Substantial Changes To Preliminary Lien Notices Go Into Effect On January 1, 2004

Substantial Changes to Preliminary Lien Notices
Go Into Effect On January 1, 2004

By
William C. Last, Jr.

Effective January 1, 2004, additional wording must be added to a California Preliminary Lien 20-day Notice (“Preliminary Notice”) for any contractor performing work on a private work of improvement. The new law, Senate Bill 134, was sponsored by the California chapter of the American Subcontractor Association. Senate Bill 134 also will require the owner of a private work of improvement, within ten days of recordation of a Notice of Completion or Notice of Cessation, to notify the original contractor, and any lien claimant who has provided a Preliminary Notice prior to the recording of a Mechanics Lien or Stop Notice as to the work of improvement.

As a preliminary matter, before discussing these changes, this article will review why a Preliminary Notice is required and how the recordation of a Notice of Completion or a Notice of Cessation affects the timing for recording a Mechanic’s Lien, or serving a Stop Notice.

The Requirements for A Preliminary Lien Notice

Anyone providing labor, services, equipment, or materials actually used and consumed in a private works construction project acquires potential Mechanics Lien and Stop Notice rights. Those rights, if properly perfected, allow a contractor to look to the project property to satisfy a judgment for the value of the goods and services provided.

The Mechanic’s Lien, Stop Notice and Payment Bond procedures involve three basic steps: (a) serving a preliminary 20-day notice; (b) recording the Mechanic’s Lien, serving the Stop Notice or making the claim on the Payment Bond; and (c) filing a lawsuit to: (1) foreclose the Lien; (2) enforce the Stop Notice, or (3) enforce the claim on the Payment Bond against the surety. This article will focus on the first requirement, i.e. serving the Preliminary Notice.

The purpose of the Preliminary Notice is to advise owners of potential lien claims against their property. The Preliminary Notice requirements are applicable to both private and California public works projects. It should be noted that a contractor on a federal public works project generally is limited to making a Miller Act Bond claim. The notice requirements for the Miller Act claim are different than the Preliminary 20-day notice requirements.

If you fail to meet the statutory requirements as to the form of the Preliminary Notice, timing of the Notice, and/or service of the Notice, your Mechanics Lien, Stop Notice and/or Payment Bond claim maybe denied. Thus, following the Preliminary Notice requirements is critical to a successful claim. The failure to serve a Preliminary Notice, if the value of the work is greater than $400, is also a violation of the Contractor State License Law.

The Notice of Completion

When a dispute arises and a Preliminary Notice is either not required, or already has been served, the next step to protecting one's rights is to record a Mechanics Lien in the office of the County Recorder where the construction project is located. Alternatively, the contractor can serve a timely Stop Notice on the construction lender. As with the Preliminary Notice, there are strict rules to be followed when preparing and recording a Mechanics Lien, or filing a Stop Notice.

Timing is most critical item with regard to the recording of a Mechanics Lien or filing a Stop Notice. A Notice of Completion can decrease the time for filing a Mechanics Lien, or Stop Notice. A Mechanics Lien may not be recorded until the claimant has finished furnishing labor, services, equipment, or materials to the project. (Civil Code §3116). There are also time limits within which all Mechanics Liens must be recorded on private works and/or Stop Notices must be served. The deadlines are as follows:

(1) When the owner records a valid Notice of Completion (i.e., a proper Notice of Completion recorded within ten days after actual completion of work on the project). (Civil Code §3093): (a) A prime contractor in direct contract with the owner must record his Mechanics Lien and/or serve a Stop Notice within sixty (60) days of the recording of the Notice of Completion. (Civil Code §3116); and (b) All others must record their Mechanics Liens and/or serve their Stop Notices within thirty (30) days of the date the Notice of Completion is recorded. (Civil Code §3116).

(2) When no Notice of Completion has been recorded, but the project has actually been completed: All claimants must record their mechanics Liens and/or serve their Stop Notices within ninety (90) days from the date of actual completion. (Civil Code §3115, 3116).

Any of the following will be deemed to be the equivalent of actual completion with respect to private works, that will trigger the ninety (90) day period within which to record Mechanics Liens and/or serve Stop Notices: (1) Occupation or use of the work of improvement by the owner or his agent, accompanied by a cessation of labor thereon; (2) Acceptance of the work of improvement by the owner or his agent; or (3) A cessation of labor for a continuous period of sixty (60) days, or a cessation of labor for a continuous period of thirty (30) days if the owner files a Notice of Cessation. (Civil Code §3086).

If the owner, after thirty (30) days continuous cessation of labor, records a Notice of Cessation, this is equivalent to the recording of a Notice of Completion. (Civil Code §3092). In that case, the prime contractor has sixty (60) days, and all other claimants have thirty (30) days, within which to record their liens. (Civil Code §§3115, 3116).

