2012 saw some of the most significant changes to California’s construction laws in the past 40 years. Legislation sponsored by the California Law Review Commission, which began a comprehensive review of the state’s construction statutes nearly ten years ago, repealed California’s construction statutes formerly found at Civil Code section 3081.1 et seq. and re-codified them to new Civil Code sections 8000-9566. Some of these changes took effect on January 1, 2012, but the bulk of the changes took effect on July 1, 2012. These changes include:

Changes in Terminology. Some of the terms commonly used in the construction industry have changed.

  • “Original contractor” has been changed to “direct contractor”
  • “Materialman” has been changed to “material supplier”
  • “Preliminary 20-Day Notice” has been changed to “preliminary notice”
  • “Stop notice” has changed to “stop payment notice”

Change in Definition of Completion. The definition of “completion,” which is important because it starts the clock on the deadline to record a mechanics lien, serve a stop payment notice, and make a bond claim, has changed. The term “completion” now no longer includes acceptance by the owner. Other circumstances constituting “completion” remain the same, namely:

  • Actual completion of the work of improvement
  • Occupation or use by the owner accompanied by cessation of labor
  • Cessation of labor for a continuous period of 60 days
  • Recordation of a notice of cessation after cessation of labor for a continuous period of 30 days
  • Acceptance by a public entity, if applicable

Notices of Completion. The deadline to record notices of completion have been changed from 10 days to 15 after actual completion of the work of improvement. Owners are now also able to record separate notices of completion where there are multiple prime contractors.

Preliminary Notices. Preliminary notices have new required language and must include a “Notice to Property Owner.” The new law clarifies that direct contractors must now serve a preliminary notice on construction lenders, if any. Direct contractors are now required to provide the name and address of the owner and any construction lenders, and if a construction loan is obtained after commencement of the work of improvement, the owner is required to provide the name and address of the construction lender to all persons who have served the owner with a preliminary notice.

Mechanics Lien, Stop Payment Notices. Mechanics liens have new required language and must now include a “Notice of Mechanics Lien” and a “Proof of Notice Affidavit.” Stop payment notices also have new required language.

Waiver and Releases Upon Progress and Final Payments. The statutory language required to be contained in conditional and unconditional waiver and releases, for both progress and final payments, has changed.

Design Professional Liens. There will no longer be design professional liens. However, design professionals will still be able to record mechanics liens for work performed before commencement of the work improvements. Design professionals who previously recorded a design professional lien have a 30-day grace period to convert an existing design professional lien to a mechanics lien. Landscape architects are now also included within the definition of “design professional.”

Release Bonds. The bond amount required to release a mechanics lien has been reduced from 150% to 125%.

Petition to Expunge Mechanics Lien. The $2,000 limit on attorney’s fees to expunge a mechanics lien has been repealed. Owners can now recover all “reasonable” attorney’s fees incurred. However, owners must first make a demand that the lien claimant withdraw the lien at least 10 days before filing a petition to expunge a mechanics lien.

Retention on Public Works Projects. The maximum amount that can be withheld in retention, has now been statutorily capped at 5% of the contract price on public works projects, subject to certain exceptions.

Prompt Payment Penalties. The deadline for direct contractors to make progress payments has been reduced from 10 days to 7 days upon payment from the owner. The former law governing prompt payment of progress and retention payments by owners to direct contractors and retention payments by direct contractors to subcontractors and suppliers remain the same, namely:

  • Progress Payments by Owners to Direct Contractors: 30 days from demand for payment.
  • Retention Payments by Owner to Direct Contractors: 45 days from completion on private works projects and 60 days from completion on public works projects.
  • Retention Payments by Direct Contractors to Subcontractors and Suppliers: 10 days from payment by owner on private projects and 7 days from payment by owner on public works projects.

The penalty for failing to promptly make payments remains the same at 2% per month subject to the right of the payor to withhold up to 150% of any amount disputed in “good faith” or where there is a “bona fide” dispute.

Payment Bond Claims. Payment bond claimants who do not have a direct contractual relationship with the direct contractor may still make a claim on a payment bond, with certain exceptions. Notice, however, must be given within 15 days after a notice of completion is recorded or, if no notice of completion is recorded, within 75 days after completion of the project.

In addition, beginning January 1, 2013, for contracts entered into, on, or after that date, Type I indemnity clauses in which a downstream contractor indemnifies an upstream contractor or owner from the upstream contractor’s or owner’s “active negligence,” will be void and unenforceable, subject to certain exceptions. Type I indemnity clauses are already unenforceable in residential construction contracts and contracts between public owners and direct contractors. The new law will extend the prohibition to Type I indemnity clauses contained in commercial construction contracts and in contracts with contractors and material suppliers of all tiers on public works projects.