Your Dream home may be one construction project away from becoming a reality. However, if you are not properly protected in the construction contract, you could be left vulnerable. To protect yourself and your property during any construction project, it is in your interest to have an
attorney review, negotiate to add in or take out provisions and even draft your construction contract agreement to avoid payment conflicts and prevent Mechanics liens.
Mechanic’s liens are legal documents or a legal claim for unpaid construction work. Anyone who provides labor or materials to property improvements can file a mechanics lien if they are not paid after construction has been completed. When a contractor files a mechanics lien, they gain a security interest in the home or property, which creates a cloud on title and appears in public property records. This means anyone who buys your house would take the property subject to the contractor’s lien, or more likely, they would require you pay the lien off first. Further, banks and lenders are ordinarily unwilling to refinance homes or lend against properties that are burdened by liens.
Construction projects often require significant costs up front while property owners pay for the work after it is complete, so the people who end up providing labor and materials spend a lot of time, money and effort before they even get paid. Liens give leverage to the general contractors, subcontractors, suppliers, and laborers who provide work and materials for an improvement of a property and can place a claim on the property if they do not get paid for their contribution, and even force the property into foreclosure.
It can also be difficult for the owner of the property to identify everyone on the project to ensure they get paid. A subcontractor or a sub-subcontractor may not know who the property owner is on a project and if their hiring party does not pay their invoices these sub-tier parties have the right to place a lien on the real-estate to get the owner involved.
Mechanic’s Liens are a process rather than a standalone document, so as a property owner it is beneficial for you to know the initial steps contractors must take to file a claim so you can recognize these steps and documents.
Preliminary Notice- Preliminary Notice is a document sent at the beginning of a construction project that tells the general contractor, property owner and lenders the job has been assigned. Notices help promote project transparency and improves communication by giving all parties visibility of every subcontractor and supplier on the job, thus getting companies paid more often and more quickly.
Notice of Intent (NOI)- the NOI is a document that notifies the general contractor, property owner and others that a mechanics lien will be filed if payments are not made. NOIs are effective at encouraging payment without the need to file a lien. While not formally required to be filed in the state of California, a properly delivered NOI to lien notifies key project stakeholders of a payment problem they may not otherwise know exists and gives all parties an opportunity to resolve the problem before a more adversarial lien claim is filed.
Notice of Completion-In California, when work is done on a project the contractor is to file a notice of completion and record it with the county. An inspector from the city then goes to the property and does a survey of the work and if approved give the owner a Certificate of Occupancy and the property owner then has 30 days to make final payments to contractors, material suppliers and/ or the laborers. If the home owner does not pay within those 30 days, the contractor has 60 days to file the mechanic lien. If you are presented with a mechanics lien you now know to check with the city that a notice of completion was filed and recorded first.
File a Mechanics Lien– Filing a mechanics lien requires the contractor to fill out a lien claim form with the accurate details of the property, the project, work performed, and amount owed. The form is generally filed with the county recorders office where the project is located. Remember, unpaid contractors must follow the steps to file a mechanics lien carefully, or they risk losing their right to make the claim.
The best ways for you as the home-owner to save time, money and worry on your home improvement project and avoid mechanics liens are to be smart and thorough. Consult an attorney to review the agreement before signing a construction contract. Keep track of the paper work and make sure you receive Preliminary Notice, Notice of Intent (NOI), Notice of Completion recorded with the county. And finally, keep track of the deadlines. When you receive your Notice of Occupancy, be sure to pay the final balances owed with in the 30 days of receipt. If any disputes regarding payment do arise, you’ll be glad you had already retained an attorney at the beginning of the project.