Category: Construction Law: Payment

The “Notice of Non-Responsibility” is one of the most misunderstood and ineffectively used of all the legal tools available to property owners in California construction law. As a result, in most cases the answer to the above question is “No”, the posting and recording of a Notice of Non-Responsibility will not prevent enforcement of a California Mechanics Lien.

For purposes of seeking payment on a construction related project in the California construction industry, the proper legal classification of the party seeking payment is of key importance. Whether one in contract with a prime contractor is a subcontractor or a material supplier determines the availability for mechanics’ liens, stop payment notices and payment bond claims. Generally, those in contract with subcontractors have the ability to assert mechanics liens, stop payment notices and payment bond claims against the owner, general contractor and/or sureties. On the other hand, those who supply materials to material suppliers are generally not entitled to assert a mechanics lien, stop payment notice or payment bond claim. The “rule” has generally been stated as: “A supplier to a supplier has no lien rights.” However, this rule is not always true.

Working within deadlines is absolutely crucial to preserving mechanics lien rights under California law. The deadlines differ, depending on whether you are a ”direct” contractor, also known as “original” or “prime” contractor (one who contracts directly with the property owner) or a subcontractor or material supplier. The primary differences are that except as to serving the construction lender if any, the direct contractor is not required to serve a “Preliminary Notice” (Civil Code section 8200-8216), whereas the subcontractor and material supplier are required to do so. Another difference is that a direct contractor has a longer period of time in which to record a mechanics lien after a valid “notice of completion” or a “notice of cessation” has been recorded (Civil Code sections 8180-8190), (60 days for original contractors as compared to 30 days for subcontractors and suppliers – See Civil Code sections 8412 and 8414).

Although the general rule is that an action to foreclose on the mechanics’ lien must be filed within 90 days after the lien has been recorded at the County Recorder’s office where the property is located, it is possible to extend this 90 day deadline. Civil Code section 8460 describes the means to do so.

Where California mechanics’ liens are concerned there are few dates, the passages of which are more appreciated by property owners than the last day to file a lawsuit to foreclose on a mechanics’ lien. This is because unless the deadline to file a lawsuit to foreclose on the mechanics lien has been extended by a properly drafted and notarized “Notice of Credit” which has been duly recorded with the County Recorder in the county where the property is located, under California Civil Code section 8460, the deadline to file such a lawsuit will expire ninety (90) days after the mechanics lien was recorded. While exceptions may possibly exist when that date falls on a holiday or weekend, for the most part the 90th day is the absolute drop dead date for filing a suit. After that date the mechanics’ lien automatically expires and is no longer enforceable.

The usual rule in California is that the first to file documents of record with the County Recorder impacting on title to property have priority over later filed documents. This general rule allows, among other things, lenders to view the title to property before granting a loan on the property. The lender can then see if there are existing encumbrances on the property in question. Unfortunately for lenders, this practice does not always work in the case of mechanics’ liens.

The California mechanics’ lien is a powerful tool for contractors, subcontractors and material suppliers to secure payment of unpaid construction related debts. The goal of the mechanics’ lien is to force a sale of the real property where the work was performed in order to obtain the funds necessary to pay the delinquent debt. Under the usual procedure, the first step is the recording of mechanics’ lien in the chain of title to the property at the County Recorder’s office. A lawsuit must then be filed in state civil court within ninety days after the mechanics’ lien is recorded. The goal of the lawsuit is to foreclose on the mechanics’ lien. A successful foreclosure lawsuit will result in a court mandated sale of the property. The proceeds of the sale will be used to pay the unpaid construction debt originally secured by the recording of the mechanics’ lien. While this may seem an oversimplification, it is necessary to grasp this basic process in order to understand the complications discussed below.

A prime contractor recently came to me with a problem involving a stop payment notice. It seemed that a supplier to a subcontractor on a project had a dispute with the subcontractor. As a result, the supplier filed a stop payment notice on the project. The problem was that the cumulative unpaid billings from the supplier amounted to no more than $65,000, while the stop notice filed was for approximately $75,000. In my subsequent conversation with the supplier, he acknowledged that there was only $65,000 in unpaid principal. He said he filed a stop notice in the higher amount because he wanted to be sure to cover anticipated interest, fees, costs and lost profits. I advised him that filing the stop notice in such an amount and for such a purpose was improper and requested he release the stop notice. He refused. I confirmed the conversation in writing and promptly took him to court.