May 28

The Design Professional’s Most Powerful Weapon In Getting Paid

During a development project, one or more design professionals will be typically engaged by the developer early in the process. Those design professionals may assist in creating a topographical map, an exterior architectural design for the project, developing a drainage plan or a plan for the contouring of the land suitable for the project through a series of cuts and fills, or a landscaping plan.

In an era when development costs have skyrocketed, while development money is scarce and investors leery, the financial risks of the development process make it imperative that the design professional be cautious about allowing the development client to incur too large of an account receivable. And it behooves the design professional to become familiar with the design professional lien.

Which Design Professionals Have Lien Rights?

For over twenty years, California law has defined a “design professional” as an architect, an engineer, or a land surveyor. However, the Civil Code’s treatment of construction lien rights was overhauled effective July 1, 2012, and landscape architects were added to the class of design professionals who have lien rights. Civil Code Section 8014.

The design professional must have a written contract for his or her services, and that contract must be with the landowner. Importantly, the landowner with whom the contract is created must also be the landowner at the time that the design professional’s claim of lien is recorded. The contract has to be for the design, engineering, or planning of a work of improvement. General consulting services will not typically give rise to lien rights for the design professional.

In preparing the written services contract, the design professional should always check to see just who the landowner is. Often, it will be an entity, which entity could be different than the entity which is undertaking the development process. The contract should also specify the work of improvement for which the services are being provided.

The Prerequisites

In order to use the design professional lien, construction on the project may not have begun yet. On the other hand, a design professional lien may not be recorded unless the landowner has already obtained a building permit or other governmental approval in furtherance of the project. Civil Code Section 8302(c). Thus, if a permit or other governmental approval is not obtained by the developer-owner, then the design professional has no lien rights.

The lien is available for the amount of the fee which has been provided under the contract or the reasonable value of the services, whichever is less. Inevitably, in a fee dispute with an owner, this may lead to a critical examination of the reasonableness of the design professional’s fees. Thus, it is important that the design professional maintain detailed records on how their time was spent on the project so that the design fees may be justified.

The landowner must have actually defaulted in the payment of the professional fees required by the contract or must have refused to pay the design professional’s demand for fees owed under the contract. And, not less than ten days before the claim of lien is recorded, the design professional must give the landowner-client a written notice which demands payment and states that a default has occurred under the contract and the amount of that default. Civil Code Section 8304(c).

The design professional must record a lien within ninety days of knowing, or having reason to know, that the project will not be started. Civil Code Section 8312.

One important limitation exists on the use of a design professional lien: A design professional cannot obtain a lien for services provided for a work of improvement relating to a single-family, owner-occupied residence for which the expected construction cost is less than $100,000.

What Must Be Included In The Lien?

A construction lien, which has its origins in the California Constitution (Article XIV, Section 3), has long been viewed as an extraordinarily powerful remedy for the contractor, or, in this case, the design professional, because it provides a form of security for payment of the design fees. Therefore, the courts have required that the lien claimant comply with the statutory requirements.

The design professional’s claim of lien must contain the following information:

1. The name of the design professional.
2. The dollar amount of the claim.
3. The current owner of record of the project site.
4. The legal description of the site.
5. An identification of the building permit or other governmental approval given for the work of improvement.

The legal description often crops up at the last moment as something that the lien claimant has difficulty in locating. Many County Recorder’s offices have copies of deeds available online; however, if the design professional has a good working relationship with a title company, a copy of the deed can often be obtained with a quick telephone call.

Because of the frequency with which they use lien claims, some design professionals have office procedures in place to accurately gather the information needed to prepare the lien and they use a template to create the lien form itself. Yet, with the importance of complying with the statutory requirements for the claim of lien, it may also be worth considering having an attorney prepare the claim of lien.

How Long Does The Lien Remain Valid?

The act of recording the lien is what imposes the lien on the property. However, the lien is not indefinitely valid; it will automatically expire if either (1) the project construction begins or (2) a lawsuit seeking to enforce the lien is not filed within ninety (90) days of the date the lien was recorded.

The design professional is presented with a bit of a quandary if the lien is recorded shortly before construction is anticipated to begin. Lien claimants often like to record a lien and then negotiate with the landowner, hoping that the lien will exert pressure upon the landowner by complicating the process of obtaining the necessary construction financing. However, if construction is close to beginning, the financing is most likely already in place. The design professional can prevent the lien from expiring by filing a lawsuit to enforce the lien, but the lien claimant usually wants to avoid the legal fees and court costs associated with starting up a lawsuit.

