Investing in California real estate often involves renovations or new construction. Unless a real estate investor plans on taking a very do-it-yourself approach, this will require the assistance of contractors, suppliers, and design professionals like architects or structural engineers. You may even want to find a real estate agent with experience in renovations. In the event that someone who worked on a real estate project believes they have not received the contracted payment, California law allows them to file a mechanics lien on the property.
Mechanics liens can be troublesome for California real estate investors. They take priority over other liens, and state law sets a very short timeline for enforcement. Perhaps the most concerning feature for real estate investors is the ability of subcontractors to file a lien when the general contractor does not pay them. In that situation, the property owner is not at fault, but must still deal with the lien.
What Is a Mechanics Lien?
A lien is a legal claim that places a hold on real property, affecting any attempt to sell the property or obtain financing. Perhaps the most common type of lien is the one held by a mortgage lender on the property purchased with the lender’s money. If the property owner defaults on the loan, the lender can foreclose on the property. Foreclosure of a mechanics lien seeks to recover money owed to a person who worked on a real estate project.
Who May Record a Mechanics Lien?
According to California law, any “person that provides work authorized for a work of improvement” may record a mechanics lien. The statute provides a very broad definition of these terms:
– “Work” may include “labor, service, equipment, or material provided.”
– “Labor, service, equipment, or material” includes a wide range of goods and services.
– A “work of improvement” includes construction, demolition, landscaping, and other services.
– Work is considered “authorized” if the property owner requested or agreed to it, or if a contractor or other person in charge of a project provided or authorized it.
General contractors may record a mechanics lien, as well as subcontractors, laborers, and individuals or businesses that supply materials, lease equipment, or provide professional design services.
How May Someone Record a Mechanics Lien?
Mechanics liens are filed with the county official responsible for real estate records, such as the San Diego County Recorder. A general contractor, or any other person with a direct contractual relationship with the property owner, must give preliminary notice to the construction lender before recording a mechanics lien. Other persons, with one exception, must give preliminary notice to the owner, the general contractor, and the construction lender. Laborers are not required to give preliminary notice.
Is a Mechanics Lien Subject to Foreclosure?
California requires a person to file a civil lawsuit to enforce a mechanics lien within ninety days of recording it. Otherwise, the lien “expires and is unenforceable.” The amount covered by the lien is the lesser of either:
– The amount agreed upon by the lienholder and whoever authorized the work; or
– The “reasonable value” of the lienholder’s work.
How Can I Remove a Mechanics Lien?
The most direct way to clear a mechanics lien is to pay the lienholder and obtain a release of lien. A property owner can oppose the lienholder in court, but this involves a substantial amount of time, expense, and risk.
Another way to remove a mechanics lien is to obtain a release bond. This requires a surety bond in an amount that is at least 125 percent of the lien amount.
More Blog Posts:
What California Real Estate Investors Should Know About Construction Contractors, Titles and Deeds, January 8, 2019
Due Diligence Tips for Commercial Property Purchases in California, Titles and Deeds, October 9, 2018
Common Problems Encountered in California Real Estate Title Searches, Titles and Deeds, June 18, 2018