Requirements for a California Mechanic’s Lien Based on Changes in California Law

By: Robert Wallace

The California statutes governing mechanics liens were repealed and replaced effective July 1, 2012. Even though such changes were made nearly a year ago, we still occasionally find that contractors are not complying with the claim requirements and owners are not requiring the new lien waiver and release forms. Although the majority of the procedures and requirements remain the same as before, the revisions have changed the numbering of the statutes and the language or attachments required in preliminary notices, mechanic’s liens and waivers and releases. Following is a very brief summary of certain provisions of California’s Mechanic’s Lien Law.

I. Determining Whether Lien Rights Exist.

Contractors, subcontractors, material suppliers, equipment lessors, laborers and design professionals (“Contractors and Suppliers”) that provide work authorized for a work of improvement may claim liens in that work of improvement and the real property in which it is situated. Civil Code Section 8400. A work of improvement includes construction, alteration, repair, demolition or removal, seeding, sodding, planting, filling, leveling or grading. Civil Code Section 8050. Contractors and Suppliers must have the right to use a mechanic’s lien. If the applicable work performed or material supplied was not consumed in the improvement, or used to improve the property, the applicable Contractors and Suppliers will not have a right to a mechanic’s lien. If a California contractor’s license is not in strict compliance with the Contractor State License Law, its rights to a mechanic’s lien will be impacted and possibly eliminated.

II. Lien and Stop Notice Rights Must Be Preserved by Serving a Preliminary Notice.

A contractor claimant, other than a general contractor, must provide a Preliminary Notice (formerly called a 20-day Preliminary Notice) to the owner, direct contractor and construction lender within 20 days of first furnishing work or materials. Civil Code Section 8200, et seq. A general contractor should provide the Preliminary Notice to the lender, but does not need to provide the Preliminary Notice to the owner. Contractors may give the Preliminary Notice at any time before work starts or products are delivered, and up to 20 days after. If such notice is given more than 20 days after work or delivery, a contractor’s lien rights only apply to the work or products provided 20 days before the Preliminary Notice was given, and any time thereafter. The Preliminary Notice should be delivered in person or by certified, registered or express mail, or overnight delivery, with receipt of the mailing or delivery as proof.

III. Serving and Recording the New Form of Mechanic’s Lien.

A claim of mechanic’s lien must be recorded after the claimant completes its contract and on or before 90 days after completion of the work of improvement. If the owner files a valid Notice of Completion, a direct contractor must record its lien (and mail a copy to the owner) within 60 days after recording of the Notice of Completion, and any other claimant must record its lien (and mail a copy to the owner) within 30 days after the recording of the Notice of Completion. Civil Code Section 8412, 8414. “Completion” occurs upon (a) actual completion of all work on the project, (b) occupation or use coupled with cessation of labor, (c) a cessation of labor for 60 continuous days, or 30 days after recordation of a Notice of Cessation, or (d) acceptance by a public entity in some cases. Owners can shorten the period for the recording of liens by recording a Notice of Completion within a window of 15 days after actual “completion.” Civil Code Sections 8180, 8182, 8184, 8186 and 8190. A claim of mechanic’s lien must be signed, verified and recorded in the county where the work was performed at the project. Note that Contractors and Suppliers must deliver the mechanic’s lien to the property owner before they file it, and they must attach the proof of delivery with the lien they are recording. The copy of the lien must be sent by certified mail, and Contractors and Suppliers should keep a record of their mailing on an affidavit swearing that they sent it on the day it was sent and in the matter in which it was sent. Attach the affidavit of delivery and the proof of mailing with the mechanic’s lien when sending it for recording. The claim of mechanic’s lien must include (a) a statement of the amount owed, (b) the name of the owner, (c) a description of the work furnished, (d) the name of the person who contracted with the claimant for the work, (e) a description of the property (i.e., address or assessor’s parcel number), (f) the claimant’s address, (g) a proof of service of the claim, and (h) a statement containing language specified in the statute. Civil Code Section 8416. There is not a statutory form of mechanic’s lien.

Note that a claimant must generally sue to enforce its lien within 90 days after recording the mechanic’s lien. Civil Code Section 8460. After the 90-day period following the recording of the mechanic’s lien, the lien will expire and will be of absolutely no effect unless the Contractor or Supplier: (i) extends the lien for an additional 90-day period; or (ii) files a lawsuit to foreclose on the lien. Extending the lien may be difficult, because it requires the property owner to sign a written consent to such extension.

IV. New Form Waiver and Releases.

Note that the required forms for obtaining conditional or unconditional waiver and releases for progress and final payments have changed. They are provided in Civil Code Sections 8132-8138.

