Significant Changes to California's Mechanics Lien Law Coming July 1, 2012

Pillsbury Winthrop Shaw Pittman LLP

[authors: Chris R. Rodriguez, John S. Poulos, William S. Hale, P.E., Robert A. James, Amy L. Pierce]

Effective July 1, all of the existing statutes governing mechanics liens, stop notices and payment bonds in California will be repealed and replaced by updated statutes.

In September 2010, Governor Edmund G. Brown, Jr. signed into law SB 189, which makes a number of significant changes to the laws governing the creation and enforcement of mechanics liens in California (the "Mechanics Lien Law"). The law will also result in new statutes governing stop notices (on both public and private works), payment bonds and related claims.

While SB 189 relocates and renumbers the Mechanics Lien Law, many of the provisions are substantively the same. Among these are two provisions that were modified as part of 2009's A.B. 457 and went into effect in January 2011: a change in the required form of mechanics lien claim and method of service (Civ. Code § 3084) and the new requirement that claimants record a lis pendens within 20 days after filing an action to foreclose on mechanics liens (Civ. Code § 3146). Pillsbury alerted clients here in April 2009 to earlier proposed versions of these changes.

The remaining changes take effect on July 1, 2012. The most sweeping change is that all of the statutes making up the Mechanics Lien Law (currently Civil Code sections 3082 through 3267), including the law governing stop notices and payment bonds, will be repealed and replaced with new statutes (Civil Code sections 8000 through 8848 and 9000 to 9566). Lawyers and clients familiar with the old statutory scheme will need to retool for the new layout. A chart showing key provisions under the current law, and the locations of the corresponding provisions after July 1, 2012, is attached.

Despite the statutory upheaval, many of the provisions of the Mechanics Lien Law will remain substantively unchanged. The substantive changes taking effect on July 1, 2012 include the following:

Definition of Completion. The deadline for recording a mechanics lien is generally triggered by the "completion" of a work of improvement. Under current law, acceptance by the owner is one of the things deemed to constitute "completion." Under new section 8180, that is no longer the case. The remainder of circumstances that constitute "completion"—i.e., actual completion of all work on the project, occupation or use coupled with cessation of labor, a cessation of labor for 60 continuous days (or for 30 days after recording of a notice of cessation), acceptance by a public entity—remain unchanged. The former provision for acceptance by a private owner was recommended for deletion by the California Law Revision Commission because it was ambiguous, in that it did not identify a particular manner of acceptance or how that acceptance should be communicated to interested parties.

Time for Recording Notice of Completion. Under current law, owners must record notices of completion within a window of 10 days after actual completion of the project. Under the new law (section 8182), that time period is extended to 15 days.

Preliminary Notice. Under existing law, a "Preliminary 20-Day Notice" must be served by most types of lien claimants at the outset of their work, to preserve their lien claim, payment bond, and stop notice rights. Under the new law, this notice is referred to simply as a "Preliminary Notice." The required language for the Preliminary Notice has been changed. Also, section 8200 eliminates ambiguity in the current law and makes clear that contractors in direct contract with the project owner need only provide a Preliminary Notice to construction lenders and reputed construction lenders, if any.

Waiver and Release of Lien Rights. In order to ensure that a "downstream" subcontractor has validly released its right to assert lien, stop notice, or payment bond rights, the law requires that specific waiver and release language be used. Under the new law (sections 8132, et seq.), the required language has been changed slightly; one should be careful to utilize the form current as of the day the release is executed. The form utilized for progress payments (as opposed to final payment) does not cover certain disputed or extra work items, or claims based on breach of contract, so “upstream” parties may want to supplement the statutory form with additional releases.

Release Bond. Under the new law (section 8424), the amount of the bond required to release property from a lien has been reduced from 150 percent to 125 percent of the lien amount.

Attorney's Fees on Petition to Expunge Lien. The new law removes the current $2,000 limit on the amount of attorney's fees that are recoverable on petitions to expunge stale liens; under the new law, all "reasonable" fees will be recoverable to the prevailing party. This will create a stronger incentive for lien claimants that did not foreclose upon their liens to make sure that their liens are formally released. The new law also adds a requirement that an owner must first make a demand that the lien claimant withdraw the lien at least 10 days before initiating a petition to expunge.

The statute governing the transition to the changed features of the Mechanics Lien Law, Civil Code section 8052, provides that the validity of an "action taken" for purposes of the lien law is governed by the laws in place at the time of that action. This provision is not entirely clear, but best practice for contractors will be to use the forms required under current law through June 30, 2012 and then switch over to the new forms on July 1, 2012.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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