California Lien Laws and Other Construction Claim Remedies - Webinar

You get paid when you are working on a construction project as either a contractor, a subcontractor, or a material supplier in California. The tips in this article will help you be the first in line to get paid, and you will be before others who do not do these things.

In particular, the preliminary notice, four types of releases (release on progress payment, final payment, conditional, and unconditional), and how to properly use them will be discussed. Mechanic's liens, stock payment notices, payment bond claims, and a little bit of the Miller Act which governs federal projects will be discussed. Finally, we will look at some forms and talk about procedures and deadlines.

While we will discuss many ways to do this all yourself, SunRay Construction Solutions can do all these things for you at a reasonable cost.

California Private Project Construction Claim Remedies

First, we will talk about private work projects. Generally, the procedures that you follow depend on whether your project is a private works project, which is owned by private people on private property, or it is a public works project which is generally on public property.

Although sometimes it is an issue when it is on private property with public funds. But many of those issues are labor issues rather than dealing with mechanic’s liens, stop payment notices, and bond claims.

As to private projects, first we will discuss the preliminary notice.

Preliminary Notice/Preliminary 20-Day Notice

Below is the form of a Preliminary 20-Day Notice. It is kind of broken into two parts.

Serving this preliminary notice, which is sometimes called a Preliminary 20-Day Notice, is a prerequisite. You must do this in order to pursue a California mechanic’s lien, a stop payment notice, or a payment or a payment bond claim.

Specifically, subcontractors and material suppliers to a project are required to serve this notice on the owner, and you can see above that the owner, the direct contractor, and the construction lender to the extent there is one (a lot of times there is not a construction lender).

Direct contractors – those who have a direct contract with the owner of the property are not required to serve a preliminary notice on the property owner in order to pursue a California mechanic’s lien against the owner.

However, it is important to note this: if there is a construction lender on the project, they would typically have a construction loan deed of trust recorded. Then the direct contractor does have to serve the notice on that lender.

So, to reiterate, if you are the direct contractor, generally, you do not have to serve a preliminary notice on anyone unless there is a construction lender in which case you should serve the preliminary notice. You should serve it on the owner, and the construction lender if there is a construction lender.

i. Procedures and deadlines for serving preliminary notices

Now we will discuss the procedures and deadlines for serving the preliminary notice. Direct contractors, subcontractors, and suppliers have to fill out and send the above form within 20 days after first furnishing labor, materials, and equipment to the job site.  

It can be sent earlier, but it should be sometime between the time you have some type of contractual agreement and beginning work or supplying materials before 20-day passes. You should serve it either by registered mail or certified mail return receipt requested. Or you can use express mail or overnight delivery by an express carrier like FedEx.

You want to make sure it is the correct addresses of the recipients that you are sending it to. Often, you can find the correct address in your contract documents. There is also a case out there that when someone was given incorrect information or address, still later on, the stop notice, or bond claim would be good because you were given bad information by the owner or the general contractor.

But you should not rely on that too much. You should try to get the correct addresses for everyone. Of course, before you send out the notice, always make a copy of the fully completed notice for your records. Then you want to save your receipt for certified mail or whatever you get from the express carrier.

Then if someone signs for it when that comes back, be sure to save that because it could be a long time later that if you have to go to court, you will need these things to prove that you sent out your preliminary notice.

You can also hand serve the preliminary notice, but that is not recommended. Because it is much more difficult to prove without that objective proof that you did so. The document above, itself, is pretty self-explanatory. You fill in the blank spaces with information about the owner, the construction lender, and the direct contractor.

As seen above, there is a section that says you are notified that you are the claimant. You describe the work, you get the address where you did the work, and you state who you contracted with. It may be the direct contractor, it may be the owner, it may be a subcontractor. Then you give an estimate of the total price for the labor. That would be your contract amount.

This does not mean that later on maybe your lien will be for a larger amount because of change orders and things like that. But at the time you fill this out, basically put in your contract amount.

Then there is the Proof of Service Affidavit above. You have to swear that you serve this in the mail, not through regular mail, but you can do personal delivery. At the top of the document, out of the choices, you can see a, b, c.