Feel free to contact us if we may be of any assistance with mechanic’s lien issues.

Supreme Court Makes Contract Terms Critical

By:  Donald J. Hamman

Early this year, the California Supreme Court reversed the long-standing rule in California that a plaintiff cannot claim fraud based upon an alleged misrepresentation that is directly contradicted by a written contract that the party signed.  Now, based upon the decision in Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Assn. (2013) 55 Cal.4th 1169, filed January 14, 2013, a party can allege a fraud and proceed to trial based upon an allegation that they were promised something that the contract says they were not promised.

More specifically, in that case the borrowers signed a written contract restructuring their $776,380.24 debt.  When the borrowers defaulted, they sued the lender for fraud, claiming that the lender’s vice-president told them before the documents were signed that the lender would extend the loan for two years in exchange for collateral consisting of two ranches, but the documents provided for a three month forbearance and eight parcels as additional collateral.  The borrowers allegedly signed the documents without reading them, although they admitted initialing three of the four pages listing the eight parcels of real estate pledged.

The lender convinced the trial court to dismiss the case (summary judgment) because the alleged representations directly contradicted the terms of the written agreement.  The lender relied upon a 1935 decision of the California Supreme Court in a case involving very similar facts, holding that the validity of the agreement could be challenged if there was some “independent fact or representation, fraud, or breach of confidence, but not a promise directly at variance with the promise of the writing.”  (Bank of America etc. Assn. v. Pendergrass (1935) 4 Cal.2d 258, 263.)  The California Supreme Court reversed that decision this year.

Now, a borrower or other plaintiff can simply claim that they were promised one thing but the documents reflect another, and if they are able to provide some credible evidence (like their personal testimony or recollection), then summary judgment should be denied and the plaintiffs are entitled to a trial.

There are some things that can be done to minimize or mitigate the effect of this recent decision, and we recommend that legal advice be obtained when contracts are negotiated, drafted and executed.  However, it is now easier than ever to sue for fraud in the inducement of a contract.

Beware Pitfalls Caused by New Requirements that Public Agencies Pay Recording Fees

By:  Cyrus Torabi

Many local governments in California continue struggling to balance their budgets.  Largely unable to raise taxes and having undertaken relentless expenditure cuts, they are also desperately searching for additional revenue sources.  It comes as no surprise, then, that the Orange County Recorder’s Office has invoked an obscure and seldom-used statute to require public agencies to pay a fee when recording lien termination documents.  While the recording fee is hardly substantial, failure to know about it and plan ahead can cause serious consequences to the project timeline.

Public agencies are generally exempt from having to pay documentary transfer taxes and recording fees.  (Rev. & Tax Code, §§ 11921, 11922; Gov. Code, § 27383.)   There is an exception to this rule, however, for recording lien releases, involving public agencies, frequently used in many types of municipal financings; e.g., where municipal bonds are payable through a lease-revenue structure in which lease documents are recorded for the protection of bondholders, or in connection with development projects.

Although public agencies have customarily paid no recording fees for such documents as lien releases, county recorder’s offices have the right to collect a fee:

Notwithstanding any contrary provision of the law, the fee for recording every release of lien, encumbrance, or notice executed by the state, or any municipality, county, city, district or other political subdivision shall be eight dollars ($8) if the original lien, encumbrance, or notice was recorded without fee as provided by Section 27383 of the Government Code.
(Gov. Code, § 27361.3.)

Despite the fact that it has been on the books since 1974, this statute has been so rarely invoked that attorneys, title companies, recording agents, and other real estate professionals may not even know it exists.  But since late 2012, the Orange County Recorder’s Office has indeed been requiring public agencies to pay the $8.00 fee when recording lien releases, and no doubt other county recorders will soon follow suit.

While an $8.00 recording fee can seem inconsequential, failure to properly prepare lien releases or to be prepared to pay the required fee when submitting documents for recording could delay the closing of a transaction involving a public agency, result in erroneous title records or (worst of all) cause a title insurance company to refuse to issue a title insurance policy.  For instance, the inclusion of the usual, standard language on the cover page of a lien release to the effect that the document is exempt from recording fees could lead a county recorder’s office to reject the lien release.  Also, recording agents will not pay the $8.00 fee without express authorization from the client, so it is important to ensure that the fee is included in the recording agent’s charges.

In order to avoid these pitfalls, counsel experienced in representing public agencies should be appointed to oversee the process of recording lien releases in transactions involving a municipal entity.  Further, savvy practitioners of public agency law are keeping an eye out for other dormant statutes like section 27361.3, which county recorder’s offices might dust off and invoke in their attempts to find more revenues.