So, what is the design professional to do under such circumstances? If the design professional lien has expired because construction of the project for which the professional provided services has already begun, then the design professional lien may be converted into a mechanic’s lien if all of the following requirements are met:

1. The design professional lien remains fully or partially unpaid.
2. Within thirty days after expiration of the design professional lien (only under Civil Code Section 8306(b)(1) where the lien has expired because construction of the project has begun), the design professional records a mechanic’s lien for the amount of the unpaid design professional lien.
3. The mechanic’s lien must state that it is a converted design professional lien but is recorded and is being enforced as a mechanic’s lien.

Where the design professional lien is converted to a mechanic’s lien, the design professional does not need to provide a preliminary notice to enforce the mechanic’s lien.

The design professional’s converted mechanic’s lien is effective as of the date of recording. It is given priority over a lien or other encumbrance on the property on which the project is situated which attaches after the work on the project is started (or was unrecorded at the beginning of the work on the project and of which the design professional had no notice).

However, this issue of lien priority can pose a problem for the design professional if other liens have attached between the time that the design professional’s original lien was recorded and the date that the converted mechanic’s lien was recorded. The converted mechanic’s lien will be junior to such intervening liens. Perhaps the best advice for the design professional is, when it may be reasonably expected that other liens may attach to the property before the design professional’s converted mechanic’s lien can be recorded, to move forward with an action to enforce the original design professional lien while it is still viable.

It should be noted that, where a design professional lien has expired because the design professional failed to file an enforcement lawsuit within ninety days, that expired lien cannot be converted in this manner.

If the landowner satisfies or partially satisfies the lien, the design professional must then execute and record a document that demonstrates the partial or full satisfaction of the lien amount and releases so much of the lien as is appropriate.

Having A System Helps

The design professional has a very powerful weapon in the design professional lien for gaining payment from a defaulting developer. While the statutory requirements for asserting such a lien must be adhered to, they are not terribly complex and vigilance by the design professional will usually serve to protect the viability of the lien as an option for payment.

Often, where a landowner has stopped paying the design fees, the design professional withdraws from further service under the contract and may no longer be privy to the developer’s actions or plans for the project. In such an instance, the design professional should establish an office system which monitors when the landowner obtains a building permit or other approval for the project because that is the event which triggers the right of the design professional to record a lien. This might consist of having a staff member make a weekly call to the local building department, or, where the city or county maintains online information about issuing building permits, making frequent checks of the city’s or county’s website.

The design professional also should not delay for long in asserting his or her lien rights once the building permit has been issued because construction can begin with little prior fanfare. Asserting lien rights early in the development process will give the design professional priority over other subsequent lien claimants. If, however, the design professional lien has been lost due to the commencement of construction activities, the design professional should not lose heart as a mechanic’s lien will usually still be available to the professional under Civil Code Section 8400.

May 7

Can A Real Estate Agent Really Be Required To Disclose More Than What He or She Knows?

At some point in time, most of us have purchased a residence or some other piece of real estate and have used the services of a real estate agent or broker in the transaction. (For the sake of convenience, I will collectively refer to agents and brokers as “agents”.)

Real estate agents play a vital role in the real estate industry as they interface between sellers and buyers. Among other things, they assist sellers in making a home attractive for potential buyers and they offer their expertise in helping a seller determine an appropriate listing price. They also assist buyers in determining what the buyer really needs in a residence and what the buyer can realistically afford.

The Agent’s Duty To Disclose

One of the most important services that an agent can provide to a buyer, and particularly an inexperienced one, is to assist the buyer in evaluating a property’s condition so that the buyer does not buy a house which has numerous mechanical or structural surprises that will cost the buyer more than was expected to make the house livable.

In adopting Civil Code Section 2079, the California legislature recognized the importance of the agent’s experience and knowledge by requiring the agent to conduct a reasonably competent and diligent visual inspection of a property offered for sale and to disclose to the prospective purchaser all facts materially affecting the value or desirability of the property that an investigation would reveal. The real estate agent satisfies much of that duty through the use of the Transfer Disclosure Statement (TDS), a form which the seller and both the seller’s and buyer’s agents complete and provide to a buyer during the escrow.

But, the agent’s duty doesn’t end with his or her signature on the TDS. The law imposes a more far-reaching duty of disclosure on an agent than merely completing the TDS form, which only requires that they disclose facts and conditions which would be revealed by a reasonably competent and diligent visual inspection. California law requires an agent to actively try to learn material facts that the agent does not know that might affect their client in making a decision to buy a property.

