Contractors or other construction businesses providing labor, equipment, or materials to construction projects in California have three primary ways to secure amounts they are owed, the mechanic’s lien, the stop payment notice, and the payment bond claim. Which of these remedies a contractor should use on a particular job depends on the type of job, the party in question’s role in the job, and the status of that party’s work. This article will cover the various situations in which a mechanics lien, stop payment notice, and/or bond claim can be used.
On What Projects May a Mechanics Lien be used?
A Mechanic’s Lien may used on any private construction project in California, but not on public works projects. A mechanics lien may not be used on public works projects because a mechanics lien establishes an ownership interest in the property that is the subject of the lien, and the California legislator has not been willing to give contractors a stake in, or right to sell at foreclosure, publicly owned real property. But to make up for the lack of mechanics lien rights on public works projects, payment bonds are instead required under most circumstances as described below. An interesting scenario comes up when a privately owned project is being constructed on public land that has been leased to the private owner. In this scenario, mechanics lien rights do exist, but are limited to the value of the improvements and lease-hold interest only. The lien does not apply to the underlying public land.
On What Projects May a Stop Payment Notice be used?
A stop payment notice may be used on both private construction projects and public works projects in California other than federal public works projects. Stop payment notices are not permitted on federal public works projects because these projects are governed entirely by the Miller Act which provides for a payment bond, but not for a mechanics lien or a stop payment notice.
On What Projects May a Payment Bond Claim be Made?
A payment bond claim may be made on any construction project in California for which a payment bond exists. The direct contractor on all California public works projects at the state level and below is required to secure a payment bond, provided that the aggregate contract amount for the project exceeds $25,000.00. (See Civil Code Section 9550; Public Contact Code section 7103(a)(1).) So, it is fair to say that most California public works projects include a payment bond. Under the Miller Act, a direct contractor on federal public works project in California must secure a payment bond for projects if the prime contract sum for the project exceeds $100,000.00. This again means that most federal projects will have a payment bond. Owners and/or their lenders on larger private construction projects in California also often require that the direct contractor secure a payment bond. But this is not required by law. And at times, lower tier subcontractors are also required to secure payment bonds for California construction projects. The important thing is always to identify what payments bonds exist and obtain the information on those bonds to use if necessary.
Who on a California Construction Project is Entitled to a Mechanics Lien?
Anyone who furnishes labor, material, leasing equipment, special skills, or other necessary services to a private construction project in California is entitled a mechanic’s lien – provided they meet any applicable notice and deadline requirements. Anyone who does not have a contract directly with the owner must serve preliminary notice within 20 days of commencing work to have mechanic’s lien rights under most circumstances. When a construction lender is involved, even direct contractors must service a 20-day preliminary notice on the lender to ensure that they have valid mechanic’s lien rights. Suppliers of suppliers, and others without a direct link to the project in question, are not entitled to a mechanic’s lien.
Who on a Construction Project is Entitled to Give Stop Payment Notice?
Other than a direct contractor on a project without a lender, anyone who furnishes labor, material, leasing equipment, special skills, or other necessary services to a public or private construction project in California (other than a federal project) is entitled to serve stop payment notice – provided they meet any applicable notice and deadline requirements. On private projects, anyone who does not have a contract directly with the owner must serve preliminary notice within 20 days of commencing work to have valid stop payment notice rights under most circumstances. On public projects, anyone who does not have a contract directly with the direct contractor must serve preliminary notice within 20 days of commencing work to have valid stop payment notice rights. On private projects, when a construction lender is involved, even direct contractors must service a 20-day preliminary notice on the lender to ensure that they have valid stop payment notice rights. Suppliers of suppliers, and others without a direct link to the project in question, are not entitled to give stop payment notice.
Who on a Construction Project is Entitled to Make a Payment Bond Claim?
Anyone who furnishes labor, material, leasing equipment, special skills, or other necessary services to a public or private construction project in California is entitled serve stop payment notice – provided they meet any applicable notice and deadline requirements. On private projects, to be eligible to make a payment bond claim, a party must serve preliminary notice within 20 days of commencing work. On public projects, anyone who does not have a contract directly with the direct contractor must serve preliminary notice within 20 days of commencing work to have to right to make a payment bond claim. However, even without preliminary notice, a party may still assert a payment bond claim if they make that claim by giving notice to both the prime contractor and the surety within 75 days of completion or 15 days from any valid notice of completion or notice of cessation. Suppliers of suppliers, and others without a direct link to the project in question, are not entitled make a payment bond claim.
When May a Mechanic’s Lien be Recorded?
