Premature Recordation of a Mechanic's Lien may Invalidate the Lien

Law Talk

Sam K. Abdulaziz
Attorney at Law

In a recent California Appellate Court case, the court examined the issue of recording a mechanic's lien before completion of the contract. This case was decided by the lower court, then the losing party appealed to the appellate court. The appellate court in Howard S. Wright Construction Co. v. BBIC Investors, LLC disagreed with the lower court when it reviewed whether Wright's mechanic's lien was recorded too early.

BBIC Investors, Inc. (OWNER), the owners of a former warehouse building, leased out space to 360networks (USA) Inc. (LESSEE). As a telecommunications company, LESSEE needed a high-tech facility for its Internet business. LESSEE hired Howard S. Wright Construction Co. (CONTRACTOR) to do the work and entered into a Design Build Agreement with them. Under this Agreement, CONTRACTOR would convert a warehouse into a modern Internet facility. The total project budget was approximately $5.2 million.

OWNER posted a notice of nonresponsibility. They did so in an effort to prevent attachment of any mechanic's lien to the property.

In March 2001, CONTRACTOR began work on the project. By May and with about 65% of the project complete, it was clear that LESSEE was having financial problems. LESSEE asked that the project be placed on hold. At that time, CONTRACTOR arranged to do what was necessary to leave the site.

On May 24, CONTRACTOR sent LESSEE a letter with the subject line reading "Authorization for Final Close-Out Work." On May 29, LESSEE responded authorizing CONTRACTOR to go ahead with the closeout work. This closeout work would cost $194,950.00. Although final inspection was set for June 26, on June 18, LESSEE told CONTRACTOR that it did not intend to pay any more money. On June 19, CONTRACTOR sent a letter to LESSEE confirming their conversation and moved its people off the site. The very next day, CONTRACTOR recorded a mechanic's lien.

A mechanic's lien can be filed only after completion of the project. The code has several definitions for "completion." CONTRACTOR argued that work was substantially completed on June 19, since that was the last day subcontractors pulled material or did any work on the project. However, CONTRACTOR's job diary showed that on June 26, CONTRACTOR moved some ductwork and did the closeout inspection. Therefore, OWNER said that the June 20th mechanic's lien was premature (recorded before completion of the project), thus invalid.

In court, CONTRACTOR made two arguments. First, they said there were really two projects - one was the original construction of the site and the other was the close-out work. CONTRACTOR argued that LESSEE abandoned the original construction project in May, which constituted actual completion under Civil Code section 3086. Second, as an alternative argument, CONTRACTOR argued their lien was timely recorded because under Section 3086 a lien could be recorded 60 days after work stopped on June 19.

However, the lower court did not agree with CONTRACTOR. The lower court said that the lien was recorded too early because according to Section 3115 completion occurs 60 days after cessation of work. In addition, the court found that the project did not end until June 26 - the date they last did any work at the site. Therefore, "completion" did not occur until sometime in late August, which was long after the lien was recorded.

On appeal, the court felt the trial court interpreted the statutes wrong. The majority of the appellate court's opinion was an analysis of the meaning of the phrase "completes his contract" in Section 3115. The court pointed out that a contract can never be considered complete unless all the work was performed. Therefore, as in this case, when a contract is cut short, a contractor could never timely record its lien. This obviously goes against common sense. Therefore, the court concluded that "a contract is complete for purposes of commencing the recordation period...when all work under the contract has been performed, excused, or otherwise discharged."

First, the appellate court found that there was only one project, not two, as CONTRACTOR tried to argue. Second, applying the above rule, LESSEE's obligations with CONTRACTOR ended on June 19. Remember, that was the day LESSEE anticipatorily breached the contract. Anticipatory breach is a legal term referring to a situation where a party to a contract makes clear that they are not going to uphold their side of the bargain. If it is significant, the other party's obligations end and he is allowed to sue.

Finally, due to LESSEE's anticipatory breach, the contract was complete on June 19. It follows that the lien was timely recorded.

This case is a clearly shows how two courts can reach two different conclusions when interpreting the law. It is just another a reason why a contractor needs a competent construction attorney when dealing with a legal dispute.