What amounts Can Be Included In Your Mechanic's Lien?

What Amounts Can Be Included
in Your Mechanic's Lien?

On March 31, 1999, the California appellate court, in Basic Modular Facilities v. Ehsanipour, ruled on how an excessive lien claim will be treated. This article will discuss what can be included in a lien claim and what can happen if the lien is excessive.

In the Basic Modular case, the contractor's lien was in an amount well in excess of the amount to be paid under the original contract. The trial court apparently concluded that the lien was greater than what was permitted and proceeded to invalidate the whole lien. The appellate court held that the whole lien could not be invalidated, but rather it should be reduced to reflect the permitted lien amount.

While a legitimate error or mistake in the amount of the lien will not invalidate a lien, a lien that is overstated with the intend to defraud will be invalidated. (Civil Code section 3261) The trial court in the Basic Modular case did not rely on that statute, but rather relied on an reported case that barred liens that included delay damages. While it is clear that the lien claimant cannot intentionally overstate the amount of the lien, the issue of what can be included in the lien claim is not as clear.

Basic Requirements For Claiming A Lien

Article XIV, section 3, of the California Constitution provides that "mechanics, persons furnishing materials, artisans, and laborers of every class, shall have a lien upon the property upon which they have bestowed labor or furnished material for the value of such labor done and material furnished; and the Legislature shall provide, by law, for the speedy and efficient enforcement of such liens."

Only certain parties are able to take advantage of the Lien Laws. In order to qualify, the prospective claimant must prove that (1) it performed services, provided labor or provided materials to the project; (2) the services, labor or materials which were supplied were used or consumed in the project for which the lien is being claimed; and (3) the owner or his representative has authorized the services or materials.

Relative to the first requirement, the following classes of persons or entities can claim a lien upon the project real property: (1) those performing labor upon the project, (2) those bestowing skill or other necessary services on the project (3) those furnishing materials or leasing equipment to be used or consumed in the project, (4) those furnishing appliances, teams, or power contributing to the project (Civil Code sect 3110)

The second requirement is that the party's contribution to the project must be direct. That requirement can be met by establishing that the labor, services and materials supplied were "used or consumed" in the project. If the contribution is indirect ,the lien claim will be denied. For example, if a lumber supplier cannot establish that the lumber it supplied to the project was used in the project, the supplier cannot claim a lien. A further requirement is that the contractor's or supplier's contribution to the project must result in a permanent improvement. For example, installing glass windows in a building is a permanent improvement. However, washing the same glass windows does not allow the laborer to make a lien claim.

The final requirement for claiming a lien is that the owner authorizes the improvements. While that requirement may appear to be difficult to establish, it is not. The Lien Laws state that every contractor, subcontractor, sub-subcontractor, architect, builder, or other person having charge of a work of improvement or portion thereof shall be held to be the agent of the owner.

What Can Be Included In The Lien

Once the basic qualifications are met the contractor, laborer or supplier is eligible to claim a lien. The amount of the lien is limited to the reasonable value of the labor, services, equipment, or materials furnished or for the price agreed upon by the claimant and the person with whom he or she contracted, whichever is less. The lien claimant may, however, include any amount due for labor, services, equipment, or materials furnished based on a written modification of the contract or as a result of the rescission, abandonment, or breach of the contract. Typically, an owner's or contractor's refusal to pay for additional work that they requested or caused will be deemed a breach of contract by the owner or the contractor. Nonetheless, the amount of the lien may not exceed the reasonable value of the labor, services, equipment, and materials furnished by the claimant (Civil Code section 3123).

Since an approved change order can be clearly included in the lien claim, the issue of what can be included in a lien claim typically arises in context of disputed change orders, disruption claims and/or delay claims. These types of construction claims are based on allegations that the owner breached the contract by requesting the additional work, thereby increasing the cost of the work. Generally, disputed change orders that add to the value of the project can be safely included in the lien claim.

The difficult question is whether the prospective lien claimant can include in the lien amount the value of impact claims that could include extended jobsite overhead, home office overhead and other similar costs that were incurred as a result of owner-caused delays in completing the project. The answer to the question is problematic.

A case that was decided prior to the change in the Lien Laws that allowed for a lien claim for breach of contract damages, held that delay damages could not be included. The decision in that case, entitled Lambert v. Superior Court of Marin County, was based on the unmodified version of Civil Code section 3123. The trial court in the Basic Modular case relied on another portion of the Lambert case in dismissing the full amount of the lien. The appellate court in the Basic Modular case overturned the trial court's decision to release the whole lien but did not address that part of the Lambert decision which barred delay damages. Thus, the issue remains unresolved.

The Lambert court stated that: "The function of the mechanic's lien is to secure reimbursement for services and materials actually contributed to a construction site, not to facilitate recovery of consequential damages or to provide a claimant with leverage for imposing the claimant's view of who caused the breakdown in the contract." In light of the changes in the Lien Laws which allow for a contractor to include in the lien claim the reasonable value of a breach of contract costs, a strong argument can be made that "impact claim" damages can be included in the lien. If the contractor can satisfy the basic requirements for claiming a lien, including the requirement that "impact claim" damages were used or consumed in the project and made a direct improvement to the property, the "impact claim" portion of the lien sum should not be deemed fraudulent.

As a result of the Basic Modular case, if the "impact claim" amounts are later successfully disputed, the trial court should only decrease the amount of the lien by the amount of the improperly included "impact claims." If it is proven, however, that the "impact claim" damages were added to the lien amount to defraud the property owner, the court can extinguish the whole lien. Until the legislature makes further Lien Law changes or the appellate courts resolve the "impact claim" damage issue, any lien claimant who intends to include "impact claim" damages should consult with competent legal counsel prior to including those sums in the lien claim.

This article, © 1999, 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 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 by e-mail at wclast@covad.net. 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 a competent attorney.