Changes to California Laws Governing Mechanics Liens Coming Soon
July 2011

The California legislature has enacted a sweeping overhaul on the filing and enforcement of mechanics’ liens. This change, embodied in SB 189, is meant to simplify statutory provisions surrounding mechanics’ liens -- replacing the complex, sometimes Byzantine rules that currently exist with a simpler set of rules that all professionals and attorneys can understand.

Although the legislature portrayed SB 189 as a largely non-substantive reorganization of existing law, SB 189 contains several notable changes that both contractors and attorneys should know. For the most part, these changes become effective on July 1, 2012.

Quick Background on Mechanics' Liens
Mechanics’ liens exist to give protection to certain people who provide labor or materials on construction projects (mechanics’ liens are unavailable to property managers or maintenance workers, even though those people may provide construction labor and materials). Mechanics’ liens are similar to a deed of trust in that they encumber property and can be foreclosed to generate liquidity to pay a claim.

However unlike a deed of trust, a mechanics’ lien is placed on property without the consent of the landowner -- the claimant has statutory authority to place an encumbrance on the property where the work was performed. First, the contractor must serve a 20-day preliminary notice of the claim; second, the contractor records the mechanics’ lien against the property where work was performed (it cannot be placed on other, unrelated real property owned by the same landowner). Finally the mechanics’ lien claimant must file a court action to foreclose the lien, or the lien may become stale and subject to removal.

Re-Write Simplifies Law
At its core, SB 189 repeals existing mechanics’ lien provisions (Civil Code Sections 3082 et seq.) and a separate section on design professionals’ liens (Civil Code Sections 2081.1 et seq.) and replaces them both with a new Part 6, beginning at Civil Code Section 8000. Licensed landscape architects are now included within the definition of “design professional,” along with the existing groups of architects, engineers and surveyors.

SB 189 also creates separate provisions for private works (Part 6, Title 2, Sections 8160 et seq.) and public works (Part 6, Title 2, Sections 9000 et seq.). In the remainder of this client alert, references to “Sections” means sections of the California Civil Code, unless otherwise noted.

New Law Also Makes Several Changes
While simplifying the statute's overall structure, SB 189 makes several substantive changes. The most notable changes include the following:

The former term “original contractor” is replaced with “direct contractor” -- a welcome clarification to distinguish more easily a “direct contractor” (i.e., the general contractor hired by the landowner) from subcontractors. “Materialmen” has become the neutral “material supplier;” and the former “stop notice” is now more clearly a “stop payment notice.”

The new mechanics’ lien provisions under SB 189 cannot be waived by a landowner; any agreement containing such a waiver is “void and unenforceable” under Section 8212.

Preliminary Notice
SB 189 proscribes different forms of preliminary notices for private work and public work. In the case of private work, a contractor must give a preliminary notice to a construction lender as well as the landowner and the direct contractor (if applicable).

Other Notices
The statute also standardizes the time requirements for several other notice provisions, improving the law’s consistency.

Construction Loans
Going forward, contracts with both direct contractors and subcontractors will have to include the identification of any construction lenders. If a construction loan is not obtained until after other work has commenced, under Section 8210 the landowner must provide the name and contact information of the new construction lender to each person who has provided a preliminary notice to the landowner.

Waiver and Release
The conditional and unconditional releases and waivers on progress payments and final payments formerly prescribed by Section 3262 have been revised and are set down in new Section 8132.

The concept of “completion” is now defined as being the landowner’s occupation or use of the improvement, coupled with cessation of labor. Mere “acceptance” by the landowner has been removed as a method of completion. In situations where work is ongoing under multiple direct contracts, a landowner may now record a separate Notice of Completion for each one (Section 8186), and the new law extends the time for the landowner to record the Notice of Completion to 15 days after the date of completion of work (Section 8182).

Recording of Liens
Mechanics’ liens may not be recorded unless they are accompanied by proof of service on the landowner. The lack of proof of service renders the lien invalid and unenforceable, under Section 8416. (Note: this provision became effective on January 1, 2011.)

Lien Enforcement
Importantly, SB 189 explicitly places the burden of proof for the legitimacy of the claim on the claimant (Section 8488); in contrast, existing case law often seemed to place the burden of proof on the landowner to rebut the claim. Though mechanics’ liens are limited to the lesser of the reasonable value of the work or the agreed contract price, Section 8430 deletes a prior requirement that a landowner provide notice to the contractor and construction lenders of any change orders that raise the price of the work by more than 5 percent. Presumably the legislature realized that the contractor would already know (being party to the change order) that most construction lenders also require their consent to material change orders.

Removal of Liens
The amount required for a bond to remove a lien from property has been reduced to 125 percent of the lien amount, under Section 8424, from the current 150 percent. If a landowner wants to go to court to get a lien removed, under Section 8480 the landowner can now do so even if the contractor has started a lien enforcement action.

Previously, landowners were barred from filing their own removal action once a contractor commenced enforcement proceedings. However, under Section 8482 the landowner cannot petition the court for removal of a lien unless and until 90 days have passed from the filing of the lien and the landowner has demanded that the claimant release its lien and at least 10 days have passed since that demand.

A court order or judgment that dismisses an action to foreclose a mechanics’ lien is now a recordable instrument, and has the same effect as the cancellation of the lien; if no timely action is filed to enforce a mechanics’ lien, under Section 8494 such lien thereafter ceases to constitute “actual or constructive notice” of its contents to subsequent people dealing with the property, and imposes no duty of inquiry on such subsequent parties.

In addition, in the past when a party sought to have a mechanics’ lien expunged, and prevailed, the reimbursement of their legal fees was capped at $2,000. New Section 8488(c) now allows a prevailing party to recover all of its “reasonable” attorneys fees.

Impact of Changes Unclear
Although SB 189 explicitly provided that court decisions under existing mechanics’ lien laws will continue to apply to the new provisions (at least, to the extent that the act substantially follows the former laws), it is unclear how well courts will be able to abide by this instruction.

The combination of major rewording of old provisions, changing terminology, and introduction of new requirements could mean that courts will feel less compelled to follow precedent. There may be a period of several years in which the case law on mechanics’ liens is unsettled -- however, in the end the simplification wrought by SB 189 should facilitate both construction activities and the efficient processing of payment claims.