Understanding Contractors Liens

Before entering into a home improvement contract or contracting for the services of a tradesperson, a homeowner is well advised to understand a powerful legal right that contractors, subcontractors, laborers, or material suppliers have to collect non-payment of services or materials supplied to a job. Under most circumstances, these individuals are allowed to file a Claim of Lien within 90 days of providing any work to a job, or the substantial completion of a project if they are not paid.

However, before a contractor can file a lien for non-payment, the contractor must “notify” the homeowner of his or her lien rights. Section 7018.5 of the California Business and Professions Code requires a contractor to provide a homeowner with a notification called a “Notice to Owner” prior to signing a contract for services to be performed. This notice states that under the “California Mechanic’s Lien Law”, any contractor, subcontractor, laborer, or material supplier who has improved real property but has not been paid for the work, has a right to place a lien on the improved property to secure payment of the monies owed to them.

The Notice to Owner is required to be in the original contract that is signed with a prime contractor. Sub contractors and material suppliers that are not directly contracted by the homeowner are required to provide them with a “Preliminary Notice” which can be sent via the mail. The Preliminary Notice provides basically the same information as the Notice to Owner, but it must be sent to the homeowner no later than 20 days after the claimant has first furnished labor, service, equipment, or materials to the jobsite.

Once a lien is filed, the claimant has 90 days to file a Lien Foreclosure Action in court. The Lien Foreclosure Action is a civil action that, if successful, could allow your property to be foreclosed and sold, with the proceeds from the sale used to pay the lien.

I spoke with Don Odell, an attorney with McNichols, Randick, O’Dea and Tooliatos, a law firm specializing in real estate and construction law. I asked his opinion of the impact that construction related liens have on the consumer. “Filing a lien on someone’s property can be a serious matter for both the contractor and the consumer.

If the contractor has not been licensed during the entire time on the job, or if the contractor does not have a legitimate reason for filing a lien, or if the contractor has not complied with the notice requirements, the contractor could be exposed to both legal and disciplinary action”, began Don.

“For a homeowner, a lien can prevent the refinance or re-conveyance of the property (subject to the lien) until the lien is settled”, Don continued. “If the contractor has recorded a lien and does not file a Lien Foreclosure Action within 90 days, the lien is unenforceable. If the contractor then fails to remove the lien, the homeowner can petition the court to have the lien removed, and may then seek recovery of the associated costs from the contractor.”

“On the other hand, if a Lien Foreclosure Action is filed by the contractor, the homeowner will have to defend against the action and may have to file a counter-claim for breach of contract in order to justify not paying the contractor in the first place.

The frustrating part about the mechanic’s lien laws is that the contractor essentially controls the matter and could delay the resolution of the lien for years. This can waste a lot of time and money for the homeowner even in the best of circumstances.”

Odell stated that although a homeowner may successfully defend against a mechanic’s lien and recover the potential attorneys’ fees and costs, fighting a mechanic’s lien is not a pleasant experience. His best practical advice for anyone in a dispute with a contractor is to make sure that you have everything documented. If you decide to withhold payment from the contractor until the work is completed, make sure you are working in good faith with the contractor to resolve your differences.

In the event that you cannot resolve your differences and wish to terminate the contractor, do so promptly and immediately record a Notice of Termination. While this will not prevent the contractor from filing a lien, recording the Notice will reduce the amount of time that the contractor has to file a lien from 90 days after the completion of the improvement, to 60 days from the date of the Notice of Termination. If the contractor is not paying attention, the reduced time frame may cause the contractor to miss the filing deadline, making the lien unenforceable.

Remember, any time that a lien is involved, the most critical supporting document you have is the contract that you signed with the contractor. Your contract will contain the agreed upon payment schedule, and a description of work to be completed, two of the most important pieces of information needed to determine the legitimacy of the claim. Your contract should also include a start and finish date, a detailed description of the work to be done, a down payment amount, a schedule of when payments are to be made and an explanation of what constitutes a completed job.

Resolving issues with liens and contracts can be a frustrating and lengthy experience for most people. Consumers need to protect themselves whenever they enter into a contract. The best way to do this is by working with a competent contractor, and having a well-written document with clearly defined terms. To assist the consumer in this matter, Don Odell has developed a six-page handout describing the various steps involved in the lien process, and what consumers can do to protect their rights.

