At times an owner of a building may have to pay for the same construction work or construction materials twice as a matter of law. And it is no defense in court to argue that the construction service or supplies rendered were already paid for in full. Assuming the subcontractor or material man filed the requisite notices to you, and was not paid by the general contractor or owner directly, the owner may very well have to pay twice. If the owner does not pay yet again, the claimant has the right, after trial, to foreclose the mechanics lien on the property and sell the property.
And this is true even if the owner has no contract with the subcontractor. It is true if the owner has never even bought one item from the material man. It is true even if the general contractor, to whom the owner paid the sums intending for them to then be paid to the sub or material man, instead stole the money and has disappeared or filed bankruptcy.
You still lose your structure or pay for the goods or services twice.
To avoid that danger certain basic steps can be taken which should be known, indeed, known well, by any person or entity considering a construction work of improvement. This article shall briefly outline the law and the basic steps of protection that any owner should undertake in any and all construction projects.
The reader should first review the law as described in our article Mechanics Liens before proceeding further. This discussion will presume the reader has read the article and will also obtain competent legal advice from an attorney experienced in the field.
It may be noted that the mechanics lien allows the claimant, who records the lien within the stringent time limits set, to file suit to foreclose on the lien if the claimant can demonstrate that the goods or services were incorporated into the job. Either the owner pays for the reasonable value of the goods and services, or the court declares the claim a lien on the property which allows the claimant to foreclose on the lien and sell the property at a public sale.
The key fact to realize is that while the general contractor must have direct contract with the owner to achieve a lien right, the subcontractors, who usually only contract with the general contractor, and the material men, who may only sell to the subcontractor or general contractor, may never meet, contract with, or even see the owner. How then can they have lien rights and sell the property of an owner who has never contracted with them?
The question was taken all the way to the United States Supreme Court who had to consider whether granting lien rights that can result in sale of property without any consent or contract with the owner violated due process requirements of the United States (and California) Constitution.
The court considered the cost benefit issues involved. Most subcontractors purchase far more in materials for a project than they could possibly afford on their own credit and most material men sell only to professionals in the field and never meet an owner. The Court decided that the only way to maintain the existence of small subcontractors and the current role of material men was to allow lien rights since they would be assured of payment because the sale was “secured” by the property being improved.
But how to protect the owner who never even meets these claimants? How to make sure the owner is not faced with claims from faceless individuals who put in services or material without notice or consent of the owner and now expect to be paid in full?
The Supreme Court simply required that appropriate prior notice be given to the owner and if the notice is provided, the owner is deemed to have consented to the work and materials being incorporated.
In California the notice required for lien rights for material men and subcontractors not under direct contract with the owner is the 20 Day Preliminary Notice described in the California Civil Code Section 3097. That notice, which is to be given personally or, more usually, by certified mail to the owner, must be delivered within twenty days of when labor or materials are first incorporated into the project for which a lien is sought, identifying the parties, the likely amount of goods or services to be incorporated, and warning that a lien may be filed if payment is not timely made. If the notice is properly given and the lien recorded in a timely manner, after trial the property may be sold to satisfy the lien.
In general, all claimants except for the general contractor or a person performing actual labor for wages must give this notice or forfeit their lien rights. Since the general contractor is under contract with the owner, the courts concluded that the owner is already on notice as to that potential claim and no notice is required.
The Usual Problem:
More often than one would suppose a frustrated owner of property comes into our office, showing us cancelled checks to the general contractor, often stating “paid in full” on them, but complaining that mechanics liens were later filed by material men or subcontractors a week or two after the payment was made to the contractor and apparently the general contractor kept the sums that should have been paid to the sub or material men or both.
They point out that they have already paid the general contractor in full for all the materials and/or work performed by the sub contractor…indeed, often more than enough to pay for more than all the materials…but now the material man or sub is claiming not a dime was paid to them.
We have to tell the owner in such situations that if a valid Twenty Day Preliminary Notice was served on them, that they may be liable for the reasonable value of the goods and services if they were actually used in the job. They may have a claim against the general contractor for breach of contract or even conversion. Indeed, the contractor may face penalties for failure to pay the material man or subcontract.
But more often than not, the general contractor has already disappeared or is bankrupt and the distraught owner can face substantial invoices for materials or work already done. And the liability can be in the tens…or in the hundreds of thousands of dollars.
Invariably we ask the owner if they received the Twenty Day Preliminary Notice and most of the time they cannot remember all the paperwork that was received during the chaotic time of the beginning of the job or simply ignored the notice, not understanding the full ramifications. They knew they would pay for all the goods and services so were not concerned about such notices.
And we have to tell them they must pay to protect their property…once again.
The law does provide various excellent protections for the owner who is educated as to their use. The owner should consult with counsel to discuss how best to structure the apparatus of protection, but in general the types of protection available in California include:
1. KNOW AND NEGOTIATE WISELY WITH YOUR GENERAL CONTRACTOR. Check him or her out. Check their bond. Talk to people who have worked with them before. Show their proposed contract to a lawyer you hire. Do not just use their pre printed form.
