In what turned out to be more of a sprucing up than an overhaul, the majority of SB 189 went into effect July 1, 2012 and serves to modernize and reorganize California’s mechanic’s lien and stop notice laws.
Traditionally, mechanic’s liens served as a way to gain a security interest in property for those who provided labor or materials to improve property, but were not paid. Alternatively, a stop notice is the official notice to a lender that the claimant (one who provided labor or materials to a property owner) has a claim against undisbursed construction funds that may still be in the hands of a project owner or lender. If the lender holds undisbursed construction funds, it must withhold an amount sufficient to pay the stop notice claim.
After more than forty years on the books, the mechanics lien and stop notice laws no doubt needed a little updating — words like ‘materialmen’ sound as though they came straight from an eighteenth century novel. (Materialmen are renamed in the new law to ‘material suppliers.’) Not to make light of the new law — in fact, most of the changes are quite logical, requiring greater transparency and communication among interested parties to a construction or improvement project, and regrouping the law in new code sections to avoid the piecemeal effect.
Some of the pertinent changes to note, whether you are a lender, material supplier, contractor, or project owner, are:
- The phrase ‘stop notice’ has been changed to ‘stop payment notice.’ (Cal. Civ. Code § 8044)
- The phrase ‘original contractor’ has been changed to ‘direct contractor.’ (Cal. Civ. Code § 8018)
- The phrase ‘preliminary 20-day notice’ has been changed to ‘preliminary notice.’ (Cal. Civ. Code § 8034)
- The definition of the phrase ‘site improvement’ has been expanded to include ‘[a]ny other work or improvements in preparation of the site for a work of improvement.’ (Cal. Civ. Code § 8042)
- An owner of property or a project owner does not have to ‘accept’ the work performed for the work of improvement to be considered complete. (Cal. Civ. Code § 8180)
- The ‘notice of completion’ filing deadline for a property or project owner has been extended to fifteen days. (Cal. Civ. Code § 8182)
- The bond required for a property owner to dispute a mechanic’s lien has been reduced from 150 percent of the claim value to 125 percent of the claim value. (Cal. Civ. Code 8424)
We want to highlight one important change — claimants with a direct contractual relationship with a property/project owner or purported owner are now required to give preliminary notice to the construction lender, if any, before recording a lien claim, giving a stop payment notice, or asserting a claim against a payment bond. Compliance with this section is a necessary prerequisite to the validity of a lien claim, stop payment notice, or a claim against a payment bond. (Cal. Civ. Code § 8200)
It is especially important for construction lenders to take note of this requirement, since a failure of a direct contractor to provide the requisite preliminary notice to the lender may serve as a complete defense against the claim, insofar as the lender is concerned. Time will tell how strong a defense the failure to provide preliminary notice will be as case law develops.
Construction lending can carry significant risk. The attorneys at Glass & Goldberg are committed to helping you minimize risk and manage uncertainty before, during, and after the deal. Glass & Goldberg provides high quality, cost-effective legal services and advice for clients in all aspects of business litigation, finance and transactional law. Call us at (818) 888-2220, email us at firstname.lastname@example.org, or visit us on the web at www.glassgoldberg.com to learn more about the firm and to sign up for future newsletters.