SB 800, Part 2, Legal Limitations

When Senate Bill 800 was passed, the intent was to create a bill that would benefit both builders and consumers. The bill was designed to control to the soaring costs and occurrence of litigation involving construction defects. This bill affects newly constructed homes, town homes, and condos sold after the first of January 2003. One of the most controversial parts of the bill that will have the greatest affect on new home buyers is the fact that the bill establishes new statutes of limitations within which a claim for a construction defect must be made.

The new statutes of limitations contained in this bill are not all inclusive in terms of what they cover. Rather, they have been designed to apply to only specific components, under certain conditions, and for only stated periods of time. While these new statutes of limitations will be offering relief to builders, manufacturers and insurance companies, they are going to impact a homeowner’s ability to seek relief from construction related claims, as well as limit their ability to discover defects. Let me explain.

SB 800 requires several different specific periods of warranty coverage to protect the interest of the new homebuyer. The most basic coverage builders must offer is a minimum one year express warranty covering the “fit and finish” of certain building components. This is similar to the one-year warranty builders are offering now, yet it is limited to only the cosmetic and finish items in the house.

There are strict time limitations contained in the bill which require builders to be responsible for certain construction defects for up to a ten-year period. Although the ten-year time frame is similar to the previous California statute of limitation for latent (hidden) defects, SB 800 specifically lists categories of items that would be covered. These categories include the most litigated issues involving new construction; water penetration through the exterior of the building (siding, roof, windows and doors), structural issues (foundations, framing), soil issues (movement, settlement, drainage), and fire protection issues.

With regards to water penetration the bill expressly states that water shall not pass beyond, through or around any windows, doors, roof, decks, balconies, flashings, or trim of the building. Foundations, slabs, patios, walks, and drainage systems, installed as part of the original construction shall not allow water, vapor, or soil erosion to enter or come in contact with the building so as to cause damage to another building component.

The provisions governing structural and fire protection issues state that all structural components and foundations are required to be constructed according to the wind, fire, and seismic design criteria set forth in the code adopted at the time of construction, and shall not cause the structure to be unsafe. The requirements for soil basically state that soil shall not cause the ground upon which the structure is built, to become unusable for its intended purpose, and shall not allow damage to be caused to other portions of the house.

While these provisions of SB 800 provide much protection for the consumer, the particular provisions for the plumbing, mechanical, and electrical systems, there are substantial limitations on the provisions for walks and patios, landscaping and drainage systems, and manufactured products (windows, doors, fireplaces, plumbing and electrical fixtures, etc.).

The plumbing, mechanical, and electrical systems are required to operate properly and not impair the use of the house, or cause an unreasonable risk of fire. However, no action is allowed for defects in these systems after four years from the date of the original construction. This language suggests that these systems only need to be designed and installed so that they remain serviceable for a four-year period, which is a small percentage of a house’s normal life span of 50 to 75 years. Changing or repairing these systems because of material or installation defects can be expensive, disruptive to the structure, and should not really be necessary during the normal life of the house.

Paint and stains shall be applied so as not to cause deterioration to the building surfaces for as long as the manufacturer warranties them, yet no action can be brought after five years. Installed irrigation systems and drainage are required to “survive” for only one year, except that a claim can be made within two years of the close of escrow.

Finally, there is a “catch-all” clause that states the provisions in the bill are intended to address every function or component of the building, and if there is an issue that is not specifically addressed by these standards, it shall be actionable if it causes damage.

Also, if there is no representation of a “useful life” for a particular manufactured product, then the useful life will only have to be one year.

Anyone reading through SB 800 will realize that the time frames to file a claim for a construction defect are not as clear or specific as the bill intended. The fact that the bill contains some vague language, sets numerous warranty periods with various restrictions, and requires specific action on the owner of the building to maintain the building, will change how construction related issues are resolved, or tried and defended in court. A homeowner who is not familiar with the provisions of this bill could be at a definite legal disadvantage in trying to resolve a dispute involving construction defects.

