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Thelen Reid Brown Raysman & Steiner LLP
A contractor contracted with a telecommunications company to convert a warehouse into a modern Internet facility. The telecom leased building space from the defendant-owner. The owner posted and recorded a notice of non-responsibility, intending to prevent the attachment of any mechanic's lien to the owner's interest in property.
In May 2001, only two months into construction, the contractor discovered that the telecom was in serious financial trouble. The telecom directed the contractor to stop construction. The contractor then requested authorization from the telecom for closeout work on the project and to "mothball" the project. On May 29, the telecom authorized the closeout work, requesting that it be completed in four weeks. On June 18, however, the telecom advised the contractor that it would not be paid any more money. The contractor memorialized this conversation in a letter to the telecom, noting that the telecom intended to breach of the contract. On June 19, the contractor and its subcontractors stopped working. Over the next few days, the contractor moved some ductwork from one floor to another at the owner's request and, on June 26, met with the owner for a closeout inspection.
On June 20, the contractor recorded a mechanic's lien for $2.3 million, which included the costs for the closeout work. On August 6, the contractor filed its complaint to foreclose on the mechanic's lien.
The owner defended the foreclosure action on two grounds: (1) Because it filed a notice of non-responsibility, the owner's property could not be liened when its tenant failed to pay for construction work; and (2) The recording of the lien was premature in light of evidence that the contractor continued working after June 20.
The appellate court addressed the first issue, the owner's claimed non-responsibility, in an earlier opinion. Howard S. Wright Construction Co. v. Superior Court, 106 Cal. App. 4th 314 (2003). There, the court held that the owner was a "participating owner" because it retained control over the construction and would benefit from the improvement to the property. The court also found that the lease required the tenant to make improvements. The owner's property, therefore, was subject to the lien. Click here for a more detailed summary.
On the second issue, the trial court held that the contractor prematurely recorded the lien, and the contractor appealed. The Court of Appeal reversed. Howard S. Wright Construction Co. v. BBIC Investors, LLC, 136 Cal. App. 4th 228 (2006).
In addressing the timeliness of the lien, the court reviewed California's mechanic's lien law. Civil Code §3115 requires that mechanic's liens be recorded after the contractor completes its contract and before specified periods of time expire. The court found that "completes his contract," as used in §3115, generally means that the contractor's obligations had been fully or substantially performed.
The court reasoned, however, that a contractor also completes its work when some event excuses or discharges its further performance. Otherwise, a contractor might never be entitled to record a lien under some circumstances. Thus, the court held that a contract is complete for purposed of recording mechanic's liens under §3115 "when all work under the contract has been performed, excused, or otherwise discharged."
The court found that the telecom unquestionably repudiated its obligations to the contractor on June 18 when it told the contractor that it had no intent or ability to pay. The telecom's anticipatory breach of the contract was sufficiently significant that it excused or otherwise discharged the contractor's remaining obligations under the contract. The court held that this event triggered the period to record the mechanic's lien.
The court further found that the contractor's work after June 20 was not sufficient to affect the commencement time for recording mechanic's liens.
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For more information about the issues covered in this report, please contact Paul Berning in our San Francisco office at 415-369-7229 or at pwberning@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.
©2006 Thelen Reid Brown Raysman & Steiner LLP
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