Valid Process? Unconstitutional? Invitation for Legislative Change?
Various sections of the California Civil Code, beginning with section 8000, protect the right of contractors, subcontractors and suppliers in the construction industry to obtain payment for work performed and materials supplied to construction projects. Under these statutes, unpaid claimants are entitled to use mechanics liens, stop payment notices and other methods to protect their right to payment. Mechanics liens allow unpaid claimants to sell the property where the work was performed in order to obtain payment. Stop payment notices force the owner or the bank to set money aside to pay unpaid claimants. Article XIV of our California Constitution even elevates the mechanics lien remedy to a “constitutional right”. The system generally works well, and claimants are paid.
As someone who practices and teaches construction law, I have noticed a seldom used statutory tool that seems to provide a mechanism for property owners under certain circumstances to prevent subcontractors and suppliers from imposing enforceable mechanics lien on property where work was performed. Under California Civil Code section 8520, it appears that all that an owner of property need do to avoid a mechanics lien on its property is to give a proper notice (per Civil Code section 8100 et seq.) to a person who has a mechanics lien right (a subcontractor or supplier) that the owner is invoking Civil Code section 8520 and that if the claimant is unpaid for work performed or materials supplied to the owner’s property that the claimant must either provide the owner with a stop payment notice or forfeit the right to a mechanics lien on the owner’s property. This would allow an owner to avoid a mechanics lien on its property if the claimant failed to send a stop payment notice to the owner.
Providing the “notice” under Civil Code section 8100 appears to be easy. It can be sent by “registered or certified mail or by express mail or by overnight delivery by an express service carrier”. It can even be by “hand delivery”. As far as the notice itself, it would seem that it can be very simple and easily performed under the process described below, which can be implemented within the office of any owner or developer.
The process begins with the “preliminary notice” described in California Civil Code section 8200 et seq. By law, subcontractors and suppliers are required to serve the owner with a “preliminary notice” if they wish to later record an enforceable mechanics lien on a property. The service of a preliminary notice is thus a key prerequisite to a subcontractor or supplier mechanics lien. To protect itself from a mechanics lien on its property, all it seems the owner has to do when it receives a preliminary notice from a subcontractor or supplier is to turn around and immediately send a notice to the same subcontractor or supplier (by registered or certified mail or by express mail or by overnight delivery by an express service carrier or by hand delivery) stating something like the following:
NOTICE Of OWNER INVOKING CALIFORNIA CIVIL CODE SECTION 8520
Owner (_____________) of the property located at _______________ (Property”) and as to which you have provided Owner with a preliminary notice pursuant to California Civil Code section 8200 et seq., hereby invokes its right under California Civil Code section 8520 to require that you give the Owner a stop payment notice if you are to any extent unpaid for work performed or materials supplied to the Property. Pursuant to Civil Code 8520 (b), if you are unpaid and fail to give the Owner a stop payment notice, as hereby demanded, you forfeit your right to a mechanics lien under Civil Code 8400, et seq.
By sending the notice, the Owner forces the claimant to serve a stop payment notice on the owner so that the owner has a legal right to withhold money from its contractor. If the claimant fails to serve the stop payment notice, the claimant gives up the right to a mechanics lien and generally has no right to any claim at all against the owner. The claimant has no contract claim against the owner because the claimant did not contract directly with the owner. The claimant has no stop payment notice claim against the owner because it did not serve a stop payment notice as the owner requested. The claimant has no enforceable mechanics lien claim against the owner because it was served with the 8520 notice and failed to serve a stop payment notice. The owner is thus well protected from any subcontractor claim against it.
I am unsure why owners have not, heretofore, regularly invoked this section and sent a notice such as this. The statute has been around since 1971 (former Civil Code 3158) and the process is simple. Perhaps it is because owners have no strong lobby to advise them to use statutes such as this, like Associated General Contractors might do for direct contractors or the American Subcontractors Association might do for subcontractors. Perhaps it is because the American Institute of Architects, which typically represents the interests of Owners in contracting matters, has not ventured into the market of state-by-state construction documents and considered this California statute. I cannot be sure. For 30 years as a practicing and teaching construction attorney, I have never seen the section invoked by an owner, until now. Finally, in recent weeks, I have seen this section invoked by an owner. Whether it is the beginning of a trend, I cannot be sure.
Certain Questions arise. First, I question whether the statute is even constitutional. After all, doesn’t a Constitutional mandate to preserve the right to a mechanics lien prevail over a statute that purports to degrade or defeat the same right? Thus far, no court has ventured to answer the question as it concerns this statute. Perhaps the legislature can step in to rescind Civil Code section 8520 and protect the constitutional right to a mechanics lien. On the other side of the equation though, the interests of the owners are also entitled to consideration. How are owners, who are quite willing to set aside money for claimants under a stop payment notice, to protect their properties from mechanics liens? After all, if owners are willing to set aside funds for a claimant and even invite a stop payment notice as per Civil Code section 8520, why should owners then also be burdened with a mechanics lien and the prospect of their property being sold out from under them? What is the best public policy? Whose interest should prevail? These are good questions for debate. Let the debate begin. I will be interested to see how it turns out.
Legal sources: California Civil Code sections 8100 et seq., 8200 et seq., 8520 and former Civil Code 3158.
Article by William L. Porter, Esq. in 2020. Mr. Porter is a principal in The Porter Law Group, Inc. in Sacramento, California. He can be reached by phone at (916) 381-7868. Visit the firm’s website at www.porterlaw.com and www.AppliedLegal.com