The possibility of mechanics liens is a key issue in any construction project. A contractor and their subcontractors and laborers want to ensure that if an owner does not pay for the work, they have recourse to recover the value of their services through a lien secured against the subject property. An owner, on the other hand, wants to make sure that it receives lien releases prior to making payment for any work done, to limit the filing of liens against its property.
Typically, a lien burdens the property owner who entered into the construction contract with the contractor. But what if the lien was foreclosed upon a subsequent property owner who was not a party to the construction contract? How is the lien valued if not based on the price in the construction contract? These concerns were addressed in a recent Court of Appeal case entitled Appel v. Superior Court of Los Angeles County. (214 Cal.App.4th 329 (2013)). In Appel, the general contractor brought an action against the condominium developer and the unit owners for foreclosure of a mechanics lien related to the contractor’s work constructing the residential condominium development. There was no dispute that the contractor had a right to foreclose on the lien even though the condominium owners were not the parties who hired and agreed to pay the contractor to do the work. The Court provided that a mechanics lien “attaches to the improved property when the first labor or construction material is furnished for the construction work, and cannot be defeated or otherwise affected by the conveyance of the property after the lien attaches.”
The question presented in Appel was to determine the proper standard for valuation of a mechanics lien enforced against a non-party to the contract. Typically, the amount of a mechanics lien may not exceed the agreed-upon price of the construction contract which is the basis for the work. Section 8430(a) of the Civil Code (listed as the former Civil Code Section 3123(a) in this case) states that the lien shall be either in “the reasonable value of the work, or for the price agreed upon by the claimant and the person with whom he or she contracted, whichever is less”. In this case the contractor, Webcor, and the developer, Wilshire Landmark, had previously settled their claims. In doing so they also adopted a change order which increased the original contract price from $81 million dollars to $95.5 million dollars. Webcor argued in its case against the unit owners that the value of the mechanics lien should be based solely on the reasonable value of its services, since the unit owners were not a party to the original contract. The unit owners responded that they should be allowed to introduce evidence as to the original value of the construction contract between Webcor and Wilshire Landmark, which was lower than the settlement amount.
The lower court in Appel interpreted Section 8430(a) of the Civil Code to mean that, the amount of the lien should be based solely on the “reasonable value” of the completed work, thus ignoring the other clause providing that it should be the lesser of that amount and the price agreed upon in the contract. The lower court determined that the value of the construction contract between Webcor and Wilshire Landmark was not relevant because the unit owners were not parties to that agreement. The Court of Appeal disagreed finding this interpretation conflicted with another statute, Civil Code Section 8434 (listed as the former Civil Code Section 3140 in this case), which codified the long adopted rule that if there is a valid contract, the contact price measures the limit of the amount of the lien which can be acquired against the property by the contractor or subcontractor. The Court of Appeal held that if Section 8430(a) was construed to use the reasonable value of services solely as a basis for recovery whenever a property owner was not a contracting party, a contractor could obtain a lien in an amount that was more than the contract price if the reasonable value of the work exceeded that amount.
The decision in Appel confirms the proposition that the amount of the mechanics lien filed against a property by a contractor or subcontractor is limited to the amount of the contract price in the construction contract, regardless of whom it is being enforced against. Owners and contractors should be cognizant of this fact when they draft a construction agreement. Further, subsequent owners should be aware of any mechanics liens filed against a property they elect to purchase. They are not insulated from liability even though they did not enter into the construction contract which is the basis for such liens. Buyers should make sure they do their proper due diligence and title review in any purchase to guard against these issues.
Development Impact Fee Deferral Program Expires July 1
The City’s impact fee deferral program is set to expire July 1, 2013. If no legislative action is taken, beginning July 1, all impact and in-lieu fees applicable to a project will be due prior to the issuance of the building permit or first site permit addenda authorizing construction. Time is running out. If you have any questions, please call Andrew Junius or John Kevlin in our office.
The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben, Junius & Rose, LLP is a full service real estate law firm. We specialize in land use, development and entitlement law. We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.