Common Interest Mechanic’s Liens Clarification
» Posted August 4, 2017 News
The law of mechanic’s liens has always been a complex, technical and confusing world for homeowners and contractors alike. Under the California Constitution, contractors, material suppliers, equipment suppliers and laborers all have the right to place a foreclosable lien upon real property if they have not been paid for their services. In order to properly record and foreclose such a lien, the claimant must jump over a number of difficult hurdles including providing proper notice to the owners of the property the contractor wishes to lien. In the common interest development context, this notice hurdle has been very high and confusing to navigate. The California legislature has recently attempted to make things a bit clearer with the adoption of Assembly Bill (AB) 534, which will go into effect on January 1, 2018.
When an association requests work to be performed upon common area that it owns, a mechanic’s lien can be recorded by the contractor on that property when the contractor has not been paid. Previously, when an association requested work to be performed on common area that is owned by all owners (as opposed to by the association) in undivided fractional interests, the contractor could not lien such property without first receiving the consent of each owner. In most condominium associations the common area is owned by the members collectively and not the association. Receiving such consent was a very heavy burden upon contractors and sometimes resulted in all owners in an association receiving scary notices of potential liens.
AB 534 modifies Civil Code Section 4615 to ease this burden by making the association the agent for notice for all fractional owners. AB 534 also adds new Civil Code Section 4620 which shifts the notice requirement to the association in that associations must now give individual notice to all members within 60 days of service of a claim of lien against common areas.
Previously, if a lien had been recorded against an association’s common area, individual owners could remove the lien against their own separate interest by paying their fractional share to the contractor. It was not clear whether individual owners could use a release bond to remove their portion instead of paying the contractor to have the lien released. For example, if an owner was refinancing a mortgage on their own home and the mechanic’s lien showed up on the title report, the homeowner could make a payment to the contractor to have the lien removed as to that homeowner’s home only. It was always unclear whether the homeowner could instead purchase an inexpensive bond to avoid having to pay the contractor for the refinance to move forward. AB 534 clarifies this question by adding a provision allowing individual owners to record a release bond in an amount equal to 125% of the sum secured by the lien.
These changes make the use of mechanic’s liens by contractors less burdensome and will likely result in more claims being recorded when payment for goods or services is late or disputes arise that result in non-payment of invoices. The changes in the notice requirements shift some of the burden to the association to notify all owners which will likely result in added pressure on boards to resolve disputes or to get contractors paid to remove the liens. The notice requirements could also be potentially costly for larger associations because of copying and postage charges. These particular changes give lien claimants more fire power when dealing with slow-paying clients and boards should be sure to negotiate payment provisions with their vendors to ensure that they can make timely payments of invoices to avoid such liens.
On the other hand, the new changes give individual owners another option when they wish to remove the lien from their property without having to pay the contractor when a legitimate dispute exists. Allowing individual owners the right to record release bonds without making fractional payment to the contractor does take some of the bite out of the contractor’s mechanic’s lien rights.
Associations should always take 20-day preliminary notices and mechanic’s lien notices seriously. Time periods for responses and action are very short and failure to act can have grave consequences. The new notice requirements mean that an association must give individual notice within 60 days of the claim being served, but it is not clear what the penalties are for failure to do so. Associations that receive preliminary notices of claims of liens should contact the association’s legal counsel immediately to avoid any loss of rights and to avoid added pressure from homeowners that find themselves receiving notices of foreclosable liens.