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The case law related to mechanics’ liens is fairly well settled and more often than not deals with issues of perfecting or enforcing the lien right. Nevertheless, the right to file a lien and against whom it may be asserted are the subject of two recent cases from the First District Court of Appeal. The prerequisite issue of proper licensing and “substantial compliance” for a contractor was reviewed in Slatkin v. White (2002) 102 Cal.App.4th 963. The obligations of owners under the “participating owner doctrine” were reviewed in Howard S. Wright Construction Co. v. Superior Court (BBIC), 2003 C.D.O.S. 1438. Both cases are important because the court explained the manner in which these two doctrines affect and are to be interpreted in the mechanics’ lien statutory scheme. Before reviewing the cases, it is important to understand that mechanics’ liens are constitutionally guaranteed rights. California Constitution, Article XIV, �3 provides: “Mechanics, persons furnishing materials, artisans and laborers of every class, shall have a lien upon the property upon which they have bestowed labor or furnished material for the value of such labor done and material furnished; and the Legislature shall provide, by law, for the speedy and efficient enforcement of such liens.” As the First District has said, “The mechanics’ lien is the only creditors’ remedy stemming from constitutional command and our courts ‘have uniformly classified the mechanics’ lien laws as remedial legislation, to be liberally construed for the protection of laborers and materialmen.’” ( Coast Central Credit Union v. Superior Court, 209 Cal.App.3d 703.) In Slatkin, the First District was asked to review the mechanics’ lien rights of a contractor whose license had been suspended during the course of construction. The contractor’s bonding company had not renewed the license bond and apparently had not informed White, the contractor. The first indication he had that his license was suspended was when the Contractors State License Board notified him. By that time he was three months from completion on a project that had been ongoing for more than 2 1/2 years. The homeowner, though, contended that White had no lien rights at all because he was not properly licensed during part of the project. White admitted that for four months he was not licensed but argued that he had substantially complied with the licensing law and therefore should not be denied the lien claim. The court reviewed Business & Professions Code �7031, in particular subsections (a) and (d) in relation to subsection (e), in order to determine how the Legislature intended the doctrine of substantial compliance to apply. “There is an important uncertainty in the meaning of subdivision (e) of Section 7031,” Justice Stuart Pollak wrote for a unanimous First District panel. “The third requirement for establishing substantial compliance with licensure requirements — that the individual did not know or reasonably should not have known that he or she was not duly licensed — has no time referent . . . while both subdivisions (a) and (d) of Section 7031 are explicit that the general prohibition against the recovery of payment applies if the contractor is not duly licensed “at all times during the performance” of the contract. . . .” According to the Legislative history, �7031(e) was “intended to ameliorate the harsh consequences of the section. (Sen. Com. on Business and Professions, com. on SB 1844 (1993-1994) Reg. Sess.) as introduced Feb. 24, 1994, p. 2.” The court reasoned that to accept plaintiff’s argument that White had no lien rights, because for a certain period of time during the contract he was not licensed, would be inconsistent with the intention of the Legislature, which was to avoid just such a harsh consequence. The court held that “the contractor does not necessarily lose the right to be compensated simply because he or she performs additional work after discovering the loss of licensure, so long as the individual did not have knowledge or notice of the loss before the start of the job.” Notwithstanding that holding, the court encouraged further rulemaking by the licensing board on this subject. It also identified other pertinent factors to consider in determining substantial compliance, including the reason the license was lost, the stage of construction when notice is received that it is lost and the “expressed or apparent desires of the client or property owner.” In Wright, the First District confronted the mechanics’ lien issue, but this time from the owner’s perspective. The contractor had provided tenant improvements in a commercial space to be used by a telecommunications company, 360network. BBIC was the landlord, and when 360network went into bankruptcy, Wright filed its mechanics’ lien against BBIC. Wright also recorded a lis pendens, which BBIC petitioned to expunge and to remove. The issue was whether Wright had any claims against BBIC as the landlord that would allow the filing of the lis pendens. BBIC had recorded a Notice of Non-responsibility when 360networks contracted with Wright for the work. BBIC asserted that 360networks was the only responsible party and that the property could not be foreclosed because BBIC had no obligations to Wright for the tenant improvements. The lease terms, though, implicated BBIC in the improvements and Wright relied on the “participating owner doctrine” to establish its lien rights. Justice Barbara Jones agreed with Wright Construction. “When the property is subject to a lease and the lessee orders the work to be done on the leased premises without the lessor’s knowledge, then the lien attaches only to the lessee’s leasehold interest,” Jones wrote for a unanimous panel, citing English v. Olympic Auditorium Inc., 217 Cal. 631 (1933). “However, improvements constructed with the owner’s knowledge are deemed to be at the instance of the owner — unless the owner gives notice of non-responsibility. (Civ. Code �3129.)” But even then, “‘the notice of non-responsibility shield is not bulletproof,’” Jones continued, quoting from a law review article. “‘If the property owner “participates” through lease provisions by requiring the lessee to make improvements to the leasehold, the owner cannot shield its property interest.’ (Diepenbrock et al., Lessor Liability for Mechanics’ Liens Under the California Participating Owner Doctrine (1992) 24 Pacific L.J. 83, 97, fn. omitted).” Under the terms of the lease with 360networks, the property was to be used for telecommunications only. Other uses, including manufacturing, warehousing or inventory, were expressly prohibited. Furthermore, alterations for the specific use of the building as a telecommunications center were identified in written supplements to the lease. Finally and conclusively, “the evidence indicates that making the improvements was not an option for the tenant (because in order to use the building at all the improvements needed to be made) . . . [and] the lease required 360networks to obtain BBIC’s approval of the plans and specifications of its initial alterations.” Therefore, as the court saw it, BBIC “participated” in the construction. BBIC defended by arguing that Wright never considered BBIC as the owner. The court dismissed this as irrelevant. “For purposes of the participating owner doctrine, the tenant need not act as the landlord’s actual or ostensible agent; the tenant becomes the agent of the landlord “by implication of law” when the lease requires the tenant to make the improvements,” Jones wrote, citing a Missouri case. Furthermore, the fact that a lease does or does not require a particular improvement is not determinative. “The question is whether the improvements were a practical necessity for the contemplated use of the premises,” Jones wrote. In order to collect any rent from 360networks, the improvements had to be completed, otherwise the building could not be used as intended. In addition, the fact that there was no cost sharing or profit sharing between tenant and owner was also not determinative. “The financial entanglement existed in a different form in that BBIC stood to benefit from the higher rent made possible by the improvements.” Accordingly, the court held that BBIC participated in the construction sufficient for the participating owner doctrine to apply and therefore Wright had a lien right against BBIC, notwithstanding that the improvements were ostensibly made for the tenant. The two cases demonstrate that in California the mechanics’ lien rights of contractors are extremely important and the courts will go to some lengths to protect them. In particular, where owners have the benefit of the contractor’s improvement to their property it is very likely that technicalities will not trump a contractor’s right to be paid, albeit with certain significant conditions. Those conditions, however, will determine the matter for either the contractor or the owner. John P. McGill is an attorney with Archer Norris in Walnut Creek. His practice consists of mainly construction-related litigation and transactional matters.

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