If California were a country, its economy would be the sixth largest in the world. A booming economy like this one requires a robust construction industry to build new commercial space, from stores to laboratories to factories. Some reports suggest that increasing numbers of new residential homes will need to be required to house the state’s growing population. All of this bodes well if you are a contractor, subcontractor, or material supplier.
Nevertheless, it is not always easy to secure payment for your hard work. Sometimes, property owners (or general contractors who hired you as a sub) will try to pay you less than they had originally agreed to pay.
Imagine, for example, that your company performs flooring work on a residential home in San Diego, but then the homeowner who hired you refuses to pay all the money owed once the floor is done. What do you do? Fortunately, California law gives you a powerful mechanism with which to put pressure on the owner and obtain the payment to which you're entitled: mechanic’s liens.
What are mechanic’s liens, and how do they work in the Golden State?
If you entered into a contract with a property owner (or a general contractor) to provide labor or services, and you did not get paid, you will likely feel angry and betrayed. But before you run to file a mechanic’s lien or a lawsuit, remember that perseverance and negotiation might actually be more cost-effective ways to approach the dispute.
First, create a paper trail and ensure that the owner is fully aware of the amount you are owed. In addition to mailing additional copies of your final invoice and/or statements, telephone the owner. Also send emails with reminders about the contract balance. Try writing a formal demand letter on your company’s letterhead. More often than not, these persistent attempts at collection will work, saving you the time and money associated with legal action.
If these initial steps do not work, however, consider hiring a lawyer to write a demand letter on law-firm letterhead. A lawyer’s letter will sometimes prompt a response more quickly. A lawyer will typically be willing to write a demand letter for a reasonable amount of money, perhaps a few hundred dollars, and it will show the property owner that you are serious about guarding your rights.
When considering an attorney, it's wise to choose one with experience in California real estate or construction law who can advise you of your rights and craft the most effective possible letter. For more on retaining a lawyer, check out Nolo’s Guide to Finding an Excellent Attorney.
While the above strategies may work in many situations, there will still be times where owners (or general contractors) will refuse to pay your company the monies that are owed. Of course, California law allows you to simply sue for simple breach of contract, or some other related cause of action (such as quantum meruit).
Under the state’s lien laws, which you can read at California Civil Code § 8000 et seq., you are also allowed to file a mechanic’s lien. Liens can be a faster tool than a lawsuit with which to pressure the owner to pay. A lien must be publicly filed in the county clerk’s office (sometimes called the county recorder's office) in the county in which the property is located. There will be a fee associated with the filing, which will depend on the county.
What function does a lien actually serve? The lien becomes a cloud on the owner’s title, meaning that the title is subject to your company’s financial interest in it. For example, if you put a $25,000 lien on the San Diego home in the example above, a buyer of that property would purchase it subject to owing you that $25,000. This will make it difficult for the current homeowner to sell the property (or to refinance it through a bank or other institutional lender), since no one would want to take property that is subject to your claim. In the worst-case scenario, the lienholder can force a foreclosure sale of the property.
In other words, the lien can incentivize the owner to settle with you in order to get you to clear the title. By the same token, if you are a subcontractor, the lien could push the owner to pressure the owner’s general contractor to settle with you.
Any person or entity that has provided labor or materials to benefit property is entitled to file a lien. California Civil Code § 8400 specifically provides: “A person that provides work authorized for a work of improvement, including, but not limited to, the following persons, has a lien right under this chapter: (a) Direct contractor; (b) Subcontractor; (c) Material supplier; (d) Equipment lessor; (e) Laborer; [or] (f) Design professional.”
Design professionals might include architects, engineers, or landscapers. (Not all states allow professionals in this category to file liens).
You can either file a lien in either the amount unpaid under the contract, or in the amount of any additional (uncompensated) work that you performed above and beyond the contract. (See California Civil Code § 8430.)
Note that in California, you cannot include consequential damages in your lien, such as lost profits, delay damages, or attorney’s fees. You are largely limited to the value of the labor or materials that you contributed to the real property.
California is somewhat unusual in that lien claimants cannot simply file a lien out of nowhere. They must have first filed a formal “notice” with the owner, general contractor (if any), and construction lender (if any). The purpose is to advise the owner or other of your right to file a mechanic's lien. It is commonly called a “20-day notice,” because it applies to work starting no later than 20 days before the service of the notice.
Practically speaking, it means you should serve this notice no more than 20 days after commencing work on a project, whether you are owed money at that time or not.
According to California Civil Code § 8200, “before recording a lien claim… a claimant shall give preliminary notice to the following persons: (1) The owner or reputed owner; (2) The direct contractor or reputed direct contractor to which the claimant provides work, either directly or through one or more subcontractors; (3) The construction lender or reputed construction lender, if any.” The notice must include “(1) A general description of the work… provided; (2) An estimate of the total price of the work provided…” as well as a lengthy formal statement of the owner’s and lienor’s respective rights, which is spelled out in the lien law.
Under California Civil Code § 8412, you must file your lien within 90 days after completion of the work (or termination) for it to be valid. (Alternatively, it must be filed within 60 days if an owner files a “notice of completion,” which is more common on large or commercial construction projects than on small, residential ones.)
As you can see, the timing of the filing is perhaps the most critical aspect of a successful lien. California’s legislature is clearly trying to incentivize potential lienors to make their claims quickly, and not allow liens to be filed years after a construction project is completed. While this gives owners some comfort in knowing that lien periods have expired, it means that you must act quickly to ensure that you do not lose any lien rights.
The actual mechanic’s lien is a relatively short document, just a few pages. There are many templates online (and no single required form), but a good model is available here. The lien must include your company’s name, the owner’s name, the location of the property, and the amount of money still due, among other pieces of information. You must also describe the labor or material you provided (in other words, how did you improve the property?).
If you are a subcontractor or supplier and worked for a general contractor that failed to pay you, you must list the primary contractor's name and address, too. You will see that your signature needs to be notarized.
If you file a lien with the California county clerk and serve the property owner with a copy of that lien, your action is likely to be perceived as aggressive. Taking this step might put the owner on the defensive and cause him or her to get lawyers involved, or otherwise retaliate by publicly claiming that you did shoddy work.
Perhaps filing a lien is the adversarial direction that you need to take, unfortunately, if the owner is refusing to pay what you are owed. But regardless, you should be prepared for this sort of antagonism once the filing is complete.
Finally, remember that California liens and the laws surrounding them can be highly technical. This is particularly true given the peculiarities of the state's lien notice requirements. If you are owed a substantial sum, it is likely worth your investment to schedule a consultation meeting with an experienced construction or real estate attorney in California, who can advise you of your rights.