Mechanic’s Lien Coverage Requires Underwriter Approval.

This note updates the Virtual Underwriter section on California Mechanics Lien Law to reflect significant legislative changes that occurred effective July 1, 2012.  The body of law is now located under Part 6. Works of Improvement (commencing with §8000) of Division 4 of the Civil Code. 

Can the Construction Loan have initial priority over mechanic's liens?

Yes, depending on the circumstances. The determination of initial priority is subject to careful review of all relevant circumstances.

A Deed of Trust securing a Construction Loan will have priority over subsequently-recorded mechanic's liens if it was recorded and the obligation it secures was created before the commencement of the work of improvement to which the lien claimants furnished labor or materials. “Commencement of the work of improvement” generally means any visible activity on the subject property which indicates that construction has begun, and includes, but is not limited to: perimeter fencing to secure the site, deposit of building materials on the site, equipment located on the site which will be used for or during the construction work, grading, etc.

However, even if the Deed of Trust is recorded before the beginning of any visible work on the property, a lien claimant may obtain priority as a result of (a) certain types of off-site work begun previously, (b) advances by the lender in violation of the building loan agreement, or (c) lack of a valid obligation at the time work began. Civil Code §§8450-8458, and §8434.

If priority is lost, can it be reacquired?

Technically, no, priority cannot be “reacquired” if work has commenced prior to the recording of the Deed of Trust.  However, a claim of lien recorded after the date set for expiration of the lien period is not enforceable. The period within which a claim of lien must be recorded varies according to whether or not the owner has recorded a Notice of Completion or a Notice of Cessation of Labor. It also depends on whether the lien claimant is a direct contractor or sub-contractor. Civil Code §8412, §8414.

Additionally, bear in mind that even if there is a recorded Notice of Completion, if it was not recorded timely after the actual completion of work, it may not be effective. A Notice recorded before the completion date or more than 15 days after that date is defective. Filing of a premature or tardy notice is not the equivalent of the kind completion that starts the lien period running; all claimants in such a situation have 90 days after the true completion date within which to record claims, just as if no notice had been recorded. Civil Code §8182.

Is there a difference between on-site and off-site work?

Yes.  The real property on which a work of improvement is being constructed or performed is defined as a "site" in Civil Code §8040.  However, there may be improvements made to facilitate the construction on the site that are physically located outside the boundaries of the property. Such would be an “off-site” improvement. An example is the construction of a road for access to the site. Those off-site improvements may be a part of the entire scheme or work of improvement, and as such, contributors to off-site property are entitled to a lien on on-site property; and, work beginning on the off-site property signals, for mechanic's liens purposes, beginning of work on the on-site property.

If the on-site work and the off-site work are governed by separate contracts, it may be assumed that there are separate and independent works of improvement. In this circumstance, mechanic's liens recorded against on-site or off-site property date from the beginning of work on the respective properties. For example, if off-site work is done under a contract separate from a contract to build residential units on the land, beginning of the off-site work does not constitute beginning of any residential unit. Civil Code §8454.

Some services are off-site in character even though contributed entirely within the boundaries of the property reported on or insured. They include demolishing or removing improvements, trees, or vegetation; drilling test holes; grading, filling, or otherwise improving the real property or a street, highway or sidewalk in front of or adjoining the real property; construction or installation of sewers or other public utilities; etc. Off-site improvements may not involve a structure, and the benefits usually accrue to all property within the entire scheme or work of improvement, in addition to any portion separately reported on or insured. Civil Code §8042.

In addition be especially careful of off-site improvements, as there is an exception to the general priority rule of Civil Code §§8402 and 8450 in §84589(a)(3) as follows:

(a) Except as provided in subdivision (b), a lien provided for in §8402 has priority over:

. . .

(3) A mortgage, deed of trust or other encumbrance that was recorded before commencement of the site improvement, if given for the sole or primary purpose of financing the site improvement.  This subdivision does not apply if the loan proceeds are, in good faith, placed in the control of the lender pursuant to a binding agreement with the borrower to the effect that (A) the proceeds are to be applied to the payment of claimants and (B) no portion of the proceeds will be paid to the borrower in the absence of satisfactory evidence that all claims have been paid or that the time for recording a claim of lien has expired and no claim of lien has been recorded.

Is priority the same for all contractors/subcontractors on the same project?

All mechanic's liens, arising out of the same work of improvement, are on a parity with each other, i.e., of equal rank, regardless of the time the respective claimants performed labor or furnished materials. Consolidated Lumber Co. v. Bastren (1931) 118 CA 267. It is immaterial whether the person claiming the lien is a contractor or a subcontractor.  However, recall that the time for the filing of a lien is different depending on whether a lien claimant is a direct contractor or not.

What are the time periods for recording lien claims by original contractors and subcontractors?

Original Contractor:  (a) after the contractor completes the direct contract and (b) before the earlier of the following times: (a) 90 days after the completion of the work of improvement or (b) 60 days after the owner records a notice of completion or cessation.  Civil Code §8412.

