Contractors who secure work in this tough economic market always be prepared for the need to file a mechanics’ lien. Many contractors do not realize that they may be losing their rights to file a mechanics’ lien simply due to incorrectly filing out their conditional and unconditional liens. We will follow Joe Contractor though a construction project. We will see (1) what type of mistakes he is making when filing out his lien releases, (2) how he can fix his mistakes, and (3) what effects his mistakes have had on his ability to collect his money.
HOW JOE UNKNOWINGLY LOSES HIS MECHANICS’ LIEN RIGHTS
Joe Contractor contracts with General Contractor (GC) to install plumbing at a new apartment complex belonging to Owner. The total amount of the contract between Joe and GC is $100,000. In order to get paid, he must submit a conditional lien release every month for payment.
Joe begins work on January 1. On February 1, Joe submits a bill for work preformed through January 31. As required, Joe fills out the conditional lien release. The lien release states the amount owed is $50,000 and payment of which will release Joe’s right to record a mechanics’ lien for his work preformed through January 31.
Not surprisingly, Joe does not receive payment on the conditional lien release, yet continues plumbing the apartment complex. Like clockwork, Joe submits a conditional lien release on March 1 for work performed through February 28. The lien release states the amount owed is $10,000 and payment of which will release Joe’s right to a mechanics’ lien through February 28. (Mistake #1: At this juncture, Joe just waived $50,000 in mechanics’ lien rights without knowing it.)
Again, Joe does not receive payment on either of the previous two conditional lien releases. However, Joe continues working through the entire month of March.
On April 1, Joe submits his third conditional lien release for work through March 31. The lien release states the amount owed is $10,000 and payment of which will release Joe’s right to a mechanics’ lien through March 31. (Mistake #2: At this juncture, Joe has now waived a combined $60,000 in mechanics’ lien rights without knowing it.) At this point, Joe has made several critical mistakes. If Joe was to go to his attorney wanting to file a $70,000 mechanics’ lien against the Owner, he would be in for a shock. Joe would discover he can only file a mechanics’ lien for $10,000, the amount states on the final lien release!
WHY JOE LOSES HIS MECHANICS LIEN RIGHTS
Most contractors, like Joe, follow a common practice of using lien releases as a receipt for work preformed. Joe had mistaken belief that each lien release was submitted for a specific timeframe i.e. February 1st through February 28th.
Joe Contractor contracts with GC to install plumbing at a new apartment complex belonging to Owner. The total amount of the contract between Joe and GC is $100,000. In order to get paid, he must submit a conditional lien release every month for payment.
In our scenario, Joe failed, to see that the lien release is given a “through date”. Therefore, the amount of each lien release must state THE TOTAL AMOUNT OWED at the date of issuing the lien release. Failure to include the previous unpaid amounts waives Joe’s rights to file a mechanics’ lien for monies owed, but not included in the last lien release.
Court does not want to promote the practice of using lien releases as a “glorified receipt”. If the California Legislature has intended the fornia Legislature had intended the lien release to be a receipt, it would have clearly included a “to and from date” other than a through date in the required language. The Court has reiterated that it is not their duty to be an “accountant” for the contractor. Therefore, the Court concluded that the California Legislature created a lien release that waives mechanics’ lien rights, bond rights, and stop notice rights even if those services and materials were not compensated by the progress payment.
WHAT CAN JOE DO NOW?
All is not completely lost for Joe. At this juncture Joe is owed a total amount of $70,000. Joe maintains his rights to a mechanics’ lien against the Owner for $10,000 with the last lien release. Upon prevailing in a lawsuit, Joe can sell the Owner’s property and collect the $10,000 that is owed on the mechanic’s lien.
Further, Joe can also file a breach of contract lawsuit for $70,000 owed against GC. This is a less desirable action against GC. This is a less desirable action as there is no collateral to collect the judgment. If Joe is lucky, the GC will remain solvent and he will collect on his judgment. More than likely the GC may become bankrupt and /or have cash flow issues which make collecting the judgment difficult if not impossible.
In conclusion, it is extremely important to properly understand and fill out conditional and unconditional lien releases up to the dollar amount that is still owed. Otherwise you will waive or limit your rights to a mechanics’ lien against the Owner’s property. The Desert Contractors’ Association promotes responsible leadership, ethical practices, quality, integrity and prosperity in the construction industry through example, education, and involvement.
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