The Agent Has To Dig To Learn Information

In Field v. Century 21 Klowden-Forness Realty (1998) 63 Cal.App.4th 18, the Court of Appeals (Fourth District) said that an agent must place herself in the buyer’s position and to ask herself what type of information the buyer would need to know in order to make a well-informed buying decision. Then, the agent must investigate facts which are not known to the agent and disclose to the buyer all material facts that might reasonably be discovered.

I tried a case some years ago in which an agent sold a property to buyers which appeared to them (and any reasonable person) to be a duplex. Each of the units had separate kitchen facilities and each was accessed through a separate entrance. The buyers had informed the agent that they intended to use the property as a duplex for their respective families. The agent knew that there were many illegally-created duplexes in the area where this property was located, but he never took it upon himself to investigate with the local planning and building officials whether or not this particular duplex had been legally created.

At trial, the agent testified that he had no actual knowledge that the duplex had not been legally created and sought to defend himself on the basis that he only needed to disclose the information that he actually knew.

The jury was given a contrary instruction, however, based upon the Field v. Century 21 Klowden-Forness Realty case, because the agent should have considered that, even though the agent didn’t have information that the duplex was illegally created, the legal status of the duplex was an important fact which the buyers needed to know to make an informed decision about buying that property. In returning a verdict against the agent, the jury found that he should have actively researched that information with local officials in order to properly inform his buyers.

A Buyer’s Failure To Investigate Does Not Absolve The Agent

The agent in my case also argued at trial that the buyers should have called the local building officials themselves to determine the legal status of the duplex property. However, a real estate agent, who owes a fiduciary duty to his or her client, and who usually has a superior knowledge about purchasing real estate over that of his client, cannot legally shift responsibility to the client to undertake that investigation. California law provides that the client has a right to rely upon the agent and that it is no defense that the buyer failed to exercise reasonable care to protect his or her own interests, or that the client might have learned the true facts by independently investigating the circumstances of the representations himself. Schoenberg v. Romike Properties (1967) 251 Cal.App.2d 154, 162; Sime v. Malouf (1949) 95 Cal.App.2d 82.

Agents Beware!

Most real estate agents are surprised to learn that they have an obligation to disclose to their client more information than they actually know and that they have to undertake an affirmative investigation of those facts which might be important for a buyer to know in deciding whether or not to purchase property. But, that is California law.

The extent of the agent’s affirmative duty to investigate and disclose facts to their client is not limitless. It depends upon the facts of the transaction and the buyer’s knowledge and experience, the questions asked by the buyer, and the nature of the property and terms of the sale.

What Are The Agent And Buyer To Do?

Diligent real estate agents should conduct an extensive discussion with their buyer to learn exactly how the buyer intends to use the property so that the agent will be better able to anticipate the information which would be important for the client to know to make the purchase decision. And, then, the agent should actually spend some time trying to think through the various issues which the specific property might possibly raise for the buyer’s anticipated use.

Similarly, an astute buyer should make certain that he or she has fully discussed with the agent how the property will be used, or what the buyer’s expectations are for the property. If the buyer has any unusual needs for the property, or if there is any expectation which is not customary in a garden variety residential purchase, the buyer should be certain to ask the agent about those issues so as to place the agent on notice that the information is important in the buyer’s purchase decision.

There is nothing worse than a real estate transaction that has gone bad. The buyer is unhappy because their dream home has become a nightmare. The seller is usually accused of having concealed information from the buyer, and the agents, who are the fiduciaries of their clients, are almost invariably made to refund some or all of their commissions to the clients. Worse yet, the seller and agents could get sued. The professional agent can avoid that, both for the agent’s sake and that of his buyer-client, by taking some time during the transaction to thoroughly investigate all of the facts about the property.

March 18

“Cash For Keys” — Consider Paying A Defaulting Tenant To Move Out

Owning a rental property can be both a rewarding and frustrating experience. With good tenants, the landlord often enjoys the emotional satisfaction of helping provide the tenants with a nice home to live in and a place to raise their family. And the rents which the tenants pay help reduce the landlord’s mortgage on the rental home. But, what about if the tenant isn’t paying their rent on time? Or worse, what if they have stopped paying their rent altogether? Dealing with a non-paying tenant can be extremely frustrating. And expensive. When a tenant stops paying, a landlord will often begin to hear excuses for the tenants’ non-payment. And, often, those explanations are based in fact. For example, during recent years, when our economy has been in a state of upheaval, and people have lost their jobs and haven’t been able to find new work, the explanation that the tenants have no money to pay their rent is very likely true. But, sometimes, there can be other reasons, such as where the tenants have been spending their money to support a substance addiction, or to feed a gambling problem. Or where they have been fired or have quit a job without having another job to transition into.

