|
MECHANIC’S LIENS
AND THE DANGER OF PAYING FOR THE SAME THING TWICE
Introduction:
At times an owner of
a building may have to pay for the same construction work or
construction materials twice as a matter of law. And it is no defense in
court to argue that the construction service or supplies rendered were
already paid for in full. Assuming the subcontractor or material man
filed the requisite notices to you, and was not paid by the general
contractor or owner directly, the owner may very well have to pay twice.
If the owner does not pay yet again, the claimant has the right, after
trial, to foreclose the mechanics lien on the property and sell the
property.
And this is true
even if the owner has no contract with the subcontractor. It is true if
the owner has never even bought one item from the material man. It is
true even if the general contractor, to whom the owner paid the sums
intending for them to then be paid to the sub or material man, instead
stole the money and has disappeared or filed bankruptcy.
You still lose your
structure or pay for the goods or services twice.
To avoid that danger
certain basic steps can be taken which should be known, indeed, known
well, by any person or entity considering a construction work of
improvement. This article shall briefly outline the law and the basic
steps of protection that any owner should undertake in any and all
construction projects.
Basic Law:
The reader should
first review the law as described in our article
Mechanics Liens
before proceeding further. This discussion will presume the reader has
read the article and will also obtain competent legal advice from an
attorney experienced in the field.
It may be noted that
the mechanics lien allows the claimant, who records the lien within the
stringent time limits set, to file suit to foreclose on the lien if the
claimant can demonstrate that the goods or services were incorporated
into the job. Either the owner pays for the reasonable value of the
goods and services, or the court declares the claim a lien on the
property which allows the claimant to foreclose on the lien and sell the
property at a public sale.
The key fact to
realize is that while the general contractor must have direct contract
with the owner to achieve a lien right, the subcontractors, who usually
only contract with the general contractor, and the material men, who may
only sell to the subcontractor or general contractor, may never meet,
contract with, or even see the owner. How then can they have lien rights
and sell the property of an owner who has never contracted with them?
The question was
taken all the way to the United States Supreme Court who had to consider
whether granting lien rights that can result in sale of property without
any consent or contract with the owner violated due process requirements
of the United States (and California) Constitution.
The court considered
the cost benefit issues involved. Most subcontractors purchase far more
in materials for a project than they could possibly afford on their own
credit and most material men sell only to professionals in the field and
never meet an owner. The Court decided that the only way to maintain the
existence of small subcontractors and the current role of material men
was to allow lien rights since they would be assured of payment
because the sale was “secured” by the property being improved.
But how to protect
the owner who never even meets these claimants? How to make sure the
owner is not faced with claims from faceless individuals who put in
services or material without notice or consent of the owner and now
expect to be paid in full?
The Supreme Court
simply required that appropriate prior notice be given to the
owner and if the notice is provided, the owner is deemed to have
consented to the work and materials being incorporated.
In California the
notice required for lien rights for material men and subcontractors not
under direct contract with the owner is the 20 Day Preliminary Notice
described in the California Civil Code Section 3097. That notice,
which is to be given personally or, more usually, by certified mail to
the owner, must be delivered within twenty days of when labor or
materials are first incorporated into the project for which a lien is
sought, identifying the parties, the likely amount of goods or services
to be incorporated, and warning that a lien may be filed if payment is
not timely made. If the notice is properly given and the lien recorded
in a timely manner, after trial the property may be sold to satisfy the
lien.
In general, all
claimants except for the general contractor or a person performing
actual labor for wages must give this notice or forfeit their lien
rights. Since the general contractor is under contract with the owner,
the courts concluded that the owner is already on notice as to that
potential claim and no notice is required.
The Usual Problem:
More often than one
would suppose a frustrated owner of property comes into our office,
showing us cancelled checks to the general contractor, often stating
“paid in full” on them, but complaining that mechanics liens were later
filed by material men or subcontractors a week or two after the payment
was made to the contractor and apparently the general contractor kept
the sums that should have been paid to the sub or material men or both.
They point out that
they have already paid the general contractor in full for all the
materials and/or work performed by the sub contractor…indeed, often more
than enough to pay for more than all the materials…but now the material
man or sub is claiming not a dime was paid to them.
We have to tell the
owner in such situations that if a valid Twenty Day Preliminary Notice
was served on them, that they may be liable for the reasonable value of
the goods and services if they were actually used in the job. They may
have a claim against the general contractor for breach of contract or
even conversion. Indeed, the contractor may face
penalties for failure to pay the material man or
subcontract.
But more often than
not, the general contractor has already disappeared or is bankrupt and
the distraught owner can face substantial invoices for materials or work
already done. And the liability can be in the tens…or in the hundreds of
thousands of dollars.
Invariably we ask
the owner if they received the Twenty Day Preliminary Notice and most of
the time they cannot remember all the paperwork that was received during
the chaotic time of the beginning of the job or simply ignored the
notice, not understanding the full ramifications. They knew they would
pay for all the goods and services so were not concerned about such
notices.
And we have to tell
them they must pay to protect their property…once again.
