Business Law Articles
Written By: Roger J. Brothers Esq. and Philip M. Greenan
Buchman Provine Brothers Smith LLP
Walnut Creek, California
Governor Brown signed into law SB 189, California's Mechanic's Lien Law. SB 189 will drastically alter the landscape of mechanic's lien law commencing July 1, 2012. Faced with the decision to phase the changes in over time or to pass one all-encompassing bill, the Legislature chose the latter, and all changes will be effective July 1, 2012. The changes will not be retroactive, and the Bill states that "the effectiveness of a notice given or other action taken on a work of improvement before July 1, 2012, is governed by the applicable law in effect before July 1, 2012."
The Bill has been commonly referred to as "clean-up legislation," but along with the clean-up provisions a number of substantive changes will affect the construction industry.
It is imperative that all those affected by changes in the Mechanic's Lien Law be prepared for the dramatic shifts caused by SB 189. The main substantive changes of SB 189 involve standardizing notice requirements and clarifying key terminology so that parties and documents involved are more accurately identified.
SB 189 introduces a new statutory scheme for governing mechanic's liens. All applicable mechanic's lien statutes will move to California Civil Code ("CC") §8000-9566 on July 1, 2012. This should improve access to all laws that apply to the filing and executing of mechanic's liens.
The new Mechanic's Lien Law modernizes a few terms (e.g. "materialman" to "material suppliers") and makes 3 key terminology changes,
1) "Original Contractor" has been changed to "Direct Contractor." "Direct Contractor" is defined as a contractor that has a direct contractual relationship with an owner. (CC §8018).
2) "20-day Preliminary Notice" has been changed to "Preliminary Notice," and the preliminary notice forms should be updated immediately to comply with the new requirements (CC §8034). The existing case law used to interpret preliminary notices' compliance will remain as unforgiving as it has been previously.
3) "Stop Notice" has been changed to "Stop Payment Notice." (CC §8044). This change was designed to eliminate confusion as to exactly about what it is that is being ordered to stop. Previously, the term "stop notice" was often misunderstood to mean stop work on the project instead of its true meaning, which is to order the stopping of payments between the owner and general contractor or between the lender and the owner.
SB 189 standardizes the notice requirements and changes the permitted methods for the service of notices. CC §§8100-8118 set forth the standard notice requirements to be utilized for nearly every aspect of the Mechanic's Lien Law. While different information is required by certain notices, CC §8102 provides partial uniformity for the information required in most notices, such as the project site, the party giving notice, the amount in dispute and the identification of the involved parties.
As is true in existing law, only certain forms of delivery are sufficient to comply with the new Mechanic's Lien Laws. From July 1st onward, "overnight delivery by express service carrier" will be allowed for the service of notices, but "first class mail" will not be. (CC §8110). Although this may seem like a minor issue, failure to change business practices now may result in notices being invalidated in the future. Those affected by the Mechanic's Lien Law should familiarize themselves with the rule changes such as this so that their business is not adversely impacted by noncompliance with the new laws.
Many of the current forms—including statutory releases—will need to be modified by SB 189. The significant changes to the statutory waivers and releases are found in the language of the forms. In order to prepare for July 1st, the construction industry must revise their existing forms to comply with the new statutes, or else the owners, lenders and direct contractors who rely on such forms may find that the forms they use are ineffective or unenforceable.
Provided below is a representative sampling of some of the substantive changes introduced by the Mechanic's Lien Law. Interested parties should make themselves familiar with the following points, but should also investigate SB 189 in its entirety in order to ensure that their businesses are compliant.
SB 189 allows any party to obtain a stop payment release bond, while the former rule allowed only owners, lenders, direct contractors or subcontractors to post a stop payment release bond. Additionally, while CC §3171 required a bond to be issued by a good and sufficient surety, SB 189 now provides that a stop payment notice release bond may be issued only by an "admitted surety insurer." (CC §8510(a)).
Under SB 189, a design professional may record a mechanic's lien if certain requirements are met. SB 189 also allows a design professional to convert a recorded design professional lien to a mechanic's lien under certain circumstances.
New CC §8200(e)(2) states that any claimant who is a prime or general contractor who has a direct contractual relationship with the project owner must give a preliminary notice to the construction lender.
SB 189 provides that if work has ceased continuously for a 60-day period, the deadline for calculating service of a stop notice to a public entity is calculated from the 60th day (CC §9200(b)). Formerly, the law stated that when work on a project ceased, the deadline for calculating service of a stop notice to a public entity was from the 30th day of the stoppage.
Under new CC §8064, an owner may give a notice, execute a document or file a document on behalf of a co-owner if the owner acts on the co-owner's behalf and includes the contact information of the co-owner being represented.
Although the purpose of SB 189 was to make mostly non-substantive changes, the bill specifically identifies more than 30 Civil Code Sections to which substantive changes have been made from the former statutory scheme. In order to understand what effect these changes have on the industry and how the new Mechanic's Lien Law will impact the manner in which you do business, you will need to familiarize yourself with this new and complex regulatory system.