SB 800 – New Rules for Builders – Part 1

If you purchased a new house after January 1, 2003, or are planning to buy one, Senate Bill 800 affects your rights as a homeowner, and the rights of a builder to correct deficiencies discovered in new construction. Senate Bill 800 was passed on August 31, 2002, and signed into law by Governor Davis on September 21, 2002. SB 800 applies to all condos, town homes, and single-family residences that close escrow after the first of this year.

This bill is significant because it makes major changes to the laws governing construction defects. Among other things, the bill eliminates the four and ten year statutes of limitations for patent and latent defects that homeowners now have to bring suit against builders. It attempts to define defects by establishing specific standards that components of a house must meet to be considered serviceable, and it creates a detailed process that both the builder and home owner must follow before litigation for defects can occur.

Up until December of 2000, a homeowner could sue a builder for construction defects as long as they were discovered within the four and ten year statute of limitations. However, in December of that year, the California Supreme Court handed down a decision in a case known as Aas v. Superior Court (2000, 24 Cal. 4th 627), that stated a builder was not responsible for construction defects unless the defect caused personal or property damage. This was a major setback for consumers and gave builders a legal defense to avoid being responsible for defective construction.

Senate Bill 800 attempts to change the effects of the Aas decision, and in the process creates an uncertain legal landscape for both builders and consumers. While the bill was drafted to provide more protection for both builders and homeowners, builders, insurance companies, and attorneys have clearly influenced its final form.

To understand the legal implications of SB 800, let’s look at what the bill entails. First, this bill states that any action seeking damages for construction defects against a builder, subcontractor, product manufacturer, or design professional, will have to comply with the requirements and time frames of this bill. The bill also says that a homeowner cannot file for a claim of defect(s) until the builder has had a chance to inspect and repair the alleged deficiency. These two requirements benefit both the builder and the homeowner.

In order to establish a claim, a homeowner must submit a written notice to the builder stating the defect(s). Then, the builder has 14 days to schedule and complete the initial inspection of the defect(s). If destructive testing is necessary, repairs must be done within 48 hours, and the costs borne by the builder. If a second inspection is required, it must be performed within 40 days of the initial inspection. After the defects have been substantiated, the builder, subcontractor, or manufacturer has 30 days to make an offer to repair the problem. These specific time periods are so restrictive that they could actually end up delaying the process and be argued by the builder or owner in court.

If the homeowner does not want the builder or subcontractor to actually make the repair, they can request up to three additional contractors to bid the repair of the defects, and then select one to perform the work. The builder would then pay the other contractor for the repairs. The builder is also allowed to offer a cash settlement in lieu of a repair. The bill also states that every effort shall be made to complete the repair within 120 days.

Under the provisions of this bill, the builder is not be responsible for defects or damages resulting from an act of God or nature, an alteration or wear and tear, a homeowner’s failure to maintain their home, or their failure to minimize or prevent damage from occurring. SB 800 puts specific responsibilities on homeowners to perform detailed maintenance (as provided by builders and manufacturers), and exercise care whenever modifying or repairing their homes. If an owner fails to properly maintain a component and damage occurs, the builder may not be responsible. Yet there is no language in the bill stating what normal maintenance is, or what specific duties an owner has to keep his or her home in good repair.

So what actually constitutes a defect? There are over 45 standards stating how certain components of a building shall function. The descriptions of the standards are very generic, somewhat vague, and essentially state the obvious. For example, the standards for components preventing water intrusion (exterior siding, windows, doors, roofs, foundations) state that the component shall not allow unintended water to pass beyond, around or through its designed or actual moisture barrier. What constitutes unintended water?

Another example of vague language in the bill is the standard for foundations, retaining walls, and other concrete surfaces, which states that there shall not be substantial cracking or vertical displacement. How much is substantial cracking or vertical displacement, one half inch, or two inches? Right now, there are no clear answers, and each situation would have to be judged separately. Without defined and measurable standards, builders and owners may not come to agreement on what really needs to be done to correct a defect.

While the standards attempt to define construction defects, they are not the panacea that the legislature had hoped for. To make matters worse, SB 800 has dramatically changed the statute of limitations within which various components are to operate properly, potentially compromising the quality of new construction. In my next column I will discuss the changes in these limitations, and what affect they will have on buyers of new homes.