Solutions:
The law does provide
various excellent protections for the owner who is educated as to their
use. The owner should consult with counsel to discuss how best to
structure the apparatus of protection, but in general the types of
protection available in California include:
1. KNOW
AND NEGOTIATE WISELY WITH YOUR GENERAL CONTRACTOR. Check him or her
out. Check their bond. Talk to people who have worked with them before.
Show their proposed contract to a lawyer you hire. Do not just use their
pre printed form.
2. KEEP
TRACK OF ALL PRELIMINARY NOTICES RECEIVED. You need to know who may
have a claim against you when unpaid. You should make contact with them
and tell them you need to know the status of their account with your
general contractor or sub contractor at all times. But do not expect
them to follow up. Before each payment is made you should contact
them or require your general to deliver to you from them a fully
executed RELEASE OF MECHANICS LIEN or CONDITIONAL RELEASE OF MECHANICS
LIEN for each progress payment. A conditional release of mechanics
lien provides that if your check to them clears, they are treated as
paid in full for the amount of the release. If the general gives you
their lien release, call the claimants to verify the signature.
3. USE
A RETENTION FUND and do not pay it out until all liens are released.
Most are ten percent but if you discover that any lien claimant is not
paid promptly and in full by the general contractor, your contract
should allow you to withhold sufficient to pay the entire potential
claim of the subcontractor or lien claimant.
4. USE
JOINT CHECKS. Once you know who has lien rights, write all checks to
the general contractor as joint checks that have to be signed off by
both the general contract and the lien claimants. Those may be treated
as payment in full to the lien holders even if they are foolish enough
to let the general contractor keep some of their money.
5. FILE
A NOTICE OF NON-RESPONSIBILITY (CC 3094). If you receive a 20 Day
Preliminary Notice you can void the rights therein by filing a Notice of
Non responsibility (and sending same by certified mail to the Claimant)
within ten days of your knowledge of actual or intended construction on
your property. Note this only applies if you and your authorized agents
did not contract for the work.
6. KEEP
TRACK OF ALL YOUR PAYMENTS General contractors, especially in
difficult times, often wish to use your payments, given to them to pay
for subcontractors or material men, for other needs. If you want to make
sure the payment goes to the lien claimants, either pay directly or
utilize joint checks. And do not just assume that a joint check will be
full protection since, sadly, some general contractors forge the other
signature. Call the lien claimants and make sure they have been paid
before you release any retention fund.
7. TRUST:
BUT VERIFY. That was what President Reagan said about arms control
agreements but it is even more true when dealing with a construction
project. Your property is at risk and you must carefully review each
document received…get legal advice about any document you do not
understand, create a construction contract that protects you, and
interact sufficiently to protect your own property interest.
8. REQUIRE
A PERFORMANCE BOND OF THE CONTRACTOR. A bonding company will assure the
work of the general contractor and this type of bond, unlike the
Contractor’s License bond, is usually enough to finish any
project…but can be expensive for the contractor and thus the cost is
often passed along in the contract to the owner. But…it may be worth it.
9. FILE
A NOTICE OF COMPLETION. Recording a notice of completion cuts off the
time for when a lien can be filed and should form an inherent part of
your protection package. Note that the completion notice will not be
valid unless the project is actually completed or work has been ceased
on the project for a sufficient period of time.
10. NEVER
PAY YOUR CONTRACTOR FOR WORK NOT ALREADY PERFORMED. If you pay ahead of
time, you lose the ability to use that money to pay lien claimants in
the future. Often the general contractor will argue that he or she must
be paid in advance to pay for materials or the like. In that case, make
it a joint check. But also determine why the general contractor is so
out of credit that he or she cannot afford the materials before you pay
for them. Avoid having your own credit used for materials since that can
create an independent obligation for the materials independent of any
lien rights. Progress payments with lien releases are the safest way to
go.
11. KEEP
INVOLVED IN THE PROJECT. Often projects last months or even years and
the owner, busy with his or her own business, begins to lose day to day
contact with the job. This becomes the most dangerous time since without
owner involvement, you may find your property at risk based on decisions
unknown to you. Nothing is as important as direct involvement in the
project on a constant basis. If necessary, hire an architect to
supervise the job…but the key is to make sure that all potential lien
claimants are paid in full and the work and materials you have paid for
are actually incorporated into the job. Too often a general contractor
will buy material for your project but use it on another, either
intentionally or unintentionally.
12. TALK
TO A LAWYER BEFORE YOU RELEASE RETENTION FUNDS. The last time you know
you have money to pay lien claimants is when you are still holding the
retention funds. It is a good idea to pay a few hundred dollars and get
some legal advice as to whether the lien coast is clear before making
that final payment.
Conclusion:
Construction is both
exciting and exhausting and a remarkably emotional experience for most
owners. Oddly, most owners do not fully learn the rights they have and
the powers the workers and material men may have once work begins. Given
the high cost of construction and the emotional turmoil a failed project
can impose on an owner, it makes good sense to have a working knowledge
of the perils that mechanics liens can impose on property.
And if the reader is
a subcontractor or material man not utilizing mechanics liens, then you
are putting yourself at tremendous risk to avoid the mild inconvenience
of filing the requisite Twenty Day Preliminary Notice. As one
construction client commented to one of the attorneys in this office,
“To save myself a half hour of pen pushing I lost two hundred thousand
dollars of work. Never again…” |
