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.
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.