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Design-Build Contractors' Lien Rights Under California Law Left in Doubt When Construction Does Not Begin
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November 28, 2005
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By Clark T. Thiel
Howrey LLP
It has long been the rule in California that mechanic's lien rights do not attach unless and until construction begins by the doing of actual, visible work on the land or the delivery of construction materials to it. Recognizing that this operates to deny design professionals - who perform a large majority of their services pre-construction - of a mechanism to lien the property to secure payment for services rendered when construction never commences, California lawmakers enacted a design professional lien at Civil Code §§3081.1, et seq. Such liens allow defined "design professionals" to secure liens for services rendered before construction begins.
A Court of Appeal, however, has suggested that these protections do not extend to design-build contractors for pre-construction services.
Summit Builders, a licensed contractor, entered into a design-build agreement for a large hotel and retail development project in Long Beach. Over two years, Summit provided the owner with approximately $850,000 in design-related services, both by performing design and planning services and by hiring design professionals. The owner was unable to procure financing for the project and never began construction. Summit was not paid for its extensive pre-construction services.
Summit recorded a mechanic's lien and filed suit to enforce it. Summit argued that Civil Code §§3081.2, et seq. authorized a lien for pre-construction design services and that its protections were available to design-build contractors as well as to design professionals. Summit also argued that its lien could not be defeated for lack of work when the owner had refused to start construction. The owner moved to remove the lien on grounds there was no legal basis for it. The owner argued that contractors cannot assert mechanic's lien rights for design services unless construction begins and that the doctrine of owner prevention of completion was not applicable. The trial court granted the owner relief but required the owner to post a release bond for 150 percent of the lien amount.
The Court of Appeal affirmed removal of the lien but struck the requirement that a release bond be posted. D'Orsay International Partners v. Superior Court (Stone), 123 Cal.App.4th 836 (2004).
The appeals court found that Summit had no right to encumber the property with a mechanic's lien. The court highlighted the differences between a design professional's lien and a mechanic's lien, found that Summit had recorded a mechanic's lien, reaffirmed that mechanic's lien rights do not attach unless and until construction commences on the property or materials are delivered to it, and refused to recognize "owner prevention of completion" as a public policy exception to that rule.
More significantly, the court also offered insight as to how it might rule had Summit recorded a design professional's lien.
Noting that Summit had recorded a mechanic's lien, the court first articulated the distinctions between a design professional's lien and Summit's mechanic's lien. Reasoning that they are separate liens, serve separate purposes and are governed by separate provisions of the California Civil Code, the court concluded that Summit could not rely upon the principles underlying the design professional's lien law to validate a design-build contractor's pre-construction mechanic's lien. D'Orsay, therefore, reaffirms the proposition that California mechanic's liens do not attach unless and until construction actually commences.
Summit also argued for resurrection of a once-recognized exception to this rule. The "owner prevention of completion" doctrine - that "against an owner who prevents commencement of construction, no actual or visible work is necessary for an architect to attach a mechanic's lien" - was recognized in In re Morrell, 42 B.R. 973, 976 (Bankr. N.D. Cal. 1984). There, the U.S. Bankruptcy Court concluded, "It would be manifestly unjust to deny an architect a lien because the person with whom the architect contracted has prevented the work that raises the lien" and, therefore, upheld the enforceability of the architect's pre-construction mechanic's lien.
The D'Orsay court, however, rejected Summit's argument. Noting that "the Legislature established the remedy of a design professionals' lien" expressly in response to Morrell, the court concluded that in so doing, "the Legislature eliminated Morrell's 'owner prevention' exception to the general rule that a mechanic's lien cannot attach until there is actual visible work on the land."
While the D'Orsay court held these findings sufficient to justify invalidating Summit's lien, the court nevertheless took the opportunity to address the apparent inapplicability of the design professionals' lien laws in situations like the one before it. The court noted that the statute expressly defines the design professionals to which it applies. In a lengthy footnote, the court acknowledged that "it is arguable [that] the rationale supporting design professionals' lien rights applies equally to contractors that perform design/planning services." But, the D'Orsay court continued:
However, a leading treatise rejects such an interpretation and reads the design professionals' lien statutes literally, stating: "The design professionals lien is available only to certified architects, registered professional engineers, and licensed land surveyors who furnish their services pursuant to a written contract with a landowner. (thereby excluding, for example, a contractor with a design-build contract)."
The court ultimately concluded that "we do not have occasion to pass upon whether a contractor performing design services or employing design professionals may assert a design professionals' lien." Nevertheless, the court made it apparent how it would rule if confronted with a design-build contractor's request to enforce a design professionals' lien. Because a literal reading of the statute provides no pre-construction lien rights for design-build contractors, design-build contractors cannot rely on their availability and must be diligent in taking other appropriate measures to secure payment for pre-construction design and planning services.
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For more information about the issues covered in this report, please contact Clark Thiel in our San Francisco office at 415-848-4934 or at thielc@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
©2005 Howrey LLP
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