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Do Not Lose Your Mechanics Lien Right Through a Subordination Agreement

Do Not Lose Your Mechanics Lien Right Through a Subordination Agreement

If you are a member of the California construction industry you might know that the right of a contractor, subcontractor or supplier to record a mechanics lien to protect the right to payment is well protected by state law.  In fact, our California Constitution, article XIV, Sec. 3 specifically elevates the right to a mechanics lien to “Constitutional right”.  The right to a mechanics lien is further protected by a statutory framework, including Civil Code sec. 8122 which states:

“An owner, direct contractor, or subcontractor may not, by contract or otherwise, waive, affect, or impair any other claimant’s rights under this part, whether with or without notice, and any term of a contract that purports to do so is void and unenforceable unless and until the claimant executes and delivers a waiver and release under this article.”

A casual reading of the above statute would seem to indicate that neither owners, nor contractors nor subcontractors may impose contract terms on those below them in the contracting hierarchy that would impair the right of that potential mechanics lien claimant to record a mechanics lien.  But not so fast!  In a more careful reading of the statute, note the use of the phrase “any other claimant’s rights”.  This phrase makes all the difference.

Since it is the owner on whom a mechanics lien is imposed, an owner cannot be a “claimant” on a mechanics lien.  Since an owner is not a mechanics lien “claimant” at all, an owner also cannot be an “other claimant”.  Therefore, as between an owner and a direct contractor there is no prohibition from an owner imposing a contract term on the direct contractor by which the direct contractor waives its mechanics lien rights.

The situation is different as between a direct contractor and a subcontractor.  Both have mechanics lien rights. As a potential mechanics lien claimant, the direct contractor is prohibited by the language of Civil Code 8122 from imposing contract terms on “any other claimant,” including of course its subcontractors, which would impair the subcontractor’s right to a mechanics lien.

While it may seem that only through mental gymnastics may such an intent be discerned from Civil Code 8122, this is exactly what the California Court of Appeal did in the case of Moorefield Construction, Inc. v. Invervest-Mortgage Investment Company, et al, 230 Cal. App. 4th 146 (4th Dist. 2014).

In Moorefield, the direct contractor attempted to claim the priority of its mechanics lien over the lender’s deed of trust.  If not for the subordination agreement which provided the lender with priority to payment over the direct contractor’s mechanics lien rights, the direct contractor would have been successful.  However, because the direct contractor had signed a subordination agreement and because the Court of Appeal held that a subordination agreement between the owner and the direct contractor was not prohibited by the successor statute, to Civil Code 8122 (Civil Code 3262), the Subordination Agreement was held to be effective and the direct contractor was ultimately unable to claim priority to available equity to the property over the lenders interest.  This entitled the lender to be paid in full before the claim of the direct contractor.

The lesson for direct contractors is that any agreement between you and the owner, lender or title insurer to subordinate your mechanics lien right is generally enforceable.  While it is enforceable against you, you cannot impose any similar restriction on your own subcontractors and suppliers.  Therefore, unless you wish to impair your right to enforce your right to payment through a mechanics lien, do not sign a subordination agreement.

Article by William L. Porter, Esq. in 2020. Mr. Porter is a principal in The Porter Law Group, Inc. in Sacramento, California. He can be reached by phone at (916) 381-7868. Visit the firm’s website at www.porterlaw.com and www.AppliedLegal.com