A Recent California Case Effects Contractors Who Perform Tenant Improvements

A Recent California Case Effects Contractors Who Perform Tenant Improvements

I.

It is A Good Practice To Always Serve a Preliminary Lien Notice

In a recent decision, a California appellate court points out how much care a contractor must exercise to avoid losing its mechanics lien rights when performing tenant improvement work.

The case of Young Kim v. JF Enterprises et al. ((1996) 42 Cal. App.4th 849) concerns a piece of real property which was formerly the site of a Jane Fonda Workout exercise gym. The owner leased the property to JF Enterprises who, in turn, sub-let the property. The owner, the tenant and sub-tenant agreed to improve the property. The tenant was to provide financing to the sub-tenant who would then be in charge of construction and responsible for paying for materials and laborers. The court determined that the owner, tenant, and sub-tenant were agents of each other, and all were to benefit economically from the project.

Plaintiff Young Kim Painting Co. entered into an agreement with the tenant to paint the property and furnish all necessary labor and materials. The agreed upon price was $ 6,300. The work was completed and Kim was paid $ 4,000 of the $ 6,300 owed to him. Kim filed mechanics lien on the property.

Kim did not file a preliminary notice under Civil Code section 3097 , and the owner did not file a notice of nonresponsibilty under Civil Code section 3094. The key issue in the case was whether or not Kim had to serve a preliminary lien notice. If Kim worked directly for the owner a preliminary lien notice would not have been necessary. Civil Code Section 3097 creates two exceptions to the requirement that a preliminary notice be served: (1) if Aone [is] under direct contract with the owner"; or (2) if one is performing actual labor for wages. Kim contended that he fell within the first category.

Kim advanced two theories in support of his argument that he was exempt from the requirement of serving a preliminary notice. First, even though the agreements in question were between Kim and the tenant, because the owner had knowledge of the work performed by Kim, Kim was, as a matter of law, under direct contract with the owner. Second, because the tenant was the agent of the owner, by law the agreements with tenants are agreements with the owners as principals.

In this case the owner did not have direct or actual knowledge of the work Kim was performing. Kim argued that the owners had constructive knowledge. The Court ruled that constructive knowledge of the work is not sufficient enough to exempt a contractor from serving a preliminary lien notice. The Court ruled that if it allowed constructive knowledge to be sufficient it would be substituting the express or actual notice required by the law with repeated litigation over whether or not the owner had constructive notice.

This case once again emphasizes the importance of determining who owns the project and then serving them with a proper and timely preliminary lien notice.

II.

Be Wary of a Notice of A Notice of Non-Responsibility

Contractors should also be cognizant of the effect of an owner posting a Notice of Non-Responsibility.

If an owner has express or actual knowledge of the construction work taking place on its property it is deemed to have work done under its Ainstance@ and hence is Aunder direct contract@ with the contractor even though its tenant contracted for the work. As a result a mechanic lien can effect his interest in the property.

The owners ability to avoid the effect of a mechanics lien is dependent on his involvement in the work of improvement. A non-contracting and non-participating owner can prevent lien rights from attaching to property (but not the actual improvements) by recording and posting a Notice of Nonresponsibility. Generally, a non-contracting but participating owner is a landlord who involves itself to such an extent with the project that it can no longer prevent a lien from attaching by posting a Notice of Non-Responsibility. An example of a participating owner is one who exercises control over disbursement of funds.

Under Civil Code Section 3094, the Notice of Nonresponsibility must be in writing, must be signed and verified by the owner or the owner's agent, and may be given only by a non-contracting owner. The notice must contain all the information required by the statute. Failure to include any required information could render the notice wholly ineffective. The notice of nonresponsibility must be posted in a conspicuous place at the job site within ten days after the person giving the notice obtained knowledge of the work of improvement. Within the same ten-day period, the notice must be recorded in the Office of the County Recorder of the County in which the job site (or some part of it) is located. The owner must post and record a notice of nonresponsibility for each separate work of improvement.

Despite the owners exclusion from the effect of a mechanic lien afforded by Civil Code Section 3094, a non-participating owner may be prejudiced by the time and expense involved in defending litigation over Mechanics' Lien claims. It should also be noted that the tenants interest in the leasehold and the improvements are still subject to a mechanic lien claim.

If you are contracting to perform tenant improvement work directly with a tenant, you should require the tenant or the general contractor to obtain a payment bond. When you first become aware of Notice of Non-Responsibility you should note the date you first learned of it and note the location of the Notice. If you have not already done so, you should also contact the person with whom you contracted to determine if a payment bond is in effect. If a payment bond exists then you have some protection to ensure payment. Otherwise you should closely monitor the contract payments.

If it becomes necessary to file a mechanics lien it is wise to have a knowledgeable attorney review the facts to determine whether an owner may still be subject to a lien claim even though a Notice of Nonresponsibility was posted. It is not uncommon to discover that the owner participated in the work of improvement and/or failed to follow the statutory requirements.

This article is for educational purposes only and is not intended to be a substitute for competent legal advice. In the event you have a specific question you should consultant a competent attorney.