Code and Legal Topics
August 2002

Liens, Waivers, Releases

In addition to contract rights, contractors in California have the unusual right of Mechanics Lien. When the State constitution was established in 1879 it incorporated a special provision protecting the interests of workers and suppliers who helped improve real property. When an owner hires a general contractor he receives the services of the general’s subcontractors and materials suppliers with whom he has no direct contractual relationship and often no real contact.

The legislative intent was to recognize the value that tiers of laborers, subcontractors and material suppliers contributed to the property being improved and to entitle them to recovery of compensation from an owner with whom they had no contractual rights in the event the general contractor filed for bankruptcy protection. Over subsequent years statutes were written that refined the concept, created a lien process and specified the person or entities entitled to this remedy.

In order to perfect a lien (foreclose on the property and recover from the equity) a contractor or subcontractor must follow statutory procedures that are time sensitive:

PRELIMINARY NOTICE

The Preliminary Notice is not a lien but is rather a statutory notice that must be filed by contractors to preserve their lien rights. The ‘20 Day Preliminary Notice’ must be served on the property owner by a subcontractor, or anyone not having a contractual relation with the owner, within 20 days of the start of his work. The notice serves to make the owner aware of the obligation he is assuming through his contract with the general. Simply put, the notice says: “Your property is at risk if I am not paid by your general contractor”.

The notice must be served on the owner, the general contractor, the lender, and bonding company (if any) by means of certified mail or in person. Mechanics liens are not valid if the notice has not been served in the in the prescribed manner.
Having a direct contractual relationship with the owner, a general contractor is not required to serve a preliminary notice – but most generals do it anyway because it costs only $2.00, secures his position and may be mandatory if his contract is with a property tenant rather than an owner.

MECHANICS LIEN

The Mechanics Lien is essentially a pre-judgment attachment against a real property that will preserve the opportunity for a contractor to recover from the equity in the property if his suit is successful. The lien law seeks to treat the owner and contractor evenhandedly – strict time limitations apply to a contractor’s rights to file a valid lien.

The general contractor and subcontractors have a period of 90 days, after the completion of the work of improvement, in which to file a lien excepting where the following notices have been filed:

(1) Notice of Non-Responsibility – Commonly found (taped to the entry door) in tenant improvement work, this notice informs all workers who come to the job that the general contractor does not have a contract with the property owner and that the owner is not liable for work being done under contract between the contractor and a tenant.

(2)   Notice of Completion – To be effective a Notice of Completion must be recorded within 10 days after the job is actually completed. The effect of this notice is to reduce the time limit during which a lien can be filed: for a general contractor the time is reduced from 90 days to 60 days and for a subcontractor form 90 days to 30 days.

(3) Notice of Cessation – A Notice of Cessation is a document that is recorded after labor has ceased for a continuous period of 30 or more days. The time limits for filing a lien are reduced just as in a Notice of Completion. Once a Mechanics lien is recorded a contractor has 90 days to bring a complaint into court. This period can be extended during negotiations for payment by means of a Notice of Extension of Credit which can extend the time up to one year.

Once a Mechanics lien is recorded a contractor has 90 days to bring a complaint into court. This period can be extended during negotiations for payment by means of a Notice of Extension of Credit which can extend the time up to one year.

WAIVERS AND RELEASES

As the project progresses a prudent owner will require of his general contractor a procedure to waive and release the right of lien by subcontractors and materials suppliers working on the project. Lien law sets forth four waiver and releases in a matrix of two each and stipulates strict verbiage that must be followed if they are to be effective. A Waiver and Release, in any of its four forms is not technically a release of a lien that has been recorded. Recorded Liens are released by means of a recorded Release of Mechanics Lien. None of these releases, in themselves, waive contractual rights and obligations between the general and owner or between the general and his subcontractors.

1. Conditional Waiver & Release upon Progress Payment- This form sets up a condition – that being, when the dollar amount on the face of the release is paid, the release becomes, by law, effective to unconditionally waive the right of lien for materials and services provided on the project through the date of the release.

2. Unconditional Waiver & Release upon Progress Payment- This form is an acknowledgement by the contractor or a subcontractor that he has been paid the amount of his previously submitted conditional release.

3. Conditional Waiver & Release upon Final Payment- This form sets up the conditional terms of the FINAL release of any claim of lien the contractor may have on the project. The form will stipulate any disputed amounts for additional work which, if noted on the form, are not released.

4. Unconditional Waiver & Release upon Final Payment- This form is an acknowledgement by the contractor or a subcontractor that he has been paid the amount of his previously submitted conditional release upon final payment and that with the exception of any disputed claims, noted on the form, he has no right of lien on the project.

The “Holy Grail” of releases is an Unconditional Waiver and Release that has $0.00 in the space noted “….except for disputed amounts”.

TiCon routinely follows the Waiver and Release matrix with its billings thereby verifying to the owner payment to its subcontractors on previous billings. Upon receipt of final payment we issue checks for remaining balances to our subcontractors in return for Unconditional Waivers and Releases which we then forward to the owner.