Construction Law

by William L. Porter

In California, a powerful legal mechanism-the mechanics lien-enables laborers and those who supply materials and services to construction projects to obtain full payment. The lien stems from a provision in the state constitution (Cal. Const., Art. XIV, § 3; see also Clarke v. Safeco Ins. Co., 15 Cal. 4th 882 (1997)). It applies to private-construction projects as well as those undertaken by government. (See Cal. Civ. Code §§ 8160-8848 (private works) and §§ 9000-9566 (public works).) This article discusses private projects only.

Before getting into the statutory intricacies of the lien process, it is helpful to understand the various layers of participation in a typical private construction project. First and foremost, there is the owner; his or her property will be directly affected (hopefully improved) by the construction work at issue. The main party performing that work is the general contractor. But in carrying out the project, the general contractor may work with subcontractors, consultants, and suppliers who have no direct contractual relationship with the owner.

When payment is not made to those parties, any one of them may assert a claim-not only against the contractor, but also against the owner's real property that serves as the site of the construction project. Such a claim against the property comes in the form of a mechanics lien, which can apply even when the property owner has no direct relationship with the lienholder. (See Cal. Civ. Code §§ 8200-8204.)

Lien Rights

The most important facet of a mechanics lien is that, as a supplement to a purely contractual claim for payment, it formally encumbers the construction site. The lien shows up on a title report, and if full payment is not made, the lienholder can foreclose-and sell the property in order to obtain the balance due. (See Cal. Civ. Code, §§ 8460-8470.)

Strict time limits are involved in the process. The lien must be recorded 90 days after the end of construction; once the owner has filed a timely notice of completion (within 15 days after completion, see Cal. Civ. Code § 8182), the deadline for recording the lien shrinks to 60 days for the contractor and 30 days for subcontractors and suppliers. (See Cal. Civ. Code §§ 8412, 8414.)

In addition, a party who has not contracted directly with an owner must file a preliminary notice so the owner knows of their involvement. If that notice is not filed, such a party loses the right to assert a mechanics lien later on. (See Cal. Civ. Code § 8200.)

So how can property owners protect themselves?

Non-Responsibility

Property owners can invoke a vital procedure to avoid being subject to a mechanics lien. It's called a "notice of non-responsibility." When properly used, such a notice bars mechanics lien claims against the construction site. (See Cal. Civ. Code §§ 8442, 8444.) However, this useful tool is often misunderstood by both owners and their counsel.

The rules for using the notice of non-responsibility are clearly set forth in the code. (See Cal. Civ. Code § 8444.) Deceptively simple, they essentially state that an owner who did not contract for specific work on his or her property must post the notice at the construction site within ten days after learning about the pending construction project. To prevent enforcement of a later mechanics lien on the property, the notice must also be recorded (Cal. Civ. Code § 8444.)

The gist of this protocol is that an owner is always responsible-and subject to a potential mechanics lien-when contracting for construction work on his or her property. But in the "indirect" cases-when an owner who has not contracted for the delegated improvements is truly ignorant of the work-a timely filed notice of non-responsibility will defeat lien claims against the subject property.

Experience teaches that the most common use of a notice of non-responsibility is when improvements to a property are made by commercial tenants occupying it, as opposed to by the entity who owns it.

The Landlord-Tenant Problem

What commonly occurs is that early in the construction process an owner/landlord authorizes-and in some cases requires-a tenant to perform beneficial improvements on the property. This authorization is often set forth in a governing lease or other written document. The dispositive factor for determining whether the notice of non-responsibility will be effective is the fact that the owner knows the subject improvements will be made to the owner's property. Often that knowledge exists long before the work begins.

The legal issues that arise from this scenario are twofold. First, the statute states that the notice of non-responsibility is available only when the owner "did not contract for the work of improvement." (Cal Civ. Code § 8444(a).) However, in the above scenario, the owner arguably did contract for the work, albeit through the lease or other authorizing document contract. This is true even though the owner never dealt with the contractor directly. (Ott Hardware v. Yost, 69 Cal. App. 2d 593 (1945).)

Second, the ten-day period to post and record the notice begins when the owner first "has knowledge" of the work of improvement. (Cal. Civ. Code § 8444(e).) But what does one do when the knowledge of the project stems from a lease that was negotiated and signed long before workers showed up on the site? In that case, the ten-day deadline is impossible to meet, and the notice of non-responsibility will fail because of both knowledge and timing.

The situation will unravel quickly for the owner, should the tenant fail to fully pay the contractor it hired. When that happens, the contractor usually has no money to pay its subcontractors and suppliers. The unpaid parties then rush to record mechanics liens and follow up with foreclosure actions, which must be filed in court within 90 days after the lien is recorded. (Cal Civ. Code § 8460(a).)

Although a beleaguered owner typically seeks protection by advising claimants of the notice of non-responsibility that was posted and recorded, the unpaid claimants will hold a trump card. They will refer to the lease or other evidence that the owner knew of the pending improvements and contracted (even if indirectly through a tenant) for them to be performed-often more than ten days before the notice was posted.

In situations such as this, busy trial court judges generally agree with the unpaid lien claimants. The notice of non-responsibility will be deemed ineffective, which is not an unfair result. Because the owner authorized the work and received a substantial benefit to the property, it is not at all inequitable that the owner should pay for those benefits. It would be wrong for the owner to obtain the benefit of the improvements while allowing those who provided them to go unpaid. Moreover, without such a system in place, the door would be open for owners to set up sham tenants who would enter into construction contracts only to disappear before the work is even finished, thus leaving the contractor, subcontractors, and suppliers without a source of payment.

The mechanics-lien system in place prevents such duplicity. Although the notice of non-responsibility is a useful protective device, it has its limitations. Owners would do well to know them, and to understand that in some cases the notice will offer no protection at all.

There are innumerable scenarios, and the key is to consult with knowledgeable counsel who has experience dealing with construction disputes in general and notices of non-responsibility in particular.

William L. Porter practices construction law with Porter Law Group in Sacramento.

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