It is suggested to use (b) which is to send by registered mail, certified mail, or overnight mail by an express carrier to the proper address. It is not recommended to mess around with (c). Then you sign and get it out there, and you make copies for yourself.

That is the preliminary notice.

Remember, you have to do this generally. Later on, if you do not get paid, you have a mechanic’s lien, a stop payment notice, or a bond claim as a remedy.

Statutory Waivers and Releases

As the project progresses, there are four types of statutory waivers and releases that you might be given. Now we will discuss which ones to use and at which time.

i. Conditional Waiver & Release on Progress Payment

The first of the four is a Conditional Waiver and Release on Progress Payment. You can only use this if a payment is promised or you get a check, but the check has not cleared the bank, because it is conditional. The condition, which is referenced in the title, you can look up the code sections on these.

You can see that it is §8132 if you want to read more about it in the California Civil Code, which you can find online very easily.

ii. Unconditional Waiver and Release on Progress Payment

Now we have the Unconditional Waiver and Release on Progress Payment. This is a Progress Payment, and it is unconditional. What that basically means is that the check has cleared the bank. So you are going to waive all your claims.

In this unconditional waiver, you put the information in here. Each section is self-explanatory – you enter who made the check, the amount of the check, and who the check is payable to. If there are disputed issues, you can write them out right here. So you waive claims for everything as long as the check clears.

iii. Conditional Waiver & Release on Final Payment

On your final payment, this is when you have been paid everything on the project. You are going to waive your claims to the extent of your payment on the date that you send this out. If there are disputed issues, you can leave it out right there. So you waive claims for everything, as long as the check clears.

iv. Unconditional Waiver & Release on Final Payment

The very final waiver and release is the Unconditional Waiver and Release on Final Payment. It is unconditional because your check cleared.

Mechanic’s Lien

A mechanic’s lien is a wonderful and powerful tool because what it does is it allows you to get paid for work that you did. You may get paid from the proceeds of the sale of the property. As you can imagine, it is a very powerful tool against the owner of the property.

Something can be done to get around it, someone could bond around it. You could get a mechanical release bond but all that does is it substitutes the bond.

Date on that stamp and you have it, it is going to be the date that was recorded. What you want to note, which is also very important, is that from the date that you will see, you have 90 days (which is 90 calendar days) to get this worked out and get paid. Or you are going to have to file a lawsuit before foreclosing on the mechanic’s lien.

So your two choices if you go beyond the 90 days is that your lien will expire and the other party could force you through the courts to release it because it is expired.

It is self-explanatory that you fill out the same basic information as on the previous form. You state the amount of money that you got paid. There is something here about an interest rate. If your contract states an interest rate, then you should put it in there. Otherwise, you should feel free because of California laws on interest to put in 10% per annum. Because there is a code section on that that would allow that.

Notice of Mechanic’s Lien

The form itself for the mechanic’s lien is three pages. The front page is the most important as below.

The second page is the same as the mechanic’s lien form above. You have this language in your mechanic’s lien and then the third page is the Proof of Service. The Proof of Service is what you would serve on the owner of the property.

Proof of Service Affidavit

Then you have an alternative Proof of Service below, and if you are unable to reach them, you can serve on the construction lender and/or the original contractor.

What it is recommended to do if you have to do this and you are not using the services of SunRay to do this for you, is you would serve both. You should serve the first one on the owner and the second on the construction lender and the original contractor if there is one. That way, you feel better that you have not missed something.

There are timelines that you have to serve these within or have them recorded. If you intentionally inflate your mechanic’s lien for work that you did not do, there is a punishment in the law and that is that the entire construction lien will be dismissed by the court. So be careful to put in good faith, the amount that you think is appropriate.

Let us talk about the timelines for recording your mechanic’s lien.

