A bill passed by the legislature in 2009 amends California Civil Code Sections 3084 and 3146, effective January 1, 2011. While the effective date of this statute is still a year away, it bears mention at this time, as construction lenders and workout officers may wish to modify their loan documents and/or operations processes to take into account the effect of the new statute, or even seek an amendment to the legislation to help make it more effective.
Assembly Bill 457 amends Civil Code Section 3084 to require, as a condition of the enforceability of a mechanics lien, that notice of the lien be served on the owner or reputed owner of the property, by registered, certified or first-class mail. The amended statute further provides:
If the owner or reputed owner cannot be served by this method, then the notice may be given by registered mail, certified mail or first-class mail, evidenced by a certificate of mailing, postage prepaid, addressed to the construction lender or to the original contractor. (Emphasis added.)
The end result is that the requirement of the statute can be met by serving one of four parties: the owner, the reputed owner, the construction lender or the original contractor. Since the choice of whether to serve the lender or the contractor lies with the mechanics lien claimant if the claimant "cannot" serve the owner or reputed owner, it will be impossible for a lender to know whether the provision has been complied with unless the potential recipients communicate with each other. Thus, a lender may wish to include in its loan documents a requirement that the borrower provide the lender with a copy of any Notice of Mechanics Lien received, and cause the borrower's contractor to do the same.
By the same token, although there is no express duty to do so under the statute, to avoid potential criticism from the borrower, the lender would be well advised to make it a standard practice to pass along to the borrower any Notice of Mechanics Lien that the lender receives.
While the final provision of the statute, subsection (d), states that failure to serve the mechanics lien, including the Notice of Mechanics Lien, "as prescribed by this section" will cause the mechanics lien to be unenforceable as a matter of law, the statute does not set forth a deadline, in relation to the recording of the lien with the County Recorder's office, by which the Notice must be served. This will make it difficult for an owner or lender who is burdened by the lien to reap much benefit from the final provision, as the claimant appears to be free to serve the notice at any time. While the entire provision is in the nature of an "extra bite at the apple" to defeat mechanics liens, to ensure that such a bite yields some substance, it may be advisable to modify the statute to clarify this point. Without such clarification, it is an open invitation for a court to rule that the new provision – a new trap for unwary subcontractors that would defeat significant legal rights – is void for vagueness.
Another point that would benefit from clarification would be to specify the address at which the construction lender or general contractor should be served. Civil Code Section 3097, which addresses preliminary 20-day notices, contains detailed provisions for the specification of such addresses, but these provisions do not formally carry over to Section 3084.
Summary of Recommendations. To address the issues and opportunities raised by Assembly Bill 457, construction lenders may wish to:
- Amend construction loan documents to require that any notices received by the borrower or its contractor pursuant to the new statute be passed along to the lender.
- Set up a process by which operations personnel who receive Notices of Mechanics Liens automatically forward such notices to the borrower at the address provided in the loan documents, with a copy to the account officer.
- Discuss through trade associations whether to seek a further amendment to the statute, to make it clearer and therefore more likely to be effective.