CA Contractors’ Mechanic Lien Rights Are Limited By Court

Most contractors know that they have the right to put a mechanics lien on a property for non-payment by the property owner. Most contractors do not know that this is a constitutional right given in the California Constitution!!!

A mechanics lien is a powerful tool for payment because the contractor can force the sale of a property and be paid from its proceeds.

The California Supreme Court just ruled that a contractor can contractually make its mechanics lien junior to that of trust deed!!! Thus, limiting a contractor’s constitutional rights.

What happened to get the this decision?

Contractor enters into a construction contract with property owners –innocent enough. Lender then requires Contractor to sign a subordination agreement that gives Lender’s construction loan priority over Contractor’s constitutionally protected mechanics rights.

After work starts, Property Owner defaults on the construction loan and stops paying Contractor. Contractor files a mechanics lien. Under California law a mechanics lien relates back to the commencement of the date construction started. In this case, the date of construction predated the construction loan. Thus, the mechanics lien would be paid before the construction loan.

The California Appellate ruled that Contractor contracted away its California constitutional rights by entering into a subordination contract with Lender. Thus, Lender was paid first.

This became an issue because there was not enough money, after the sale of the property, to pay in full both the mechanics lien and the construction loan in full. Based on the above ruling the construction loan was paid, but the mechanics lien was not.

The moral of this new case…make sure you understand all documents that you are signing. The documents may not seem important at the beginning of the project, but at the end of the project, the same documents could decide if you get paid.

For all those who want to read more about this the case go to Moorefield Construction, Inc. v. Intervest-Mortgage Investment Company.

Plumtree & Associates is a full service construction law firm.