Notice of Completion or Notice of Cessation

If there is a valid Notice of Completion or Notice of Cessation recorded on the project, then there are timelines. Then there is a different timeline if there is no Notice of Completion or Notice of Cessation. Then there is a little bit of a distinction between whether you are a direct contractor, with a direct contract with the owner, or a subcontractor or a supplier.

i. Filing a mechanic’s lien as a direct contractor with Notice of Completion/Notice of Cessation  

So with direct contractors, if there is a valid Notice of Completion recorded on the project, then the direct contractor will have 60 days after the Notice of Completion or Notice of Cessation was recorded before they must record their mechanic’s lien in order for it to be timely.  

ii. Validity of the Notice of Completion

When it comes to Notices of Completion and Notices of Cessation, there is something that is often violated by the owner. So if the owner says you cannot file a mechanic’s lien because there is a Notice of Completion, note this – a Notice of Completion is valid only if it is recorded within 15 days after actual completion of work or improvement.

Half of the Notices of Completion seen are not valid because they are not recorded within that 15-day period. When you are getting ready to record your mechanic’s lien, you do not know if the Notice of Completion is valid or not valid.

You just need to record the mechanic’s lien, then if someone raises an issue, you will figure out whether the Notice of Completion is valid or not. Half of the Notices of Completion themselves are not timely, and if they are not timely you disregard them.

iii. Validity of the Notice of Cessation

There is also something called a Notice of Cessation. That is when a project never does conclude, but it stops, so then you can record a Notice of Cessation. But a valid Notice of Cessation can only be recorded after work on the project stops for a continuous period of 30 days.

iv. Filing a mechanic’s lien as a subcontractor/supplier with a Notice of Completion/Notice of Cessation

Now with subcontractors and suppliers it is different with the direct contractor. If you are a subcontractor or supplier and there is a valid Notice of Completion or Notice of Cessation, then you are only going to have 30 days to record your mechanic’s lien after that valid Notice of Completion or Notice of Cessation.

v. Filing a mechanic’s lien when there is no Notice of Completion/Notice of Cessation

Now there is another situation that develops here on when you record a new mechanic’s lien. A lot of times there is no Notice of Completion or Notice of Cessation. So in those cases, what you have to do is you are going to have to record your mechanic’s lien within 90 days after actual completion of the project whether you are the direct contractor, subcontractor, or supplier.  

It is recommended not to get close to those 90 days, because you may be off a little bit if it looks like you have tried and tried to get payment and it is not happening. Then you may not be sure when the actual completion is so you probably want to get moving and record your mechanic’s lien.

Note this: After you record your construction lien, you have 90 more days to file a lawsuit or get a release. So it takes quite a bit of time to get things worked out. You should note also that with private projects except for little residential projects of less than 5 units, the owner or the direct contractor is supposed to let you know.

If they do not let you know, then you have 90 days regardless of whether a notice was recorded or not recorded. It is just one of those distinctions that are good to mention.

Often it is difficult to tell. If there is no Notice of Completion, and even if you do not know when the completion was, to say whether they are within 10 days or 30 days for Notice of cessation, then when is completion?

These are some options to look at whether completion has occurred.

1. Whether there can be no dispute that all the work on the project is completed. Then there is actual completion.  

2. If work stops and the owner or the owner’s agent occupies the work of improvement. For example, let us say there is a McDonald’s restaurant that has a grand opening. Then that constitutes completion.

3. If there is a cessation of labor for 60 continuous days, then you can say that equals completion. Then you have 90 days to record your lien.

So remember, if (1) there is actual completion, (2) work stops and the owner occupies it, or (3) there is cessation of labor for 60 days, then that equals completion.

You have 90 days to record your lien and then 90 more days to file your lawsuit.

How to record your construction lien

The procedure for recording your lien is you go down to the county recorder’s office and you record it there in the county where the property is located, not where let us say, the contractor, the owner, or someone’s office is. It is supposed to be done in the county where the property is that you worked on.

Then you need to send out the Proof of Service to the owner and/or the construction lender in the original contract. You send them a copy of what you sent to the county recorder’s office. Then as mentioned above, you have to file your lawsuit within 90 days. After that there is a way to extend that 90-day deadline.

It is called a ‘Notice of Credit.’ The owner of the property would have to sign it before a notary and then it would have to be recorded at the county recorder’s office. It is limited in duration, and it is a rare thing. Just know that it is possible to extend the lawsuit’s deadline.

