United States: Notices Of Completion

The year 2004 brought a subtle but important change to California's mechanics' lien law. Under new Civil Code Section 3259.5, for a property owner to shorten the time period for claimants to file liens or related claims, not only must a notice of completion be filed in the applicable county land records, but copies of the notice must also be promptly mailed to the contractor and potential claimants who have served the property owner with a preliminary notice.

Lien law aficionados will instantly grasp the meaning of this change and need read no further. For everyone else, passage of this humble statute is a good opportunity to recap the overall benefits and limitations of completion notices for private owners, and their corresponding impacts on claimants.

To Claim Tomorrow, Identify Yourself Today

Prime contractors, subcontractors, certain suppliers and a number of other types of participants who contribute to the construction of a work of improvement to realty can pursue either mechanics' liens against the property so improved, or "stop notices" against undisbursed funds held by the property owner or construction lender for such improvements. But to exercise such rights, claimants must observe strict notice requirements, including (a) delivering preliminary notices when starting their work and (b) recording lien claims or serving stop notices within a defined time period following completion of the improvement. Each of these requirements is described below.

Preliminary Notices

The owner and any construction lender are entitled to know up-front who may be capable of asserting claims at the end of a project. Potential claimants (other than direct contractors, wage laborers and express union trust funds) must, at the outset of their work, serve a preliminary 20-day notice on the owner, construction lender, prime contractor and any surety to be eligible to later claim a lien or stop notice. The notice is prescribed by statute and widely available as a printed form. Service may be accomplished by personal delivery or by certified or registered mail.

If the notices are not served within 20 days after a claimant commences work on the project, the claimant's lien or stop notice rights only apply to compensation for work performed 20 days before the notices are finally provided. So a subcontractor who starts work January 1, but does not get around to serving its preliminary notices until February 20, can only assert lien or stop notice rights for work performed starting February 1. For its January work, such a tardy claimant is left with only its breach remedies against the party with which it contracted.

Lien Claims and Stop Notices

If a compensation dispute later erupts, a subcontractor's or supplier's lien claim or stop notice must generally be recorded or served no later than 90 days after completion of the work of improvement. Completion is a fuzzy term, defined as any of (a) the owner's occupancy or use of the improvement accompanied by cessation of work, (b) the owner's acceptance of the work or (c) cessation of labor on the work for 60 days. Under California case law, completion has been found where the remaining punchlist work was to replace items that were defectively installed, but not where the remaining work was original installation of a specified item, even as trivial as soap dispensers or a second coat of paint. Owners should consider making a formal acceptance of the work (reserving all of their warranty and contract rights), as this test is the clearest option provided in the statute.

In addition to the difficulty in defining completion, the 90-day period is a long time for owners or lenders to be exposed to claims. They normally insist on retaining portions of the contract price as security for the full period of exposure, which is not in the contractors' interest either.

The Completion Notice

From the owner's and lender's standpoint, the 90-day period of exposure to claims can be considerably shortened and clarified by properly using a notice of completion. A properly recorded notice of completion can reduce the time period for subcontractors and suppliers to record lien claims or serve stop notices from 90 days to only 30 days. Moreover, the 30 days is measured from the precise date the notice of completion is recorded, rather than the imprecise date of actual completion.

The 30-day period is why so many California construction contracts provide for final payment to the prime contractor a mysterious 35 days after final completion. The 35-day period affords owners an opportunity to record a completion notice, wait 30 days for liens to be filed, then check the land records for lien recordings -- all before letting go of the undisputed retained funds.

The notice of completion is fairly simple. The owner need only certify the completion date, the owner's name and address, the owner's estate or interest in the realty (e.g., fee, leasehold or easement), a description of the site (not necessarily a legal description) with the street address and the name of the prime contractor. The owner's signature on the notice is verified (i.e., signed once, then signed again under penalty of perjury), not acknowledged before a notary public.

The upside to an owner of recording a valid completion notice is, of course, that the exposure to lien and stop notice claims is extinguished after 30 days. The downside is that the owner trades the shorter time period for the possibility that such public notice will attract claimants who might not otherwise make a timely filing.

To benefit from the shortened 30-day period, completion notices must be recorded within the 10-day period following actual completion (as defined in the statute). If not timely recorded, the completion notice is generally of no effect, and all claimants have the full 90-day period following actual completion to record liens and serve stop notices.

Commencing in 2004, Section 3259.5 requires that the owner send notice of the recording of the completion notice, both to the prime contractor and to anyone who has served a preliminary notice, within 10 days of recordation. The notice may not be accomplished by personal delivery (unlike for preliminary notices), but must be sent either by registered or certified mail, or (unlike for preliminary notices) by first-class mail, evidenced by a certificate of mailing.

If this notice is not sent promptly to any given claimant, the completion notice does not shorten that individual claimant's time period, and it has the full 90-day period (this time, measured from recordation of the completion notice) to record its lien claim or serve its stop notice. It is not clear what minimum information must be in the notice required by Section 3259.5, but a copy of the completion notice bearing the recordation date would presumably satisfy all requirements.

Section 3259.5 is the product of construction claimants' latest attempt to ensure being advised of lien deadlines. Previously, claimants had to protect themselves, either by subscribing to a service that reports daily recordings of completion notices in a given county, or by electing to require the county recorder to alert them of filings on a given project. With Section 3259.5, the burden of alerting claimants is now imposed on those owners who want the benefit of the early time cutoff afforded by completion notices.

The California mechanics' lien law is a curious blend of broad equitable principles and strict legal formalities. The general goal of enhancing the payment prospects of those who improve property is set off against the need for finality and order in real estate construction and finance transactions. Changes to the rules, even ones as incremental and modest as the new statute, are best understood in light of those policies.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.