BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2011-2012 Regular Session
SB 424 (Rubio)
As Introduced
Hearing Date: April 5, 2011
Fiscal: No
Urgency: No
TW
SUBJECT
Mechanics Liens: Design Professionals
DESCRIPTION
This bill would give design professionals providing services for
private works of improvement the ability to convert a design
professionals lien into a mechanics lien, as specified.
BACKGROUND
The California Constitution grants laborers and materials
suppliers a mechanics lien on any property improved by their
labor or material. The mechanics lien law in the Civil Code
generally specifies the obligations, rights, and remedies of
those involved in a construction project. Mechanics liens are
only available once construction begins on the project. While
mechanics liens are not available on public works of
improvement, existing law provides claimants on public works
projects with other statutory remedies, including stop notices
and claims against payment bonds.
AB 1789 (Cortese, Ch. 1789, Stats. 1990) established the design
professionals lien right. Prior to this legislation, design
professionals, who typically provide design, engineering, or
planning on a work of improvement, could only assert a mechanics
lien against the project owner to collect monies owed. Design
professionals regularly provide services on works of improvement
prior to actual construction, so the mechanics lien did not
apply to services rendered prior to construction. Accordingly,
the design professionals lien was created through AB 1789 to
allow design professionals to recover monies owed prior to
(more)
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construction.
SB 189 (Lowenthal, Ch. 697, Stats. 2010) overhauled the
mechanics lien law and was based upon the February 2008
recommendations of the California Law Revision Commission (CLRC)
resulting from its study of mechanics lien law. (California Law
Revision Commission, Recommendation, Mechanics Lien Law,
February 2008.) In general, the CLRC included substantive
changes to existing law only if the proposed reform fell into
one of two categories: 1) substantive reforms that were believed
to bring about an overarching improvement to the statute as a
whole, thereby benefiting all affected persons; and 2)
substantive reforms that, although primarily benefiting one
group of persons affected by the statute more than others, were
perceived not to unduly burden any other group. (See California
Law Revision Commission Memorandum 2009-45, October 13, 2009.)
This bill, sponsored by the American Council of Engineering
Companies of California, would provide that a design
professionals lien could be converted into a mechanics lien, as
specified.
(This analysis contains author's amendments to be offered in
Committee.)
CHANGES TO EXISTING LAW
1. Existing law authorizes design professionals to record design
professional liens against project owners prior to
construction of a private work of improvement. (Civ. Code
Sec. 8300 et seq.)
Existing law authorizes design professionals to record
mechanics liens against a private work of improvement after
construction has begun. (Civ. Code Sec. 8300 et seq.)
This bill would authorize a design professional to convert a
design professionals lien into a mechanics lien if the design
professionals lien otherwise expires, the lien remains
partially or fully unpaid, and the mechanics lien is recorded
within 30 days of the expiration of the design professionals
lien.
This bill would require the recorded mechanics lien to
specifically state that it is a converted design professional
lien and that it shall be recorded and enforced in the same
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manner as a mechanics lien.
2. Existing law requires a preliminary notice to be served, as
specified, prior to the recording of a mechanics lien. (Civ.
Code Sec. 8200 et seq.)
This bill would exempt the converted design professionals lien
from the preliminary notice required of a standard mechanics
lien.
COMMENT
1. Stated need for the bill
The author writes:
Currently, a design professional can work for a particular
owner who defaults and abandons the project without fully
paying the design professional. A second owner then comes in,
picks up developİment] plans and builds, but overlooks the
fact that a design professional is still obligated payment.
Once the work of improvement begins, the design professional
lien is expired anyway.
SB 424 would authorize a design professional to convert a
recordİed] design professional lien to a mechanics lien if
certain requirements are met. Specifically, this bill would
create a statutory mechanism for the lien to be converted to a
mechanics lien for the following reasons: the lien expires
because the work of improvement for which the design
professional provided services begins, the lien remains fully
or partially unpaid, and the design professional records the
mechanics lien within 30 days.
The sponsor of this bill, the American Council of Engineering
Companies of California, writes:
In the approximate twenty years of experience with the
design professional lien, we have learned that the
automatic expiration of the design professional lien
has had at least one significant unintended
consequence. It is quite simple to defeat the design
professional lien by making a minor permanent
improvement to the project, which causes the
expiration of the design professional lien, and
therefore defeats the ability to collect the unpaid
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balance without costly litigation.
SB 424 allows design professionals to file for a
mechanics lien for the unpaid balance of payment for
professional services if, and only if, the design
professional lien expires because the project is
moving forward so the work of improvement commences.
The recording and enforcement of the unpaid mechanics
lien would conform to existing law. Additionally, the
conversion is not automatic; the design professional
must proactively protect their rights and file for a
mechanics lien in a timely manner.
SB 424 will provide a benefit to small A&E firms who
struggle daily with making sure that their efforts and
hard work are justly compensated.
2. Converting a design professionals lien into a mechanics lien
This bill would authorize a design professional to convert a
recorded design professionals lien into a mechanics lien.