A mechanics lien may be recorded at any time after the amount that is the subject of the lien is due if the party recording the lien does not intend to perform any further work until the lien is paid. This is because performing further work after a mechanic’s lien has been recorded invalidates the mechanic’s lien
When May Stop Payment Notice be Given?
Stop payment notice may be given at any time after the amount that is the subject of the stop payment notice is due. Performing further work does not invalidate the stop payment notice making it the preferable remedy if work is ongoing and the claimant has a contractual duty to continue work not withstanding the payment dispute.
When May a Payment Bond Claim be Made?
A payment bond claim may be given at any time after the amount that is the subject of the payment bond claim is due. Performing further work does not invalidate the payment bond claim making it a preferable remedy compared to a mechanics lien if work is ongoing and the claimant has a contractual duty to continue work notwithstanding the payment dispute.
What are the advantages of a Mechanics Lien over Stop Payment Notice?
The mechanics lien has three primary advantages over stop payment notice. First, if there is equity in the property in question, mechanic’s liens tend to secure amounts due better than stop payment notice. This is because stop payment notice merely gives the recipient of the stop payment notice the affirmative duty to withhold the funds subject to the notice. Thus, the recipient has already distributed the funds, it has no duty to withhold them, and the stop payment notice offers no protection. Further, even if the stop payment notice recipient fails to withhold the funds when they should have, the result is an unsecured claim against the party who failed to withhold the funds rather than a secured claim against property. Second, stop payment notice is not recorded and does not affect title to the property. Because it does not affect title to the property stop payment notice are less disruptive to an owner trying to sell or refinance the property. Finally, stop payment notice is only binding on a construction lender if the claimant secures and serves a stop payment notice bond on the lender.
What are the advantages of a Mechanics Lien over a Payment Bond Claim?
The main advantage of a mechanic’s lien over a payment bond claim is that a mechanics lien is always available on private projects and is available to direct contractors. A payment bond claim will only be available if a payment bond is in place and is not available to direct contractors as they are they one’s who must purchase the payment bond. Another advantage is that the mechanic’s lien affects title to the property creating a stronger incentive for any owner looking to sell of refinance the property to resolve the claim quickly. Finally, mechanic’s liens can be more secure than a payment bond claim because a claim on a payment bond is limited to the amount of the bond which could prove insufficient under some circumstances. In contrast, a mechanic’s lien is secured by all equity in the property existing at the start of work.
What are the advantages of Stop Payment Notice over a Mechanics Lien?
Stop payment notice has two primary advantages over a mechanic’s lien. First stop payment notice is a more broadly available remedy because it can be used on both private and public projects (except for federal public projects). Second, a claimant may continue to perform work on a project after giving stop payment notice meaning that they can secure their claim without creating other potential contractual liability due to stopping work. This is not possible with a mechanic’s lien as performing further work invalidates the mechanic’s lien.
What are the advantages of Stop Payment Notice over a Payment Bond Claim?
The main advantage of a stop payment notice over a payment bond claim is that a stop payment notice is always available on both public and private projects (except for federal public projects) and is available to direct contractors when a construction lender is involved. A payment bond claim will only be available if a payment bond is in place and is not available to direct contractors as they are they one’s who must purchase the payment bond.
What are the advantages of a Payment Bond Claim over a Mechanics Lien?
The main advantage of a payment bond claim over a mechanic’s lien is that payment bond claims are available on most public works project, including most federal public works projects, whereas a mechanic’s lien is not. Payment bond claims also have more forgiving deadlines as the minimum deadline to file a lawsuit to bring a payment bond claim is at least 270 days from actual project completion or 210 days from a notice of completion or cessation – and often longer. In contrast, a lawsuit to foreclose a mechanic’s lien must be filed within 90 days of recording the mechanic’s lien.
What are the advantages of a Payment Bond claim over Stop Payment Notice?
The main advantage of a payment bond claim over stop payment notice is that payment bond claims tend to secure amounts due better than stop payment notice. This is because stop payment notice merely gives the recipient of the stop payment notice the affirmative duty to withhold the funds subject to the notice. Thus, the recipient has already distributed the funds, it has no duty to withhold them, and the stop payment notice offers no protection. Further, even if the stop payment notice recipient fails to withhold the funds when they should have, the result is an unsecured claim against the party who failed to withhold the funds rather than a secured claim against the payment bond surety. Payment bond claims also have more forgiving deadlines as the minimum deadline to file a lawsuit to bring a payment bond claim is at least 270 days from actual project completion or 210 days from a notice of completion or cessation – and often longer.