Stradling’s public agency law specialists are experienced in public/private partnerships, development agreements and the issuance of municipal bonds, including bonds secured by land and land-based taxes.  Read more here.

AB 1103 – New Energy Use Disclosure Required by Commercial Building Owners

By:  Javier F. Gutierrez

A new law, Assembly Bill  1103, requires nonresidential building owners throughout California to benchmark and disclose their building’s energy use in advance of the sale, lease, or financing of the entire building.  Known as the “Energy Use Disclosure Law,” it is codified at California Public Resources Code section 25402.10.   This new obligation creates additional work for property owners and their brokers and property managers, and failure to make the required disclosures creates risk of potential claims by lenders, buyers and tenants.  This new law becomes effective as early as July 1, 2013.

The first steps in complying with the Energy Use Disclosure Law are for building owners to (i) open an account at the EPA’s ENERGY STAR® program Portfolio Manager website, and (ii) request all utility and energy provider companies serving the building to release energy use data for the entire building from the most recent twelve (12) months to the owner’s Portfolio Manager account.  The utility companies are required to upload at least the most recent twelve (12) months of the entire building’s energy use within fifteen (15) days of receiving a request from a building owner.  After all the utility companies serving the building have uploaded the building’s energy use data, a building owner must then access the website and download from its Portfolio Manager account the following disclosures: “Disclosure Summary Sheet, Statement of Energy Performance, Data Checklist and Facility Summary”, and also complete and submit a Compliance Report.  The disclosures expire thirty (30) days after they are generated.

The compliance schedule proposed by the California Energy Commission requires commercial property owners to comply with the reporting requirements starting July 1, 2013.  The disclosure obligation will be phased in over six-month time spans based on the square footage of the building.  Owners of buildings with a total floor area measuring more than 50,000 square feet will be required to comply first, followed by owners of buildings measuring more than 10,000 square feet and those of buildings measuring at least 5,000 square feet.  Initially, the proposed regulations required owners of buildings in excess of 50,000 square feet to comply with the Energy Use Disclosure Law on January 1, 2013, but the compliance schedule was delayed by the Energy Commission to July 1, 2013, to allow for substantial notice to the public before the regulations take effect.

Although section 1681 of the proposed regulations adopted by the Energy Commission provides that the law applies to all nonresidential buildings in California, it is unclear whether or when buildings of less than 5,000 square feet will be required to comply.  The schedule of implementation stated in section 1683 of the proposed regulations omits any such effective date for small building owners, creating some confusion.

Finally, based on the definition of “Building Owner” in the proposed regulations, the Energy Use Disclosure Law will impact the owner and “an agent authorized to act on behalf of a person possessing title” (i.e., the owner’s broker and property manager).

Owners, brokers and property managers should be aware that the disclosure must be made as soon as practicable prior to execution of the sales contract or lease, or submittal of the loan application.  Failing to make the disclosure is a potential source of liability.  Thus, real estate professionals should now update their standard form purchase and sale agreements, leases, and financing documents in order to ensure compliance with this new requirement prior to the July 1, 2013 effective date.

New California Law Seeks to Decrease Frivolous Disability Access Lawsuits

By:  Robert C. Wallace

Effective September 19, 2012, California Senate Bill 1186 was adopted and became law.  The law seeks to curb frivolous Americans with Disabilities Act access lawsuits in California and to give those with disabilities greater access to businesses.  The gist of the new law is to give incentives for property owners to have their buildings inspected by a Certified Access Specialist (“CASp”) and correct any violations.

Key points of the law are as follows:

