I received an interesting telephone call from a client recently, which caused me to dig a bit deeper into California’s recent mechanics lien law changes with respect to the “new” requirement that general contractors send preliminary notices. As you’ll see from this post, general contractors certainly have a preliminary notice requirement under the new law, but things are quite hazy under the old statute.
General Contractors Preliminary Notice Requirement Uncertain Under Old California Mechanics Lien Code Articles
Under the pre-amended California mechanics lien laws, preliminary notice requirements were enumerated in Cal. Civil Code §3097. Paragraph (b) had this very peculiar language:
Except the contractor, or one performing actual labor for wages…all persons who have a direct contract with the owner and who furnish labor, service, equipment, or material for which a lien or payment bond otherwise can be claimed under this title…shall, as a necessary prerequisite to the validity of any claim…cause to be given to the construction lender, if any, or to the reputed construction lender, if any, a written preliminary notice as prescribed by this section.
According to this language “all persons who have a direct contract with the owner” must deliver preliminary notice to the construction lender, if there is one. However, a “person performing actual labor for wages” or a “contractor” was clearly exempt from the requirement. The problem, of course, is that the term “contractor” was not defined by the statutes. Is the term “contractor” supposed to mean prime contractor or general contractor? Or is it referring to a trades person? Or is it referring to a material supplier tho contracts with the owner.
To further complicate things, the preceding paragraph (a) indicated that preliminary notice was required of everyone “except one under direct contract with the owner.”
In a recent appellate decision from California’s Fifth Appellate District, a material supplier argued that it was exempt from delivering a preliminary notice to the construction lender under the legacy code articles because it contracted with the owner (Shady-Tree-v-Omni-Financial). The court had to define the term “contractor” and reconcile the clear ambiguity between paragraphs (a) and (b). It stated:
Other courts that have had occasion to analyze the term “contractor” as used in section 3097(b), have concluded that “the contractor” refers to the general or prime contractor…[C]onstruing section 3097(a) and (b) so as to give the words their ordinary and usual meaning and to avoid surplusage, we conclude that [the material supplier] was required to give a preliminary 20-day notice. Subdivisions (a) and (b) are not alternatives. If either one is met the 20-day notice must be given. Further, persons who have a direct contract with the owner are not “the contractor” under section 3097(b) based solely on that relationship.
Under prior law, therefore, it appears that only general contractors or prime contractors would be exempt from the preliminary notice requirement.
New California Code Articles Clarify the General Contractor’s Preliminary Notice Requirement
California completely revamped their mechanics lien and stop payment laws in July 2012, and included a fix for the above-discussed confusing language. We wrote about the effects of this fix in a previous article: General Contractors Must Now Send Preliminary Notice in California.
The new less confusing language is in Cal Civ Code §8200(e)(2), which provides that everyone must give preliminary notice except that:
(1) A laborer is not required to give preliminary notice. (2) A claimant with a direct contractual relationship with an owner or reputed owner is required to give preliminary notice only to the construction lender or reputed construction lender, if any.
There are two effects to this change in language.
First, there is no longer use of the confusing “contractor” term. The law now just refers to the “claimant,” which means that every possible claimant would be included in the exemption including material suppliers, subcontractors, and the like.
Second, it is clear that all parties — including general contractors — must notify the construction lender, if there is a lender one the project.
What Law Applies To Contracts From Before July 2012?
This brings us to the question presented at the beginning of the post. What requirement would apply to a general contractor who contracted before the July 2012 law change date?
The answer appears to be that if the general contractor contracted before July 2012 they would be regulated by the pre-amended law. Accordingly, they would be exempt from providing any preliminary notice whatsoever.
Once the contracting date crosses the July 1, 2012 mark, however, preliminary notice must be delivered to the construction lender.