Existing law allows a design professional to record a lien prior
to construction on a work of improvement through a design
professionals lien. (Civ. Code Sec. 8300.) Existing law also
allows a design professional to assert a lien after construction
begins through a mechanics lien. (Civ. Code Sec. 8400.) A
design professional can utilize either or both liens against a
project owner to recover monies owed.
However, the sponsor of this bill, American Council of
Engineering Companies of California, argues that private project
owners have discovered a loophole between these two liens. If
the design professional provides services on a private work of
improvement but the owner fails to pay for services rendered by
the design professional, the design professional can assert a
design professionals lien. This lien expires as soon as
construction begins on the project or 90 days after the lien is
recorded and the design professional has not begun an
enforcement action on the lien. If construction begins and the
design professional is still owed full or partial payment but
has not begun an enforcement action on the lien, then the design
professionals lien expires and the owner has no obligation for
payment on this lien. The design professional's next tool to
collect payment is through recording a mechanics lien.
Prior to recording a mechanics lien, existing law requires a
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preliminary notice to be served within 20 days of commencing
services on the work of improvement. (Civ. Code Sec. 8204(a).)
The design professional, because of the nature of his or her
work being performed prior to commencement of construction of
the work of improvement, is allowed to serve the preliminary
notice within 20 days of construction commencement. (Civ. Code
Sec. 8204(b).) The sponsor argues that, because the services
provided by design professionals are performed, in most
instances, prior to construction, the vast majority of design
professional contract claims are defeated by the timing
requirement of the preliminary notice for mechanics liens.
After a project owner contracts for and receives design
services, it may be many months if not years after receiving
these services that construction commences on the project. By
this time, the design professionals lien would have expired, and
the design professional would have to keep tight watch over the
construction project to make sure to record a mechanics lien
within 20 days of commencement of construction.
The consequence of this unfortunate timing is that the project
owner benefits from the services of the design professional but
does not have to pay pursuant to either the expired design
professionals lien or a mechanics lien which is untimely served
because the design professional is unaware of the exact date of
construction commencement. Instead of forcing the design
professional to monitor for any signs of construction on the
project, this bill would allow a design professional to record a
mechanics lien after 30 days of the expiration of the design
professionals lien. This bill still would require design
professionals to proactively assert their rights to payment, but
their rights would not be lost due to the timing loophole.
3. Removal of preliminary notice requirement for converted
mechanics lien
This bill would allow a design professional to convert a
properly recorded design professionals lien into a mechanics
lien without serving the 20-day preliminary notice required for
mechanics liens. Existing law requires a notice of demand to be
served on the project owner ten days prior to recording a design
professionals lien. (Civ. Code Sec. 8304(c).) Prior to
recording a mechanics lien, existing law requires a preliminary
notice to be served within 20 days of commencing services on the
work of improvement. (Civ. Code Sec. 8204(a).) The design
professional, because of the nature of his or her work being
performed prior to commencement of construction of the work of
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improvement, is allowed to serve the preliminary notice within
20 days of construction commencement. (Civ. Code Sec. 8204(b).)
The sponsor argues that the preliminary notice usually required
for a mechanics lien would not be necessary because the project
owner already would have had notice of the claim through the
design professionals lien.
4. Converted lien generally could not be asserted against a new
owner
Staff notes that this bill would not permit a mechanics lien to
be asserted against a new project owner with whom the design
professional did not contract. The author describes the
situation where ownership of the work of improvement transfers
to a new owner, construction finally commences on the work of
improvement, but the design professional has yet to be paid by
the previous owner. Existing law authorizes a mechanics lien in
the event there is privity of contract between the design
professional and the project owner or authorized agent. Civil
Code Section 8302 provides that a design professional lien may
be recorded "if the landowner who contracted for the design
professional's services is also the owner of the site at the
time of recordation of the claim of lien."
Further, a mechanics lien may be recorded for work authorized
for a work of improvement. (Civ. Code Sec. 8400.) "Work
authorized" means work that "is provided at the request of or
agreed to by the owner or authorized by a direct contractor,
subcontractor, architect, project manager, or other person
having charge of all or part of the work of improvement or site
improvement." (Civ. Code Sec. 8404.) Accordingly, recording a
design professionals lien or a converted mechanics lien against
a new owner would circumvent the privity of contract protections
under existing law. In recognition of this privity issue, this
bill does not allow for a lien against a new owner.
5. Operative date amendment
This bill currently does not contain an operative date
consistent with SB 189, the bill that enacted the provisions of
law which this bill would amend. SB 189 will become operative
on July 1, 2012. To avoid confusion as to the operative date of
the provisions contained in this bill, the bill should be
amended to make its operation consistent with SB 189. The
following amendment would achieve this:
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On page 2, under line 14 insert: "SEC. 2. This act shall be
operative on July 1, 2012."
Support : None Known
Opposition : None Known
HISTORY
Source : American Council of Engineering Companies of California
Related Pending Legislation : None Known
Prior Legislation : See Background.
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