Preventing Mechanic’s Liens

Mechanics LienPreventing Mechanic's Liens

Not all churches have tenants, and those that do, may not have tenants that desire to make some sort of capital improvement to the church property. However, this article is not limited to churches with tenant(s) but rather all churches and preventing mechanic’s liens. At some point or another, all buildings require some sort of repair or maintenance. What comes to mind in a new roof, but this article also applies to any repairs commenced of the property from the roof all the way down to the getting the toilet unclogged.

Mechanic’s Liens:

When someone, namely a contractor, is hired to complete some project on real property, that contractor often hires others. This may include labor, delivery drivers, materials or equipment necessary to complete the project. If the property owner does not pay that contractor, or that contractor fails to pay anyone who provides those materials, equipment, or services, they may be able to file a lien against your property.

Mechanic's liens are a "hold" against real property that, if unpaid, allows a foreclosure, thereby forcing the sale of your property. This lien is recorded with the County Recorder's office by the unpaid contractor, subcontractor or supplier allowing them to claim a lien against the property until they are paid.

Since the primary or prime contractor has a direct contractual agreement with the property owner, that contractor can sue you directly on the contract and record a mechanic's lien. However, as many subcontractors, workers and suppliers don't have a contract with the property owner, they cannot sue the property owner, even if the primary contractor has been paid and the contractor has not paid them. When the prime contractor has been paid, but fails to pay the laborers, subcontractors and materials suppliers, their only recourse is to file a mechanic's lien on the property.

What all this means is that mechanic’s liens filed with the county recorder against your property could result in a foreclosure, or minimally paying twice for the same job because you already paid the prime contractor, but now have to pay a subcontractor. Further yet, all this could result in what is known as a cloud on the title of your property. A cloud on title limits your ability to borrow against or sell it.

Mechanic’s liens take priority over other liens, (excluding certain governmental liens), mortgage, deed of trust or other encumbrance which attached subsequent to time when the building, improvement or structure was commenced, work done or materials were furnished to the job site; also to any lien, mortgage, deed of trust or other encumbrance of which the lienholder had no notice and which was unrecorded at the time building, improvement or structure was commenced, work done or the materials were furnished.

Protections against Mechanic’s Liens:

According to the California Contractors State License Board, you can protect yourself from unwarranted liens by carefully selecting your contractor and responsibly managing your construction project.

Investigate your prime contractor before you sign a contract and do the following:

  • Hire only licensed contractors and check the contractor's license status on California Contractors State License Board’s website;
  • Make sure your contractor hires only licensed subcontractors, and check their licenses, too;
  • Check with your local courthouse to see if the prime contractor has a history of litigation;
  • In some manner, take or get a list of all subcontractors, laborers, and delivered on-site materials suppliers, and deliver drivers, to be used by your prime contractor;
  • Check with suppliers and workers about the payment history of the prime contractor;

Get a written contract and make sure it includes the following:

  • A schedule that demonstrates when specific construction activities will start and end, (such as the framing, sheetrock work, or painting) and the projected payments tied to the contract price of these activities;
  • Identification of subcontractors and on-site workers who will be performing these construction activities;
  • Identification of suppliers and drivers who are providing on-site delivery of materials necessary for these activities;

Preliminary 20-Day Notice:

Most, but not all prime, subcontractors, workers and suppliers will provide property owners with a Preliminary 20-Day Notice. This notice is nothing more than that, a notice that a subcontractor or supplier has provided or will be providing goods and services to improve your property and could file a lien claim if they are not paid. However, most prime contractor will not give you a Preliminary 20-Day Notice because they have a direct contractual relationship with you and as such, are not required to, (although the prudent ones often do).

Subcontractors and suppliers must provide you with this notice in order to maintain their right to file a lien. If they don’t provide you with the notice, they lose the right to file a lien.

These notices allow you to track who has a potential claim against your property, but you must watch the timing. A subcontractor or supplier can give you the Preliminary Notice before delivering supplies or starting work and up to 20 days after delivering supplies or starting work.

Preventing Mechanic's liens:

Prior to paying your prime contractor, assume the worst-case scenario and plan to deal with the possibility of a lien. This can be done by keeping track of the Preliminary 20-Day Notices you have received so you are aware of those that may file a lien against you. If you haven’t received any, ask your prime contractor of any they may have received.

Property Management and/or staff should be trained to recognize and maintain a daily log of all such work and delivery companies, and including the names of all subcontractors, workers, and delivery drivers, and another log maintained of all Preliminary 20-Day Notice’s, and their significance so that correct preventative action may be taken

In addition to tracking the notices, pay your prime contract with a joint check. When the contractor presents a bill for materials or labor, compare it to the schedule of payments in your contract and the Preliminary Notices you've received. Make sure that work was provided as described and then make out the check to both the contractor and the supplier, or the contractor and the subcontractor. Both parties will have to endorse the check, which will ensure that the subcontractors and suppliers get paid.

Take advantage of conditional and unconditional releases which are designed to allow property owners to track when potential lien claimants have been paid. Before you make a payment, you should first get a signed conditional release from the possible lien claimants. If you ask for one, the prime contractor is required to get this release for you from the potential lien claimants. Once you receive receive the conditional releases, make the appropriate payment for the work that was done. After you pay, the contractor should get you an unconditional release signed by each of the claimants paid for the portion of the work being released. Make sure that the actual claimant signs the unconditional release. Most importantly, you may withhold the next payment until you get the unconditional releases for the previous payment.

Once the project has been completed on your property, you can reduce the amount of time a contractor, subcontractor or supplier has to record a claim against your property by filing a Notice of Completion with the County Recorder's office. This notice reduces the amount of time a contractor has to record a mechanic's lien from ninety (90) to sixty (60) days, and reduces the time a subcontractor or materials supplier has to record a mechanic's lien from ninety (90) days to thirty (30) days.

Tenant Improvements:

When a tenant, as opposed to the property owner, wishes to begin a capital improvement or other project on the property, the property owner may and is advised always to seriously consider recording what is known as a Notice of Non-Responsibility. This is a written notice recorded with the County Recorder’s office by the property owner intended let those subcontractors, workers, suppliers, and anyone else that the owner disclaims responsibility for paying for the project, and it must be filed within certain time constraints. Remember the key to filing a Notice of Non-Responsibility is when the owner is not the contracting party, or otherwise deemed to have “caused” the improvement work.

The California Civil Code has several requirements that must be met in order for the Notice of Non-Responsibility to be effective. In some circumstances, a Notice of Non-Responsibility will not protect against the recording of a mechanic’s lien. In particular, such a notice will not have effect where the property owner caused the improvement by requiring the work as a condition of a lease agreement.

There are other precautions that the owner can do to lessen the filing of Mechanic Liens, even when the owner is paying for the tenant’s improvements, but these are not addressed in this article.

Please see our other related articles

Corporations in Suspension
Why Use Bushore Real Estate
Church Officer and Director Liability

 

Disclaimer: Every situation is different and particular facts may vary thereby changing or altering a possible course of action or conclusion. The information contained herein is intended to be general in nature as laws vary between federal, state, counties, and municipalities and therefore may not apply to any given matter. This information is not intended to be legal advice or relied upon as a legal opinion, course of action, accounting, tax or other professional service. You should consult the proper legal or professional advisor knowledgeable in the area that pertains to your particular situation.

 

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