California Mechanic's Liens: Homebuyers asked to pay Subcontractors and Suppliers stiffed by the builder

News - Lien times hit Elk Grove - sacbee.com (registration required, or visit bugmenot.com for user ID): "Sukhwinder 'Suki' Kaur bought the wrong house at the wrong time. Within months of her July closing on the two-story home in Elk Grove, work in the new subdivision stopped and the builder's parent company, Dunmore Homes, filed for bankruptcy protection. Kaur, who is paying on a $430,000 mortgage, has become the target of two lawsuits and 28 liens from unpaid subcontractors and suppliers. More than a dozen other individuals in the Monterey Village development are in similar predicaments."

SacBee has some really bad writing, and it's a bit difficult to figure out from the story exactly what's happening. But I've done some renovations on my house, so I'm somewhat familiar with the Mechanic's Lien laws here. The story sounds implausible - buyers paying for their homes, and then having to pay the subcontractors, too - but it is a reality under California's mechanic's lien laws.

I used to have a client who made and delivered concrete. Every time I was in their office, I heard one side of the non-stop phone calls to the woman who processed Mechanic's Liens. It seems there was a small army of unlicensed, often illegal, contractors who poured cement patios, driveways, and foundations. They charged the homeowner for materials and labor, but never paid the suppliers. What I gathered from the conversations I overheard at the concrete plant, was that the homeowner was responsible for the suppliers being paid, even if a subcontractor had already been paid for the materials.

Soon after, I had my roof replaced. I was served with a Mechanic's Lien, and I finally learned what law allowed concrete companies to sue homeowners when a contractor 1) contracted for the supplies, 2) received payment for the supplies, and 3) didn't pay the supplier for the supplies. Contractors and subcontractors do work that increases the value of the home. The person who owns the home thus benefits from the contractors'/suppliers' work, even if the owner didn't contract for the work (like if a tenant made unauthorized improvements) or if the homeowner didn't contract with the supplier(s) or make any payment promise to the supplier(s). California law provides a way for subcontractors to be paid for their work, even if a client stiffs them. The contractor files a Mechanic's Lien with the county, does the work, receives payment, and then provides the homeowner with a final release of the lien. If the contractor doesn't get paid, the lien remains against the property and the contractor can even foreclose on the property to get their payment.

That's right - the homeowner can be forced to double-pay for materials and/or subcontractors if the homeowner hires a sleazeball who doesn't pay subs and/or suppliers. The homeowner is responsible for hiring honest, licensed contractors and for understanding the law. Because of this, when I hired contractors, I made final payment with a cashier's check and demanded a lien release at the time of final payment (we put it in the contract). When a subcontractor was involved, we required the contractor to provide a payment bond, or else we paid the materials/subcontractor portion of the bill w/ a joint check (payable to the contractor and the sub/supplier jointly). Go to the Contractors State License Board to read up on the law. For a new home purchase, I would consult a lawyer and ask the title company about mechanics' liens.

These poor buyers in Elk Grove seem to be in a pickle. They didn't hire the contractors - they just bought a house. They paid in full for the house, they shouldn't have to pay any more. I would bet none of them ever, ever imagined this could happen - neither would I. This is what title insurance is for, right? The title company searches public records for any liens outstanding, and then promises to pay off any liens they missed. If the liens were filed after the title insurance policy was issued, the title company won't cover them.

According to the CSLB, suppliers and subcontractors have to provide a Preliminary 20-Day Lien Notice within 20 days of beginning work/delivering materials, and then they must record the Mechanic's Lien within 90 days of completion, acceptance, or "When owner began using the improvement." It seems that California law puts buyers of new-construction homes into a 90-day gray zone, where the title policy has been issued at close of escrow, preliminary lien notices (which are not recorded, and thus won't appear in a title search) were probably delivered to the builder before close of sale, but subcontractors and suppliers can file liens up to 90 days later. Since the lien attaches to the property, the homeowner is on the hook - failure to pay can result in a cloud on the title or even foreclosure. The buyer's recourse is to sue the builder - but if the builder is bankrupt (or simply skipped town), the buyer may never recover a penny.

It's a jungle out there in real estate land. Be careful.


This is not intended to be legal advice, just practical advice to be aware of the existence of mechanic's liens and what they can mean for you. Please consult the CSLB and/or a competent attorney for your specific situation.

Note about SacBee: It appears they move stories to their archives within a few days, and then require payment for access to them. The link above will probably only be good for a few days.