• It bans “demand for money” letters for attorneys in disability access cases.  In such letters, lawyers often order businesses to pay a set amount, plus their high legal fees, in exchange for dropping the lawsuit.  Attorneys may still send letters to businesses alerting them of potential violations, but such letters may not include a demand for payment of money.  Attorneys must also send a copy of such letters to the California State Bar, in order that it may examine the letter to make sure it meets the requirements of the law, and to the California Commission on Disability Access (the “CCDA”).
• A defendant in a lawsuit may request a stay of litigation in an early court evaluation conference if:  (i) the claim pertains to a location where new construction or improvements were approved after January 1, 2008 by the local building permit and inspection process; (ii) the claim pertains to a site that has a CASp inspection report; or (iii) the property owner or tenant is a small business (defined as having 25 or fewer employees and no more than $3.5 million in gross annual receipts).
• Small businesses will have 30 days to fix violations and their statutory damages may be reduced from $4,000 to $2,000 per violation.
• If (i) a business is operating in a location where new construction or improvements were completed between January 1, 2008 and January 1, 2016 and approved by the local building permit and inspection process, or (ii) the claim pertains to a site that has a CASp inspection report, such business will have 60 days to fix a violation and its statutory damages will be reduced from $4,000 to $1,000 for each unintentional violation of construction-related accessibility violations.
• Commercial property owners must state, on all lease forms or rental agreements executed on or after July 1, 2013, whether the property being leased or rented has undergone an inspection by a CASp.  If the property has been inspected by a CASp, such form or agreement must state whether the property was determined to meet all requirements.
• To prevent “stacking” (multiple claims arising from the same construction-related accessibility violation on different particular occasions), the courts are now required to consider the reasonableness of the plaintiff’s conduct in light of the plaintiff’s obligation to mitigate damages.  The CCDA will compile a “top ten” list of violations and will post them on its website on or before July 1, 2013.  It will also list those attorneys who file the bulk of the lawsuits.

The law adds Section 6106.2 of the Business and Professions Code, amends Sections 55.3, 55.52, 55.53, 55.54, and 55.56 of the Civil Code, adds Sections 55.31, 55.32, 55.545, and 1938 to the Civil Code, adds Section 425.50 to the Code of Civil Procedure, amends Sections 4459.8 and 8299.05 of the Government Code, adds Chapter 7.5 (commencing with Section 4465) to Division 5 of Title 1, and Sections 8299.06, 8299.07, and 8299.08 to the Government Code, and adds Section 18944.5 of the Health and Safety Code.

Professional Services Insurance Exclusion Applied to Real Estate Manager

By:  Donald J. Hamman

In Golden Eagle Insurance Corp. v. Lemoore Real Estate and Property Management, Inc. (WL 1670475), a Court of Appeal decision filed May 14, 2012 but not approved for publication, an insurance policy exclusion for professional services was held to exclude coverage and a defense, in a negligence and wrongful death lawsuit against a real estate broker providing property management services.

In that case, a fire caused the death of five people, whose heirs sued alleging that the property manager had failed to maintain and control the apartment complex in a safe condition.  The property manager tendered the claim to the insurer, Golden Eagle, under a commercial general liability (“CGL”) insurance policy.  Golden Eagle denied coverage, and sought a judicial declaration that the insurance policy did not provide coverage on the claim.

The court concluded that the “professional services exclusion” denying insurance coverage for injury or damage caused by the “rendering or failure to render any professional service” extends to any act within the insured’s occupation or employment whether or not it requires specialized knowledge or training.  So if the cause of the harm was something as simple as replacing batteries in smoke detectors, the insurance policy does not apply even though the act of replacing batteries might not be considered by some to be “professional services.”

The exclusion for professional services in commercial general liability policies has also been held to avoid insurance coverage for ear-piercing in a retail cosmetics store, providing escrow services, and a plumber installing a water heater.  In each case, there should have been coverage under an “errors and omissions” (“E&O”) policy, but there was no coverage under the CGL policy.

This is a good reminder to review insurance policies and coverage before a loss is suffered; and to insist that those hired to provide services have E&O insurance with suitable policy limits.

Only One Option to Renew Based on Lease Ambiguity

By:  Javier F. Gutierrez

Cutting corners when drafting an agreement can be costly.  The 2012 appellate decision in Ginsberg v. Gamson, 205 Cal. App. 4th 873, is an example of how an ambiguous lease provision can lead to unnecessary litigation and the potential for punitive damages.

Ginsberg concerned a dispute over a commercial lease and the landlord’s performance under that lease.  The parties disagreed as to whether the tenant had the right to unlimited extensions of the lease term, among other issues.  Initially, the trial court concluded that the lease granted the tenant the right to unlimited five-year extensions for 99 years and, in addition to compensatory damages, a jury subsequently awarded the tenant over $300,000 in punitive damages, based upon tenant’s claim for “intentional interference with premises.”

The appellate court reversed the trial court’s ruling, interpreting the option to extend the term of lease as a single extension right for only one five-year option period.

In rendering its decision, the court stated that the absence of evidence of “long-term” planning in the lease created further doubt on the perpetual quality of an extension provision that, on its face, did not clearly and unequivocally provide for unlimited extensions.  The lease contained numerous provisions that were consistent with a short-term lease, rather than a perpetual, decades-long leasehold.

Regardless, the lesson here — even though it may sound inherently obvious to those of us who routinely draft leases — is to strategically avoid ambiguous lease provisions. The crux of this dispute could have been avoided with clear and unequivocal language concerning the option to extend.