Orange County Branch Newsletter

November 2013

Law and CE News

Law and CE News - Out With The Old, In With The New: Preserving The Right To Payment Under Mechanic’s Lien Laws


The role of a design professional on a construction project is unique – often, the work of a design professional is completed before the first hammer is swung or the first foundation is dug on a construction site.  This unique role on construction projects begs a simple question: may a design professional preserve their right to payment prior to the start of construction on a project? 

A REFRESHER ON THE DESIGN PROFESSIONAL’S LIEN

Previously, design professionals were able to preserve their right to payment for work performed on certain types of construction projects before construction even began by asserting what was commonly known as a “design professional’s lien” on the real property that was the subject of a planned work of improvement.  Statutory law, namely California Civil Code sections 3081.1 et seq., provided the express authority for these design professional’s liens.

PRESERVING PAYMENT UNDER THE UPDATED MECHANIC’S LIEN LAWS

On July 1, 2012, the design professional’s lien was repealed.  However, the repeal of the design professional’s lien does not eliminate a design professional’s ability to preserve its right to payment before construction begins on a project.  Many of the code sections pertaining to the design professional’s lien have been integrated into the updated mechanic’s lien laws.  Consequently, it is important for design professionals to not only be aware of the changes made to mechanic’s lien laws generally, but to have a knowledge base of the former “design professional’s lien” statutes and their applicability to planned works of improvement.

SIMILARITIES IN THE NEW LAWS

The concepts put forth by the former design professional’s lien laws can now be found under California Civil Code sections 8300 – 8319.  Rather than allowing for a design professional’s lien, these new codes allow design professionals to record a mechanic’s lien prior to the commencement of construction.  Some of the highlights of these codes are as follows:

 

·         The owner of the site where the planned work of improvement is to take place must also be the owner who contracted with the design professional at the time of recordation of the lien.  (Civil Code section 8302(a)).

·         The lien must be for the same amount as the design professional’s fees for services under the contract with the owner or “the reasonable amount of those services, whichever is less.”  (Civil Code section 8302(b)).

·         The design professional must provide the owner with at least ten (10) days’ notice before recording the lien.  (Civil Code section 8304(c)).

·         The mechanic’s lien expires ninety (90) days after its recordation unless the design professional commences an action to enforce the lien.  (Civil Code section 8306(b)(2)).

·         The design professional has ninety (90) days from the time at which it knows the work of improvement will not commence to record the lien.  (Civil Code section 8312).

·         If the design professional is in a direct contractual relationship with the owner and is planning to file a pre-construction mechanic’s lien, they must notify any construction lenders on the project within 20 days.

Many of these new requirements have similarities to the requirements that applied to the former design professional’s lien law.

SO, WHAT’S CHANGED?

One major difference between the former design professional’s lien laws and the current mechanic’s lien laws that apply to design professionals is that under the new Civil Code section 8319, a design professional can more easily convert a mechanic’s lien that was recorded prior to the commencement of construction into a general mechanic’s lien within thirty (30) days of the start of construction on the work of improvement rather than filing a completely new lien.  The lien must simply be re-recorded in order to be converted – there are no additional notice requirements under this method.  This provides design professionals with a simple and efficient means of enforcing payment for their services performed on a planned work of improvement not only prior to, but after, the commencement of construction.

Also note that under Civil Code section 8316, any pre-construction lien recorded by a design professional does not take priority over the interest of a purchaser, lessee, or other encumbrancer who recorded their interest prior to the pre-construction mechanic’s lien.  Any interest a construction lender may have also takes priority over the pre-construction lien.  Furthermore, converting the pre-construction mechanic’s lien to a general mechanic’s lien will cause the lien to lose any priority it may have had as a pre-construction lien (see Civil Code sections 8450 -8458).

WHAT CAN DESIGN PROFESSIONALS DO TO PRESERVE THEIR RIGHTS?

Of course design professionals always have the ability to record a regular mechanic’s lien after commencement of a construction project in order to enforce payment for their services whether or not a pre-construction lien is recorded.  However, given that the work of a design professional is uniquely often completed prior to commencement of construction on a project, it is important for design professionals to know and understand that these opportunities are at hand to protect and preserve their right to payment from the outset. 

Some items to consider:

1.    What is the timeline for commencement of construction of the project? Design professionals must allow sufficient time to properly notify the owner of the impending lien and complete the appropriate steps to record it.  If commencement of construction of the project is fast approaching, the benefit of a pre-construction lien may not outweigh the costs.

2.    Are there any immediate concerns about whether you, the design professional, will be fully compensated for your services on the project?  If the answer is yes, preserving your rights as soon as possible under a pre-construction mechanic’s lien may be an invaluable tool.

3.    Is the construction project a single family, owner-occupied residence for which the expected cost is less than $100,000.00?  If so, under Civil Code section 8318, the pre-construction mechanic’s lien does not apply and other remedies should be considered.

4.    Is your client (party named on your contract) exactly the same as the named entity on title?  If not and you have to file a mechanic’s lien later, you need to do a preliminary 20-day notice as required under Civil Code section 3097.

5.    Is there a construction lender and if so, you need to get notice to them ASAP.

6.    Once construction begins, will you want to record a mechanic’s lien anyway?  If so, filing a pre-construction mechanic’s lien and converting it later on may be beneficial.  However, always keep in mind there is a 90 day time frame for conversion once construction begins.

7.    If you convert a pre-construction mechanic’s lien, how much time do you have to file a lawsuit?  Under Civil Code section 8319(a)(4), a converted mechanic’s lien “shall be effective as of the date of the recordation of (the converted) mechanic’s lien.”  This means that design professionals have 90 days from the date the pre-construction mechanic’s lien is recorded as a general mechanic’s lien to file a lawsuit.  Always keep this timeframe in mind – the failure to timely file suit will render your lien invalid.

Remember, despite the repeal of the design professional’s lien law, opportunities to preserve the right to payment prior to the start of construction still exist – a design professional simply needs to know where to look to find them.

Please contact us at the Oakland, South Pasadena, Orange or San Diego offices to discuss further.

Brian K. Stewart, Esq.
1100 El Centro Street | South Pasadena, CA 91030
Phone:  (626) 243-1100 | Fax:  (626) 243-1111
[email protected]www.ccmslaw.com

Valerie N. Gallo, Esq.
1100 El Centro Street | South Pasadena, CA 91030
Phone:  (626) 243-1100 | Fax:  (626) 243-1111
[email protected]www.ccmslaw.com

Nothing contained within this article should be considered the rendering of legal advice.  Anyone who reads this article should always consult with an attorney before acting on anything contained in this or any other article on legal matters, as facts and circumstances will vary from case to case.

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