Subcontractor:  (a) after he has ceased to provide work and (b) before the earlier of the following times:  (1) Ninety (90) days after the completion of the work of improvement; (2) Thirty (30) days after the owner records a notice of completion or cessation.  Civil Code §8414.

Completion of a work of improvement (i.e., the event that marks the beginning of the lien period) ordinarily refers to completion of the work of improvement as a whole. There are additional code sections addressing the situation where there are two or more separate residential units, and how the lien period is calculated, condominiums, and other types of situations.   

After what period of time may a mechanic's liens be waived if no suit is filed?

Generally speaking one year (1) after a mechanic’s lien is recorded.  However, see notable exceptions with regard to both a lesser time period and further extensions of such time period below. 

Civil Code §8460 provides that the claimant shall commence an action to enforce a lien within 90 days after recordation of the claim of lien.  If the claimant does not commence an enforcement action within that time, the claim of lien expires and is unenforceable. However, if the claimant and owner agree to extend credit and notice of the fact and terms of the extension of credit is recorded (1) within 90 days after recordation of the claim of lien or (2) or more than 90 days after recordation of the claim of lien but before a purchaser or encumbrancer for value and in good faith acquires rights in the property, the claimant must commence an action to enforce the lien within 90 days after the expiration of the credit, but in no case later than one year after completion of the work of improvement. If the claimant does not commence an action to enforce the lien within that time, the claim of lien expires and is unenforceable.

The owner's bankruptcy at the time a mechanic's lien is recorded or within the 90-day period extends the period for bringing an action to foreclose the lien until a trustee in bankruptcy is appointed and permission is obtained from the bankruptcy court to bring a foreclosure action, plus a reasonable time (e.g., five days) within which to file the action.

The Servicemembers Civil Relief Act (“SCRA”), formerly the Soldiers' and Sailors' Civil Relief Act of 1940, provides for a tolling of statutes of limitations and any other period limited by law, regulation or order for the bringing of an action or proceeding which may adversely affect the rights of servicemembers during and for a one-year period after their military service.  50 USCS Appx §526. The time for foreclosure of a mechanic's lien is extended by the SCRA when either owner or claimant is or was in the military service.  Clark v. Mechanic's Am. Nat'l Bank (8th Cir 1922) 282 F 589. Also See Bulletin SLS2015009

Is there a statutory procedure for affidavits of completion or Notices of Completion?

Yes.  A Notice of Completion must be recorded on or within 15 days after the date of completion of a work of improvement.

An erroneous statement of the date of completion does not affect the effectiveness of the notice if the true date of completion is 15 days or less before the date of recordation of the notice; however, a notice recorded before the completion date or more than 15 days after that date is defective. A notice of completion that does not comply with the provisions of this section is not effective. California Civil Code §8182.

Can a statutory bond terminate a mechanic's lien as an encumbrance on the title?

Yes. See Civil Code §8424.

Can the original, general, or subcontractor’s contract or waiver agreement subordinate or waive mechanic's liens by general contractors and/or subcontractors?

Original or general contractors can subordinate their own lien rights, but not any other party’s lien rights. Such permitted subordination may be done prospectively. See Moorefield Construction, Inc. v. Intervest-Mortgage Investment Company, et al., (2014) 230 Cal.App.4^th 146, 178 Cal.Rptr.3d 709) and Civil Code §8122.

Can a bona fide purchaser or bona fide lender take free of mechanic's liens later recorded for earlier work?

Yes, if the lien period had already terminated when the bona fide purchaser or encumbrancer acquired his/her/their interest(s), there was no agreement for credit or extension of the lien or of the time to enforce the same recorded in the office of the county recorder prior to the acquisition of the rights of such purchaser or encumbrancer, and there is no action brought to enforce a lien within the 90-day statute of limitations or within the time of any extension.

What are the customary requirements for issuing Loan Policies on construction loan mortgages?

Construction loan polices that will include Mechanic’s Lien coverage must be submitted for Underwriter approval as a Special Risk. For transactions where there is no loss of priority, generally, the minimum requirements will include the following: 1) STG Indemnity Agreement: Construction, together with financial data, from the borrower; 2) Construction Loan Agreement and cost breakdown, including hard and soft costs, from the lender. An inspection must be performed prior to the recordation of the insured mortgage to confirm whether there is a loss of priority due to commencement of work.  If the inspection discloses that work has commenced, there may be additional requirements that must be met prior to authorization to record, including further Indemnities, review of the project budget and related schedules, review of contractor information, and any other requirements or conditions based on particular circumstances of a given transaction, as determined by an underwriter.

See procedures outlined in the Bulletin below:

MU2010008

Is it customary to add a "pending disbursement" clause or mechanic's liens exception in the Loan Policy insuring a construction loan mortgage?

Yes, a pending disbursement clause or use of appropriate ALTA endorsements (32 and 33 series) is generally required where there is a loss of priority, and may be required under certain circumstances where there is no loss of priority.

See procedures outlined in the Bulletin below: 

MU2010008

Also subject to any bulletins relating to mechanic’s liens.

Updated July 29, 2016