The Stop Payment Notice

The Stop Payment Notice is different from the mechanic’s lien where you get to sell the property. What this notice does is you put in your claim, and it stops money from flowing either from the owner to the direct contractor or sometimes from the lender to the direct contractor.

What happens is when you create a stop payment notice, they will hold this money until it is clear that all the deadlines have passed for you to make a lawsuit claim on that stop payment notice. These remedies are not exclusive to each other. You can file a mechanic’s lien and then for the same amount, you can do a stop payment notice. Then for the same amount, you can file a payment bond claim.

You can do all three of them, so you really have a huge impact on the project and the flow of money. In the end you do not get paid three times, it gets worked out, you get paid once on the amount you are owed. Then possibly if there are attorney’s fees, you might get some attorney's fees if there is an attorney’s fee clause or a statute that would allow you to get attorney’s fees.

The Stop Payment Notice is a wonderful tool that you can use.

Since we are discussing private works, there is a distinction in your Stop Payment Notice. As you can see, it is similar to the form above and there is a Verification at the end. You have to sign that it is true and that you have served it on so and so individuals that are mentioned at the beginning.

But there is a distinction to draw on private works. If the project has a construction lender, then you are going to have to go to a bond company, or it would be recommended for sure that you go to a bond company and bond the Stop Payment Notice. Because if there is a construction lender and you want to get the money from the construction lender, there is no bond on the Stop Payment Notice, and it is a Stop Payment Notice bond, the construction lender is going to ignore your Stop Payment Notice.

They will just ignore it and they will not tell you that you need a bond so that is going to be up to you. They are not in the habit of telling people how to come and take their money. They are going to leave that to you.  

Be sure if there is a construction lender to get a Stop Payment Notice bond. Then what will happen is that either the owner or the lender, if they have the money, are going to withhold 125% of the amount of your claim from the general contractor.  

You may have your Stop Payment Notice and then you do not pay someone because you did not get paid. For example, let us say you are a subcontractor, and your supplier does not get paid. They will have another Stop Payment Notice if they pursue their remedies, and it really starts to become a problem for the direct contractor because a lot more money is being held up and is actually owed.

It is the same thing with the mechanic’s lien. They can overlap too because contractors, subcontractors, and suppliers at all levels can do these same things. So it is cumulative.

i. Procedure to get Stop Payment Notice

Now we will discuss the procedure to get this Stop Payment Notice. You fill out the above form, and you can see that you give it to the owner, the direct contract and the construction lender if there is one. You can also give it to the owner’s architect. That may be sufficient for services on the owner if you cannot reach the owner.  

Be sure when you serve it to use an overnight express carrier, registered mail, or certified mail so that you are able to preserve a copy of the proof that you served the notice.

ii. When to serve the Stop Payment Notice

When you serve the construction lender if there is one, you are going to be required to serve the manager or other responsible officer or person at the branch of the lender where the funds are being held. So if it is a local branch of the bank, you would serve that local branch. You would not serve the World Headquarters at Bank of America, just the local branches where you will be serving.

iii. Deadline to serve Stop Payment Notice

Now like with liens, there is a deadline to serve your stop payment notice that has to be followed. So if there is a valid Notice of Completion or Notice of Cessation – we talked about when they are valid based on their time on this already – then a subcontractor or supplier has only 30 days from the date the notice was recorded or before a Stop Payment Notice must be served.

iv. If there is no Notice of Completion

It has the same rules as before. Let us say that there is no Notice of Completion, then you wonder if it was actually completed, whether they occupied the property, whether there was no work for a continuous period of 60 days even though it did not finish. And if that is the case, then you time period to give your Stop Payment Notice expires 90 days after any of those events that show it is completed even though there was no Notice of Completion.

So you have some time to get this worked out in that case. But just know that if there is a Notice of Completion/Notice of Cessation then get everything done within 30 days. Get your Stop Payment Notice served within 30 days and if there is none, you have 90 days. Those are the deadlines on Stop Payment Notices, but then that is on serving you.

v. Deadline to file lawsuit

You also have a lawsuit deadline. So if you are going to sue somebody for not paying you, let us say you are going to sue somebody for not paying you. You are going to assume definitely for breach of contract because they have not paid you, if you have recorded a lien, you are going to have a claim on the mechanic’s lien.