By shortening the time within which to record Mechanics Liens and serve Stop Notices, the Notice of Completion and/or Cessation can be very useful from an owner's or lender's perspective. However, from the Mechanics Lien and Stop Notice claimant's perspective, these Notices are a fatal trap if the shortened time limits are not met.

A Notice of Cessation is used when work has temporarily halted for more than 30 days. (Civil Code §3092). A Notice of Completion must be recorded in the County Recorder’s office after work has actually been completed, as that term is defined in Civil Code §3086. Listing an erroneous date of completion does not affect the validity of the notice so long as the true date of completion was within 10 days preceding the date of recording of such notice. However, if the Notice of Completion is prematurely filed or filed late, it is invalid and the time limits are extended. Therefore, when a Notice of Completion is recorded, the lien claimant always should check to determine if that Notice was timely recorded, and therefore valid.

Senate Bill 134

Since the recordation of a Notice of Completion or Notice of Cessation (“Notice of Completion/Cessation”) decreases the time limit for contractors and subcontractors to record Mechanic’s Lien and most contractors and subcontractors are not automatically apprised that a Notice of Completion/Cessation has been recorded, a number of unpaid contractors and subcontractors always will fail to timely record Mechanic’s Liens. The intent of the new law is requiring owners who record a Notice Completion/Cessation to give written notice to the subcontractors.

The new law, which amends Civil Code §3097 and adds Civil Code §3259.5, that requires the owner of a private work of improvement to give notice of the recordation of a Notice of Completion or a Notice of Cessation to the original contractor and to any claimant who has served a Preliminary Notice. This notice of recordation must be sent by registered or certified mail, or by first class mail with a certificate of mailing. This notice must include the date the Notice of Completion/Cessation was recorded. The notice must be given within 10 days of recordation of the Notice of Completion/Cessation. In the event the property owner fails to give the proper notice, the time for a contractor or claimant to record a Mechanic’s Lien or file a Stop Notice is extended to 90 days.

However there new law does have certain limitations. First, it is limited to certain types of private property. Under the new law, “owner” means a person who has an interest in real property, or the person’s successor in interest on the date a Notice of Completion/Cessation is recorded, that caused a building, improvement, or structure on the property, to be

constructed, altered, or repaired. If the property is owned by two or more persons as joint tenants or tenants in common, any one or more of the cotenants may be deemed to be the “owner” within the meaning of the new law. However, “owner” does not include a person who occupies the real property as a personal residence when the dwelling contains not more than four residential units, or does it include a person who has a security interest in the property. “Owner” does not include a public entity.

In addition, the new law requires that the following notice, in bold type face, to be included in a Preliminary 20‑day Notice:

“NOTICE TO PROPERTY OWNER. If bills are not paid in full for the labor, services, equipment, or materials furnished or to be furnished, a mechanic’s lien leading to the loss, through court foreclosure proceedings, of all or part of your property being so improved may be placed against the property even though you have paid your contractor in full. You may wish to protect yourself against this consequence by (1) requiring your contractor to furnish a signed release by the person or firm giving you this notice before making payment to your contractor, or (2) any other method or device that is appropriate under the circumstances. Other than residential homeowners of dwellings containing fewer than five units, private project owners must notify the original contractor and any lien claimant who has provided the owner with a preliminary 20‑day lien notice in accordance with Section 3097 of the Civil Code that a notice of completion or notice of cessation has been recorded within 10 days of its recordation. Notice shall be by registered mail, certified mail, or first‑class mail, evidenced by a certificate of mailing. Failure to notify will extend the deadlines to record a lien.”

Conclusion

Generally, courts require strict compliance with the 20-day Preliminary Notice statutory provisions. Defects in the form of the Notice can result in the loss of valuable Mechanics Lien, Stop Notice, and/or Payment Bond rights. It is strongly recommended that contractors, on an annual basis, review the Preliminary 20-day Notice form they use to ensure that it complies with any recent statutory changes as to the information required in the Notice as well as the Notice To Owner statement. Finally, you should make it a practice to review the information that is placed on the Notice to ensure that it is accurate and complete.

Since, the new law requires specified private work owners to provide written notice of the recordation of a Notice of Completion or a Notice of Cessation; contractors should look to receive such notices. With the exception of including the date that the Notice of Completion or Notice of Cessation was recorded, the statute does not require any specific language to be included in the owner’s notice. If you receive such a notice from the owner, you must calculate the shorten time for recording your Mechanics Lien or serving your Stop Notice and act before the deadlines expire.

This article, ©2003, was written by William C. Last, Jr. Mr. Last is an attorney who has been specializing in Construction Law for over 25 years. In addition to belonging to a number of construction trade associations, Mr. Last holds a California “A” and “B” license. He can be contacted at 415-764-1990 or 650-425-7679 (e-mail: wclast@lastlawfirm.com). A number of his past articles can be found on his website (lhfconstructlaw.com). This bulletin is published periodically to provide general information about current legal issues. The articles are not intended to be a substitute for the advice of an attorney as to a specific problem. If you have a specific legal question or need legal advice, you should contact an attorney.