If You Record Your Mechanic's Lien Too Early The Lien Is Ineffective

If You Record Your Mechanic's Lien

Too Early The Lien Is Ineffective

By

William C. Last, Jr.

On February 2, 2006, a California Appellate Court held that a mechanic's lien was not prematurely recorded and thus void if the owner materially breached the contract between them. The case is entitled Howard S. Wright Construction Co. V. BBIC Inverstors, LLC (2006)

136 Cal. App. 4th 228. The case is significant since it reinforces the statute that a mechanic's lien be timely recorded between the earliest date for recordation and the last dated for recordation. This article will discuss the holding in the Wright case and California Civil Code section 3115 that sets the periods for timely recordation of a mechanic's lien.

In the Wright case, the trial court concluded that the lien was prematurely recorded and therefore void. The appellate court reversed the trial court. The facts of the case are relatively straight forward. Wright and the owner entered into a contract for the construction of a business facility. After Wright began work, the owner informed Wright that, due to financial problems, it was stopping further work. However, the owner told Wright to perform closeout work. Shortly thereafter, the owner informed Wright that there would be no further payments. Wright then wrote a letter to the owner stating that owner's statement about no further payments was an anticipatory breach of the contract by the owner. Wright then stopped work and recorded a mechanic's lien.

The owner claimed that the lien was premature. The owner claimed that Civil Code section 3115 was applicable. That section states: "Each original contractor, in order to enforce a lien, must record his claim of lien after he completes his contract and before the expiration of (a) 90 days after the completion of the work of improvement as defined in Section 3106 if no notice of completion or notice of cessation has been recorded, or (b) 60 days after recordation of a notice of completion or notice of cessation." (Emphasis added)

The time limits within which all liens must be recorded on private works are based on when the project is completed, or work on the project stops short of actual completion. When actual completion has not been obtained, California law defines what constitutes completion so that the contractor will know when time for recording a lien commences to run.

Specifically, Civil Code §3086 states that:

"Completion" means, in the case of any work of improvement other than a public work, actual completion of the work of improvement. Any of the following shall be deemed equivalent to a completion:

1. The occupation or use of a work of improvement by the owner, or his agent, accompanied by cessation of labor thereon.

2. The acceptance by the owner, or his agent, of the work of improvement.

3. After the commencement of a work of improvement, a cessation of labor thereon for a continuous period of 60 days, or a cessation of labor thereon for a continuous period of 30 days or more if the owner files for record

a notice of cessation...

The question before the appellate court was whether or not the work was completed for the purposes of Civil Code section 3115. If it was not, the lien was prematurely recorded. As the decision states: "The parties agree that a construction contract is "complete " within the meaning of section 3115 if the contractor's obligations have been fully performed. As a corollary, a contract is generally not completed for purposes of section 3115 if work under the contract remains to be done. (Cf. Lewis v. Hopper (1956) 140 Cal. App. 2d 365, 366-367 [295 P.2d 93] (Lewis).) n5 More precisely, a contractor completes the contract upon substantial performance of its obligations. (Hammond Lumber Co. v. Yeager (1921) 185 Cal. 355, 358 [197 P. 111] (Hammond Lumber); see Lewis, supra, at p. 367.)"

The holding in the Hammond case indicates that if only minor warranty or repair work is left to be completed, the earliest date for recording a mechanic's lien will not be extended.

The Wright court wanted to strike a balance between the rights of the contractor and the property owner. It basically concluded that if a construction contract is rescinded or otherwise terminated before the work is "complete" the earliest time for recording a lien commences.

A Overview of the General Time Limits For Recording A Lien

The general rule is that when all the work on the project actually has been completed all possible lien claimants must record their liens within ninety (90) days from the date of actual completion. (Civil Code §§ 3115-3116).

If the project is not completed, but all work on the project stops, California law deems the work complete after a certain period of time passes. If there is a cessation of labor for a continuous period of sixty (60) days, California law declares that such cessation is deemed to be an equivalent to the completion of the work. After that sixty (60) day period elapses, all possible lien claimants must record their liens within ninety (90) days from that date. (Civil Code §3092).