You can sue on that which is 90 days after you recorded your mechanic’s lien, on a Stop Payment Notice, you can file your lawsuit any time after you wait 10 days after serving your Stop Payment Notice. But no later than 90 days after the project.

When a project ends, and there is a Notice of Completion, then you have 30 days plus 90 days to file your lawsuit. If the project ends and there is no Notice of Completion, you have to figure out when it ended and then you have 90 days to serve your Stop Payment Notice, and then 90 more days to file your lawsuit.

Those are the deadlines, and you can find all of them in the Civil Code in the § 8000 series, approximately from 8000 to 8500 or so.  

Payment Bond Claims

The third remedy that will be discussed here is the Payment Bond Claim.

There is not always a payment bond on private projects. Sometimes there is and sometimes there is not. But if there is a payment bond, then there is a form for it. That can be seen below.

Payment Bond Deadline

The payment bond deadline is generally pretty far out there. If you are going to serve this Payment Bond Notice, you should do it within 15 days after the Notice of Completion, and if there is no Notice of Completion, then probably within 75 days of completion.

A lot of times though, it is not even necessary. Generally, though, it is good to put people on notice, but in many cases, there are some distinctions in the law on this, where people just go directly to the payment bond. This would be part of their lawsuit which would include Breach of Contract, mechanic’s lien, Stop Payment Notice, and payment bond if there is one.

You serve the Payment Bond Notice on the bond principle. You can see that above in the beginning of the form, and that would generally be the owner, the direct contractor, or the subcontractor. Usually, it is the direct contractor and then the surety which is the bond company that issued the bond.

Then generally, your lawsuit is a little bit further away. It is going to be six months after completion of the work or improvement. That is with a recorded payment bond. If it is not recorded, it could be up to four years but of course why would you want to wait four years to file a lawsuit? You want to get your money.

Those are the basic rules on private works in California.

California Public Project Construction Claim Remedies

Now on public works in California, there are so many similarities.  

a. Preliminary notice

With public works projects, there is a preliminary notice. The preliminary notice is basically the same as with private works projects. In many regards, the main difference is if you are the direct contractor or the prime contractor on the project, you do not need to serve a preliminary notice unless there is a lender.

With public works, the direct contractor is not going to need to serve a preliminary notice at all.

Now, an interesting distinction with public works is the first-tier subcontractor also does not have to serve a preliminary notice. You can see the code sections above and if you want to look them up you would come to the same conclusion.

Now best practices say that though the first-tier subcontractors should serve a preliminary notice anyway. But if you did not it is not the end of the world. Because you should (with public works) be able to go forward with your claims.

That is the preliminary notice.  

b. Statutory waivers and releases

Then there are the statutory waivers and releases. We discussed the types above and they are the same four types as private projects. Those are Conditional and Unconditional on Progress Payment and Conditional and Unconditional on Final Payment. The main thing is to never send an Unconditional Waiver unless the check has cleared.

There are some programs out there like Textura that do not follow this. And they are probably wrong legally. But Textura is a program that protects your rights, and they will hold, an Unconditional release until you actually do receive your payment which comes from them anyway or through them.

c. Stop Payment Notice

With private works note that you have to get a bond on your Stop Payment Notice if there is a construction lender, otherwise you do not. Now with public works, you never need to bond for a public works Stop Payment Notice. You just serve it as is indicated on the form which is the same as the one above.

As noted above with private work, there is often not a payment bond. But there is almost always a payment bond on public works projects. That is available out there. Again, you can use all these remedies.

With private projects you can use the mechanic’s lien, Stop Payment Notice, or Payment Bond Claim. With public works, you can use the regular Breach of Contract, as with private projects. But also, you will be using a Stop Payment Notice with a bond. And you will be using the payment bond. Both are available and you can avail yourself of both remedies with public works.

d. Miller Act Bond claims

There is another type of public works that we will also go through briefly. It is not known how long this is active for but there is quite a bit of a discussion here.