2. KEEP TRACK OF ALL PRELIMINARY NOTICES RECEIVED. You need to know who may have a claim against you when unpaid. You should make contact with them and tell them you need to know the status of their account with your general contractor or sub contractor at all times. But do not expect them to follow up. Before each payment is made you should contact them or require your general to deliver to you from them a fully executed RELEASE OF MECHANICS LIEN or CONDITIONAL RELEASE OF MECHANICS LIEN for each progress payment. A conditional release of mechanics lien provides that if your check to them clears, they are treated as paid in full for the amount of the release. If the general gives you their lien release, call the claimants to verify the signature.
3. USE A RETENTION FUND and do not pay it out until all liens are released. Most are ten percent but if you discover that any lien claimant is not paid promptly and in full by the general contractor, your contract should allow you to withhold sufficient to pay the entire potential claim of the subcontractor or lien claimant.
4. USE JOINT CHECKS. Once you know who has lien rights, write all checks to the general contractor as joint checks that have to be signed off by both the general contract and the lien claimants. Those may be treated as payment in full to the lien holders even if they are foolish enough to let the general contractor keep some of their money.
5. FILE A NOTICE OF NON-RESPONSIBILITY (CC 3094). If you receive a 20 Day Preliminary Notice you can void the rights therein by filing a Notice of Non responsibility (and sending same by certified mail to the Claimant) within ten days of your knowledge of actual or intended construction on your property. Note this only applies if you and your authorized agents did not contract for the work.
6. KEEP TRACK OF ALL YOUR PAYMENTS General contractors, especially in difficult times, often wish to use your payments, given to them to pay for subcontractors or material men, for other needs. If you want to make sure the payment goes to the lien claimants, either pay directly or utilize joint checks. And do not just assume that a joint check will be full protection since, sadly, some general contractors forge the other signature. Call the lien claimants and make sure they have been paid before you release any retention fund.
7. TRUST: BUT VERIFY. That was what President Reagan said about arms control agreements but it is even more true when dealing with a construction project. Your property is at risk and you must carefully review each document received…get legal advice about any document you do not understand, create a construction contract that protects you, and interact sufficiently to protect your own property interest.
8. REQUIRE A PERFORMANCE BOND OF THE CONTRACTOR. A bonding company will assure the work of the general contractor and this type of bond, unlike the Contractor’s License bond, is usually enough to finish any project…but can be expensive for the contractor and thus the cost is often passed along in the contract to the owner. But…it may be worth it.
9. FILE A NOTICE OF COMPLETION. Recording a notice of completion cuts off the time for when a lien can be filed and should form an inherent part of your protection package. Note that the completion notice will not be valid unless the project is actually completed or work has been ceased on the project for a sufficient period of time.
10. NEVER PAY YOUR CONTRACTOR FOR WORK NOT ALREADY PERFORMED. If you pay ahead of time, you lose the ability to use that money to pay lien claimants in the future. Often the general contractor will argue that he or she must be paid in advance to pay for materials or the like. In that case, make it a joint check. But also determine why the general contractor is so out of credit that he or she cannot afford the materials before you pay for them. Avoid having your own credit used for materials since that can create an independent obligation for the materials independent of any lien rights. Progress payments with lien releases are the safest way to go.
11. KEEP INVOLVED IN THE PROJECT. Often projects last months or even years and the owner, busy with his or her own business, begins to lose day to day contact with the job. This becomes the most dangerous time since without owner involvement, you may find your property at risk based on decisions unknown to you. Nothing is as important as direct involvement in the project on a constant basis. If necessary, hire an architect to supervise the job…but the key is to make sure that all potential lien claimants are paid in full and the work and materials you have paid for are actually incorporated into the job. Too often a general contractor will buy material for your project but use it on another, either intentionally or unintentionally.
12. TALK TO A LAWYER BEFORE YOU RELEASE RETENTION FUNDS. The last time you know you have money to pay lien claimants is when you are still holding the retention funds. It is a good idea to pay a few hundred dollars and get some legal advice as to whether the lien coast is clear before making that final payment.
Construction is both exciting and exhausting and a remarkably emotional experience for most owners. Oddly, most owners do not fully learn the rights they have and the powers the workers and material men may have once work begins. Given the high cost of construction and the emotional turmoil a failed project can impose on an owner, it makes good sense to have a working knowledge of the perils that mechanics liens can impose on property.
And if the reader is a subcontractor or material man not utilizing mechanics liens, then you are putting yourself at tremendous risk to avoid the mild inconvenience of filing the requisite Twenty Day Preliminary Notice. As one construction client commented to one of the attorneys in this office, “To save myself a half hour of pen pushing I lost two hundred thousand dollars of work. Never again…”