Navigating California lien laws with ease

Those working in construction credit know all too well how important lien rights are on any project. Regardless of what stage a project is in or whether you are serving as a contractor or subcontractor, it is essential that a credit manager understands their lien rights in that particular state to best protect themselves from risk.

Why it matters: Knowing your lien rights is the best way for credit managers working in construction to mitigate risk and protect themselves from huge losses while a project is underway. With each state employing a different set of rules and regulations around lien rights, it is important that you are well versed and knowledgeable on these laws in every state your company operates in. California has mechanic’s liens and stop notices ingrained in their constitution, now it is up to the credit managers on protecting those rights and acting on them.

“In California, you have constitutional rights to a mechanic’s lien,” said Michael Murray, principal attorney at Lanak & Hanna, P.C. (Orange, CA). “It’s important to know the processes to go through to make sure that you protect those rights.”

While you may understand your constitutional right to a mechanic’s lien, the process of protecting those rights can still be complicated and convoluted. Here are a few key ideas to keep in mind as you consider how best to protect your company from risk.

Who gets lien rights

It’s important to understand, first and foremost, who gets lien rights in California. For the direct contractors, subcontractors, material suppliers and equipment lessors, or the “Big Four” as Murray puts it, you have the right to enforce a mechanics lien.

If you are not one of those select four, you still might be able to enforce lien rights. California has a non-exhaustive list of those who could get a mechanics lien depending on their role and the circumstances around the claim.

“Not everybody gets mechanic’s lien rights,” Murray said. “There’s a non-exhaustive list in our civil code and we have an abundance of case law in California. The way we set it up with mechanic’s liens and mechanic’s lien claims is that we want your lead to be taken. The legislature has told us, ‘We are in favor of subcontractors and suppliers being paid, we want you to be paid.’ So, this list of who has mechanic’s lien rights has expanded over the years and years.”

Securing lien rights is likely out of reach for suppliers selling to other suppliers, suppliers whose materials are not incorporated into the project and unlicensed contractors. It’s important to know what activities or standards preclude you from securing lien rights as you create a plan that best protects your company from risk.

Preliminary notifications do’s and don’ts

A preliminary notice of lien, or a notification to owner, is delivered at the start of a construction project or when your work as a subcontractor starts or materials are delivered. If you have a direct contract with the owner, you don’t need to serve a preliminary notice, unless there is a lender.  

“I would always serve a preliminary notice,” Murray said. “If you do a prelim, and it turns out you didn’t need to do one, that’s okay. If you didn’t do a preliminary notice because you thought you had contracted directly with the owner and it turns out you didn’t, there’s no coming back. You can’t send a prelim over after the fact.”

Importance of timing

While you may be completely within your rights to file a lien, you are still beholden to a set framework regarding timing. With liens, timing is very important. The absolute last day to file a lien is 30 days after completion of work if a valid Notice of Completion was filed. This timeline extends to 60 days for general contractors. If no Notice of Completion is filed or if it is deemed invalid, you have 90 days to file a lien.  

“My suggestion, generally you don’t have to wait until the end of the job. Once you are done with your work you can record your liens. Don’t wait till the end of the project,” Murray said. “The earlier you record your lien, the more money in the project fund that still exists.”

What is completion?

It’s important to know when a project is deemed complete, and it is not always clear. Most projects will reach the final stages and be deemed complete as the project wraps up, other times it can be more complicated.

If a project is not finished, but labor has stopped for a period of 60 days or recordation of a notice of cessation after cessation of labor for a period of 30 days, it can be deemed complete. Also, if there is occupation or use by the owner that is accompanied by cessation of labor, it is complete.

“If you’re an early subcontractor or middle supplier on a job, you may be done with your work or done providing material, but that job may go on for months or years,” Murray said. “Don’t wait to file a lien until the end of the project, because you don’t really know when the job is going to be complete.”

The bottom line: Understanding and effectively exercising your lien rights is crucial for mitigating risk in the construction credit industry. Take the time to learn the ins and outs of your state’s lien laws to better prepare yourself for tricky situations down the line.

Learn more about construction laws by tuning into NACM’s monthly webinar series. Sign up now for the next webinar on Arizona lien and bonds on March 19!