Now with federal public works projects, everything discussed before is not going to work, because it does not apply. You are going to go through this document called the Miller Act.  

Instructions for Federal Public Works Introduction

Federal public works are unique in that there are no Stop Payment Notice or Mechanic’s Lien remedies available. Furthermore, although a remedy is available by proceeding against the original contractor’s payment bond under a federal law known as the “Miller Act,” and its corresponding Federal Regulations (40 USCS 3131 et seq. and 48CFR 28.101-1 et seq.), these remedies are not available to all subcontractors or suppliers. In addition, there are circumstances where a different form of security can be substituted for the payment bond (40 USCS 3131(b)(2)).

Among those who cannot sue on the Miller Act Payment Bond are third-tier subcontractors (subcontractors to a subcontractor who has a contract with the original contractor) and suppliers to suppliers. (See J.W. Bateson Company v. Board of Trustees, 434 U.S. 586 (1978)). As a general rule, every subcontractor, laborer, or material supplier who deals directly with the prime contractor may bring a lawsuit against the bond company providing the Miller Act Payment Bond. Further, every subcontractor, laborer, or material supplier who has a direct contractual relationship with a first tier subcontractor may bring such an action. See the diagram below. In the diagram, only subcontractors and material suppliers ABOVE the heavy black dotted line can proceed against the original contractor’s Miller Act Payment Bond.

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There are limitations to this. It is like a payment bond, but it has different rules. Going up to the diagram, this is really important: if you are going to do a public works project, you are always going to want to make sure that you are above the individuals above the dotted line as can be seen in the diagram.

Because let us say a dispute develops. If you are a first-tier subcontractor, you can make a claim against the original contractor for breach of contract. You can make a claim on the Miller Act Bond, if you are a material supplier to the original contractor, or if you are a material supplier to a first-tier subcontractor or, you are their sub-subcontractor (second-tier subcontractor), all these people can sue whoever owes them money. And they can sue the Miller Act Bond company to get their money from that.

The danger is if you are below the above-mentioned dotted line. None of the individuals at the bottom of the diagram can make a claim against the Miller Act bond. So it would be terrible if you are a material supplier below the dotted line and the material supplier above you goes bankrupt.

It is equally bad if you are a subcontractor or material supplier to the second-tier subcontractor and they go bankrupt. Because you would not be able to make a Miller Act claim. All you would be able to do is put in the claim against this person’s bankruptcy.

Maybe you would get a penny on the dollar, or pennies on the dollar years later. So you should avoid being down there unless you know that the person above you has done a lot of federal projects. They should know what they are doing and that they are going to disappear at the end of the job.

e. Rules on Federal Public Projects

There are some other distinctions now.

i. If claimant is the direct contractor

If you are the direct contractor, you have to pay for the Miller Act Bond, you cannot make a claim on it.  

ii. If claimant has furnished work or materials

If you furnish work or materials under a direct contract with the direct contractor, and you sue the direct contractor for Breach of Contract, you sue the surety on the Miller Act bond, and you have to file your lawsuit in federal court no later than one year from the date that you last furnished work or materials on the project.

That is not when the project ends, it is when you last furnished work or materials on the project no later than a year.

iii. If the claimant has a direct contractual relationship with a first-tier subcontractor

If you have a direct contract with the first-tier subcontractor, then you can sue the subcontractor for Breach of Contract. You can also sue the surety on the Miller Act Bond.

iv. Claimant must serve 90-Day Notice

But there is an additional rule – You have to serve a 90-Day Notice to the direct contractor no later than 90 days after you last furnished work or materials to the project.

There is a Miller Act form for making claims on federal public works projects. Again, you have to file a lawsuit against whoever owes you money, plus against the Miller Act Bond within one year after you furnished work or materials to the project.

v. If claimant only has direct contractual relationship with anyone other than direct contractor or first-tier subcontractor

If you are below that black dotted line, you can only sue whoever you had a contract with. You cannot make any claim on the Miller Act Bond.

This is brief information, but SunRay Construction Solutions can do all of these things for you.

But there above is a kind of do-it-yourself primer.