Knowing when to stop trying to accommodate the tenants’ excuses and to start up an eviction process is something that is different for each landlord and can often depend upon the landlord’s own debt service obligations for their rental property.

Treat A Rental Property Like A Business

We recommend to our clients to view a rental property like they would any other business. If a merchant were to allow customers to take goods from their store without having to pay for them, that merchant wouldn’t be able to remain in business for very long. The same is true for the landlord where the tenants aren’t paying their rent. The landlord should ask herself the question, “How long can I afford to not have the tenant pay rent and still be able to pay the mortgage on the property?”

Eviction

When the landlord eventually concludes that the tenants can no longer remain in the property, the landlord does have some options. One is to begin an unlawful detainer proceeding by serving the tenants with a three-day notice to pay rent. A three-day notice is a legal prerequisite for filing an unlawful detainer action to regain possession of the property from the tenants.

Often, the tenants won’t understand that the landlord is serious about their need to pay rent unless and until a three-day notice is actually served upon them. However, while an unlawful detainer action is often a necessary step for a landlord to regain possession of their rental property from the tenants, it can also be an expensive proposition, particularly if the tenants are savvy and know how to prolong the process and make it more costly for the landlord.

“Cash for Keys”

Another option available to a landlord is to offer the tenants some “cash for keys.” That is to say, the landlord offers to pay the tenants to move out of their house. This may seem like an extraordinary step — having to pay a defaulting tenant to give up possession of the landlord’s rental property — but, with the cost of a lengthy eviction often reaching thousands of dollars, it can also often result in an actual savings of money for the landlord. And, when a tenant has defaulted in their payment of rent for a month or two, there is usually too little money or other assets against which a landlord could hope to enforce a future judgment for those unpaid rents. So, the landlord is better off quickly regaining possession of their rental unit so that they can get it cleaned and promptly re-rented.

The “Key Components”

There are several “key” components to such a “cash for keys” arrangement, however. First, the amount of money that the landlord offers the tenants for the keys to the house should be reasonable. Depending upon the amount of the monthly rent, perhaps an amount equal to a week’s or two weeks’ rent. But, this is all negotiable between the landlord and the tenants and, while the landlord should be reasonable, he should not feel a need to be generous or benevolent. After all, if the landlord offers to pay too much cash, she doesn’t really save much more than if she had actually gone through the eviction process.

Second, the landlord should rarely give the tenants the “cash for keys” money until the tenant has actually entirely moved out. Third, the tenants should be given enough time to pack up their belongings and move from the house. Often, this may require one to two weeks’ time. The tenants, however, will usually want a longer period of time. They are getting free rent and know that, when they move elsewhere, they will have to pay the first month’s rent and a security deposit, which they may not have. But, there needs to be a sense of urgency impressed upon the tenants that they need to get out quickly so that the landlord can get the property back and re-rent it so that it begins to produce income for the landlord again. Almost invariably, the landlord benefits from as short a period of time as possible.

Finally, and perhaps most importantly, there needs to be a legally enforceable right for the landlord to have the tenants immediately evicted if the tenants have not moved out by the agreed-upon date. If the landlord has agreed to pay the tenants money to regain possession, and the tenants don’t actually leave by the move-out date, the landlord will have lost precious time if he has to start the eviction process now from scratch. It is far better to have the tenants’ written agreement that, in exchange for the promised “cash for keys”, the tenants are giving up the right to a trial and are giving up possession of the property so that a writ of possession can be obtained and served upon the tenants should they not actually move out.

Preserving this important right for the landlord is usually something that should be entrusted to a lawyer to handle because it does require that specific language be used in the “cash for keys” agreement. An experienced eviction attorney can quickly draft the agreement for the landlord’s use with the tenants and, in doing so, the landlord will usually save quite a bit of cost by avoiding a lengthy unlawful detainer process and trial.

In summary, a landlord should treat the rental property like a business by using good business judgment in your dealings with your tenants. Then, think outside the box and be creative in working out a resolution of the unpaid rent and the need to regain possession of the property. But, most importantly, make sure that the agreement has an enforcement mechanism that will permit the landlord to actually regain possession of the rental house.