The Notice of Non-Responsibility: Only Limited Protection from Contractor, Subcontractor or Supplier Mechanics Lien Claims
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 mechanics lien stems from a provision in the California Constitution (Cal. Const., Art. XIV, §3; see also Clarke v. Safeco Ins. Co., 15 Cal.4th 882 (1997)). The Mechanics Lien applies to private construction projects only (See Cal. Civ. Code §§8160-8848). This article discusses private projects only.
Before discussing 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; it is his or her property that will be directly impacted (hopefully improved) by the construction work at issue. The main party performing that work is the general contractor. In carrying out the project, the general contractor may work with subcontractors and suppliers who have no contractual relationship with the owner.
When payment is not made, any one of these parties may assert a claim not only against the owner personally, but also against the owner’s real property that serves as the site of the subject construction project. The claim against the property comes in the form of a “mechanics lien” which is recorded against the property at the office of the County Recorder in the County where the property is located.
Mechanics Lien Rights
The most important feature 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 lien holder can foreclose—and sell the property in order to obtain the balance due. (See Cal. Civil Code, §8460-8470.)
There are strict time limits involved. The lien must be recorded 90 days after the end of construction; if the owner files a valid notice of completion, the time limit shrinks to 60 days for contractors and 30 days for subcontractors (See Cal. Civ. Code § 8412-8414). Sometimes, the owner must provide special notice to claimants that they have recorded a mechanics lien. Failure to do so may extend the mechanics lien filing deadline from 30 or 60 days to 90 days (See Cal. Civ. Code § 8190).
In addition, a party who has not contracted directly with an owner must serve a “preliminary notice” within 20 days after beginning work or supplying materials, so the owner knows of their involvement. Unless that notice is served, a subcontractor or supplier likely loses the right to assert a valid mechanics lien. (See Cal. Civ. Code § 8200.)
What makes a mechanics lien particularly potent is that it can apply even in cases where the owner has no direct contractual relationship with the lien holder. (See Cal. Civ. Code § 8200-8204.)
All of which leads to a key question: how can an owner protect itself?
Notice of Non-Responsibility
There is a vital procedure that a property owner can invoke 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 property. (See Cal. Civ. Code § 8442-8444.) However, despite its utility, the notice of non-responsibility is often misunderstood by both owners and their counsel.
The rules for the use of the notice of non-responsibility are clearly set forth in the Civil Code. (See Cal. Civil Code § 8444.) Deceptively simple, the rules essentially state that an owner who did not contract for the work on his or her property must post the notice at the construction site within 10 days after learning about the pending construction project. The notice must also be recorded in order to prevent enforcement of a later mechanics lien on the property. (Cal. Civ. Code §8444.)
The gist of this protocol is that an owner is always responsible, and subject to a potential mechanics lien, when contacting for construction work on his or her property. But in the “indirect” cases, an owner who has not contracted for the improvements, is truly ignorant of the work and acts in time, the notice of non-responsibility will defeat lien claims against the subject property.
Experience teaches that the most common effective use of a notice of non-responsibility is when improvements are made by tenants occupying the property as opposed to the person who owns it.
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 whether or not the owner knows the subject improvements will be made to his or her property. Often that knowledge exists long before the work begins.
The legal issues that arise from this scenario are two-fold.
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 scenario above, the owner arguably did contract for the work of improvement, albeit through the lease or other authorizing document. 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 10-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 site? In that case, the 10-day period is impossible to meet; 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. When that happens, the contractor usually has nothing with which to pay its subcontractors and suppliers. The unpaid parties will rush to record mechanics liens and follow-up with foreclosure actions, which must be filed in court within ninety 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 constructed—often more than 10 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.
This is by no means an unfair result. Since the owner authorized the work and it received a substantial benefit to his or her 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 done, 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 resonable limitations. Owners would do well to know these limitations, and to understand that in some cases, the notice will not offer any protection at all.
There are innumerable scenarios to illustrate the ins and outs of these procedures. The key is to consult with knowledgeable counsel who has experience dealing with construction disputes in general and notices of non-responsibility in particular.
Article by William L. Porter, Esq. Mr. Porter is a principal at Porter Law Group, Inc. in Sacramento, California, and specializes in Construction Law. www.porterlaw.com.
