Thursday, December 24, 2009

Mechanic's Lien and respective rights of homeowner and contractor

In California, as in most states, any person or company (contractor or sub-contractor) that works on property has a powerful tool to make sure they are paid: the mechanic's lien. Liens are authorized as a matter of right in the California Constitution.

If the property owner does not pay for construction work, the contractor may record a document that gives notice of its Claim of Mechanic's Lien against the property. The document is recorded with the Recorder in the county where the property is located and will be a cloud on title to the property, signifying to the world that a contractor believes it is entitled to draw the dollar amount of its claim from the equity in the property. Depending on the type of contractor and whether the owner has recorded certain notices that construction is complete, the contractor has either 30, 60 or 90 days to record notice of its mechanic's lien.

It is quite easy for a contractor to record the mechanic's lien claim. It simply must prepare the single-page document and present it to the county Recorder along with any recording fees. There is no judge or jury to determine whether the mechanic's lien claim is valid at the time it is recorded. So, as soon as the lien is recorded and without any testing of its validity, a contractor can put a cloud on the property's title that can make mortgage lenders and potential property buyers shy away from the property.
Occasionally, and unfortunately, an unscrupulous contractor may abuse this process. Because the county Recorder will not question the merits of the claim, a contractor could record a mechanic's lien against the property even if the owner correctly believes no money is due and owing.
After recording the mechanic's lien, a contractor in California has exactly 90 days to file a complaint (lawsuit) in court to seek a judgment allowing the sheriff to hold a foreclosure sale on the property and use the proceeds to pay the amount of the mechanic's lien claim. If the contractor does not file the foreclosure complaint within the 90 days, the mechanic's lien becomes unenforceable or "stale." But, even a stale mechanic's lien still will appear on the property's title report until officially expunged and still can cause concerns to the potential buyers and mortgage lenders.
There is a procedure available to property owners that will allow them to remove the stale mechanic's lien from property records. Pursuant to Civil Code §3154, the property owner may file a verified petition seeking a court order acknowledging that that the stale mechanic's lien is unenforceable. The petition must state the following: (1) the date that the lien was recorded; (2) a description of the property; and (3) allegations that no action to foreclose the lien has been taken, no extension of credit has been recorded, the lien claimant is unwilling to execute a release and the owner has not filed for bankruptcy.

The lien claimant must receive service of the petition at least 10 days before the date set for hearing on the petition. Finally, the property owner will be required to prove that service of the petition and the order fixing the date for hearing both were made in compliance with the statute.

When property owners prevail on their petitions, they can recover some or all of their attorney fees from the mechanic's lien claimant.

Once the court order is obtained, the property owner can record notice of the order with the county Recorder, clearing the title. Then any prospective buyer or lender who sees the lien claim in a title report also will see the court order stating that it is invalid.