Mechanic's Liens, Stop Notices, and Payment Bonds
In California, direct contractors, subcontractors, material suppliers, equipment lessors, laborers and design professionals, along with any person providing work authorized for a work of improvement on private property may record a mechanic’s lien. The mechanic’s lien holder is entitled to collect its debt against the proceeds from the sale of the property. When large sums are at stake, the lienholder can foreclose the mechanic’s lien and actually force the sale of a property. Given the significance of this right, the procedure to enforce it is very technical and can be complicated.
California law generally requires that a preliminary notice be sent prior to recording a mechanic’s lien. The failure to provide a preliminary notice to all necessary parties in compliance with the form and time requirements can be fatal to enforcement. A mechanic’s lien can be removed if the intricate rules and strict timelines are not precisely followed. From properly serving the 20-day preliminary notice to property owners, lenders and contractors, to sufficiently preparing and recording the mechanic’s lien, to filing a lawsuit to foreclose on the lien, we can help clients utilize practices that help ensure their mechanic’s liens are valid and enforceable so that they perform as intended—to ensure payment for work performed. Contact our office today to speak to a lawyer to assist you through navigating the courts and enforcing your mechanic’s liens.California Stop Payment Notices
Stop payment notices are available for public or private projects where there are funds held by a construction lender or owner. While mechanic’s liens attach to real property, stop notices attach to the funds held by a lender or owner. A stop payment notice on a private work of improvement will effectively freeze any unexpected construction funds in the possession of the owner as well as funds that are still being held by the construction lender.
A stop payment notice is useful when the real property is no longer valuable enough to satisfy a mechanic’s lien. Subcontractors, material suppliers, laborers and trust funds can serve stop payment notices on both owners and construction lenders. Time limits to serve a stop payment notice on the owner and lender are the same as for recording a mechanic’s lien. One exception is that a stop payment notice is not premature if served prior to the claimant completing its work on the project. If the stop payment notice is not accompanied by bond for 125% of the claim, then the lender has the option of withholding the funds. We always recommend that the stop payment notice for private works be bonded. On private works projects, subcontractors of all tiers and material suppliers are required to serve a preliminary notice in order to enforce a stop payment notice.Payment Bonds
Generally speaking, a surety bond involves a surety company that exists to ensure that another party (“obligor”) will perform as promised. If the obligor fails to fulfill its promise or meet its obligation, the surety will step in for the obligor and meet the obligation. If payment is not made, the surety and the general contractor are liable for rendering payment.
In California, the general contractor (“obligor”) buys a surety bond to assure the property owner (“obligee”) that payment will be made to the subcontractors and suppliers. Many large construction projects and public works projects require that the owner and/or general contractor post payment bonds. A statutory payment bond essentially protects all potential lien claimants by requiring the surety to pay mechanic’s lien and stop payment notice claims in the event the owner or contractor does not make required payments. If a contractor and/or subcontractor do not get paid, these types of bonds serve as a source of funds for payment. Subcontractors and other lower-tier parties may not always be aware that a payment bond has been issued; it is always a good idea to get this information early in the project.
The payment bond is very useful if the general/prime contractor or other party that has hired your company goes bankrupt. A payment bond is not required on private works, but may be posted and/or recorded by the property owner or any contractor on a private works project. Payment bonds are rarely used for private projects, however, because of the additional costs. A claim against a California payment bond must be enforced with a lawsuit. For further questions about enforcing a claim on a payment bond please call one of Lockhart Park, LLP’s construction attorneys today.