of Action within 20 days after filing an action to enforce a mechanics lien, making the existence of the action a matter of record for title searches. General contracts and subcontracts must now contain information about construction lenders and if a new construction loan is obtained after commencement of the work, the owner must identify the new lender to each entity that gave a preliminary notice.
Q: What are the differences in the statutory waivers and release?
A: The new forms of statutory waivers and release are substantially similar, but not identical to, the old forms. The new forms are formatted differently. The form of conditional waiver and release includes an exception for previously submitted but unpaid progress payment requests, for which conditional waivers and releases had previously been given. The use of the new forms is mandatory, as was the case with the old forms.
Q: Are there any provisions of the new law that have a greater or different impact upon owners, designers or contractors than the old law?
A: The requirement that the owner receives notice of intent to record a lien, and that a Notice of Pendency of Action be recorded, benefit the owner. The ability of the owner to record a separate Notice of Completion for each direct contract also benefits the owner. The requirement that the owner identify the construction lender benefits the contractor and subcontractors. Design professions still have the same lien rights prior to commencement of the work of improvement, and the same mechanics lien rights afterwards. To the extent that the new law is more user friendly, it benefits all equally.
There remain some issues under the new law that existed under the old law. For example, the new statutory waiver and release forms still exclude “extras” from the scope of the waiver and release. This may benefit a contractor who characterizes certain costs as “extras” and then argues a lien to continue to exist even after an effective waiver and release.
The old and new provisions for an expedited judicial proceeding to release a lien are limited to situations where the contractor has not timely commenced an action to enforce the lien and the remedy is limited to owners. However, there is no longer a $2,000 cap on recoverable attorneys’ fees. California case law recognizes a right to challenge mechanics liens on other grounds, either by a separate legal proceeding or by way of a motion in an action to enforce a mechanics lien. However, a recent case held that construction lenders do not have that right. The new mechanics lien law could have provided a broader right to expedited legal proceedings to challenge the validity or amount of a mechanics lien.
Q: Will there likely be other changes to the mechanics lien law?
A: Given its importance to the construction industry and its history, undoubtedly yes.
Jeffrey A. Sykes is a Construction Law Partner at Farella Braun + Martel LLP in San Francisco.