For example, if the owner runs out of money and cannot complete the original agreed-upon scope of work and, as a result, all work stops before the project is complete, the contractor has one hundred and fifty (150) days from the total and complete stoppage of all work to record a mechanic's lien so long as no Notice of Cessation was recorded.

If, however, during the first fifty-nine (59) days of the work stoppage, the original agreed-upon scope of work recommences, the time for recording a mechanic's lien will be restarted and subject to the same rules relative to: (a) whether actual completion occurs, or there is an equivalent to completion; (b) whether or not the owner shortened the deadlines by recording a Notice of Completion or Notice of Cessation; and (c) whether or not the contractor has a direct contract with the owner of the project.

A. Notice of Completions or Cessations Impact the Deadlines.

California law allows an owner to record one of two types of notices that, upon timely recordation, will effectively shorten the time for recording a mechanic's lien. The two types of notices are a Notice of Completion, or alternatively a Notice of Cessation. Lenders and owners may use recordation of a Notice of Completion and/or Cessation to reduce the number of liens timely recorded against a project, since there always will be some contractors who are unaware of the importance of obtaining current information from the recorder's office as to the status of a project. If a lien claimant fails to discover that a Notice of Completion and/or Cessation has been recorded, that failure may well be fatal to any valid claim when a lien is not properly recorded within the shortened time limit.

A Notice of Cessation is used when work has temporarily halted for more than thirty (30) days. (Civil Code §3092). A Notice of Completion must be filed after work has actually been completed, as that term is defined in Civil Code §3086. An erroneous date of completion entered on a Notice of Completion does not affect the validity of that notice so long as the actual, true date of completion was within the ten (10) days before the date the notice was recorded.

The deadlines when a Notice of Completion or a Notice of Cessation have been recorded are:

1. Notice of Completion: When an owner records a valid Notice of Completion (i.e. 10 days after actual completion of work on the project) (Civil Code §3093).Prime contractor in direct contract with the owner must record his or her lien within sixty (60) days of the recording of the Notice of Completion (Civil Code §§ 3115-3116). All others must record their liens within thirty (30) days of the date the Notice of Completion is recorded. (Civil Code §3116).

2. Notice of Cessation: When an owner, after thirty (30) days of continuous cessation of labor, records a valid Notice of Cessation (this is the equivalent of recording a Notice of Completion). (Civil Code §3092): Prime contractor in direct contract with the owner must record his or her lien within sixty (60) days of the recording of the Notice of Cessation. All others must record their liens within thirty (30) days of the date the Notice of Cessation is recorded. (Civil Code §§ 3115, 3116).

Finally, once a mechanic's lien is recorded, under California law, a contractor must file a lawsuit to foreclose on a mechanic's lien within ninety (90) days after it was recorded.

Closing Comments

While the Wright court sought to balance the right of a contractor to record a mechanic's lien, the holding in the case will make it that more difficult for a contractor to determine the earliest date for recording a lien. The question of when a project is completed is a factual issue.

Once again, it is important to gather and maintain documentation that will support your contention as to when the project was completed. The timely filing of either a mechanic's lien is the most important step to the contractor's recovery of its claim. It is critical that the contractor identifies the date when work first commenced on the project. Similarly, it is critical that the contractor also determines when the work on that project stopped or was completed. The collection of this type of information, and the maintenance and updating of records supporting this information will always substantially increase the likelihood of the contractor prevailing in litigation concerning a project. In addition, a contractor will also increase his or her likelihood of preserving lien claims by using all sources of notification, such as the County Recorder, or even hiring an independent service bureau that will inform the contractor when a Notice of Completion and/or Cessation is recorded.

This article, 8 2006, was written by William C. Last, Jr. of Last & Faoro. Mr. Last is an attorney who has been specializing in Construction Law for over twenty seven years. Mr. Last also holds a California A&B contractors license. If you have any questions Mr. Last can be contacted at 415-764-1990 or 650-425-7679. He has other articles on his web site: lhfconstructlaw.com. This bulletin is published periodically to provide general information about current legal issues. If you have a specific legal question or need legal advice, you should contact an attorney.