Good intentions with a wide-open field for fraud and extortion without consequences
Imagine the situation, you are about to refinance your house or sell it, and all of a sudden you find out that there is a mechanic’s lien recorded on the title of your house, and unless and until you pay it, you can’t close on the purchase or the refinance. You start doing some research, turns out some contractor stopped by your house a year ago to give you an estimate for some simple repair, he didn’t get hired, so he decided to get back at you by filing a mechanic’s lien on your house for $2,000 claiming that he had done some work on your property and didn’t get paid. And now you have a choice to make: pay him now in exchange for a clean title, or pay between $5,000 and $25,000 in legal fees and spend the next 6 months fighting him in court, and most probably he will win!
Sounds crazy, but in California, this is a harsh reality that many homeowners and even professional developers and builders face on a daily basis, and California laws are not offering any protection! In California (and many other states), there is a serious imbalance in how mechanic’s lien laws are structured and who they protect the most.
Mechanic’s lien regulations and laws were put in place many decades ago in order to provide legal protection for contractors, subcontractors, laborers, and material suppliers to ensure they get paid for work or materials provided to improve real property. California’s lien laws date back more than a century and are rooted in constitutional protections (California Constitution, Article XIV, Section 3), recognizing that workers and suppliers often don’t have leverage against property owners or general contractors who fail to pay. The system was designed in an era when contractors were the underdogs, often not paid by wealthy landowners.
The lien gives them the right to record a claim against the property, and if unpaid within 90 days, force a sale of the property through a foreclosure action. It’s a strong tool because otherwise, these workers might be left unpaid with no collateral.
Now, especially in residential settings, homeowners have become equally or more vulnerable, particularly against unscrupulous or unlicensed contractors. While the intention of the law was honorable, nobody considered putting any verification procedures in place to ensure that the claims are valid, and where a void like this exists, it becomes the hunting ground for thieves, liars, fraudsters, and impostors. And over decades, this made consumers more and more vulnerable to the point that it so much easier to extort money from consumers and still maintain your license without any repercussions. Not even a slap on your wrist, just pure extortion money-making machine!
How is it possible? Why is it hurting Consumers?
First off, Mechanic’s Liens can be recorded without any court review or verification.
Anyone who claims to have done work or supplied materials can record a lien at the county recorder’s office without proving its validity first. All they need to do is to pay the court filing fee, and they now clouded the title to your property and got themselves the right to start a foreclosure on your house, sometimes without you even knowing it, because they don’t even have to notify you about the recording! Once the lien is recorded, the burden is now on the property owner to challenge the lien, often at their own expense.
No Pre-Screening or Verification
There’s no government agency or process in place that verifies whether the lien is valid or whether the work was actually done. Unscrupulous contractors can misuse this by filing fraudulent or exaggerated liens as leverage in disputes. You don’t even have to be licensed to file the lien, any handyman can file a lien for a small amount, say $500, and claim wrongdoing on behalf of the homeowner.
You would think that the California Contractors Board would help you, think again. Like most licensing agencies in California (Department of Real Estate comes to mind, for example), most of these agencies are mostly concerned about collecting licensing fees, but when it comes to enforcement or investigation, they claim that this is not their priority, and they don’t have the personnel to do it, so they will refer you to a legal council (at your own expense) to deal with the situation.
Legal Costs and Delays are on the Consumer now
Once the lien is recorded, the property owners’ choice of actions to remove it is very limited, they can file a “Petition to Release Mechanic’s Lien” or initiate a “quiet title” action, both of which cost substantial amount of money and TIME! This is especially burdensome if a lien is preventing the sale or refinance of a home. Now the Consumers have to decide, follow the “legal” process to remove “illegal” lien for 6 months or more, or just pay the ransom, and move on. What would you do?
No Remedy for Consumer and no Penalty on Contractor
Although there are penalties under Civil Code § 8422 for willfully overstated or fraudulent liens, they’re rarely enforced, and homeowners often lack the resources to pursue a case against an unscrupulous contractor. There is no investigative or enforcement agency that deals with such situations, because they are considered too small, and it’s hard to find out if the same contractor used the same extortion tactics on multiple homeowners, so neither the DA Office nor the State Licensing Board will do any investigation into the matters, regardless of how blatantly false the claim filed by the contractor.
So, the reality is that the process to record the lien is fast and simple; the process to get a lien removed is slow, complex, and painful!
And if you think that affects only individual property owners, you are wrong! It affects professional developers and builders just as much! Any sub or an employee of the sub can claim some unpaid part of work on the project and record a lien, and since the developers are often under pressure with their investors, construction lenders and other parties to keep the title clean, they are forced to pay thousands of dollars to these extortionists in order to avoid complications on multimillion dollar projects. And the California Contractor State Licensing Board (CSLB) will not even consider their complaint because CSLB considers it a “commercial” complaint and claims that this is outside of their jurisdiction (personal experience!), even though the contractor licenses that they regulate are the same for residential or commercial or large-scale construction projects.
What can California legislation do about it?
The overhaul of the mechanic’s lien laws is overdue by over 100 years. Just like title fraud, mechanic’s liens can become an extortion weapon in the hands of unscrupulous contractors without any repercussions, even if the property owner eventually prevails and removes the fraudulent or invalid lien from the property title. These are just a few suggestions that California lawmakers can put in place to
- Mandatory Bonding or Pre-Qualification of contractors before they can record a lien. Bonds should be especially required if the contractor starts a foreclosure process on the property, as this triggers a substantial risk for the homeowner!
- Fast-track Dispute Resolution, such as a small claims-style lien review board.
- Increased Penalties for knowingly fraudulent or outdated liens, potential license suspension or revocation, and civil penalties.
- Automatic Judicial Review before allowing certain liens to be recorded on owner-occupied residential property.
- Lien Waiver Protections that are clearer and enforceable during progress payments.
- Automatic license suspension for contractors filing fraudulent liens. If the lien was not fraudulent, but illegal due to missed deadlines or other legal requirements, the license should be suspended until the contractor retakes and passes the Legal part of the license exam again and posts an additional contractor bond. Filing deadline is one of the basics of the legal part of the contractor license exam; failing this in practice demonstrates a lack of knowledge, therefore, no license.
- The consumer prevailing in the dispute should be able to collect the legal fees and any other fees related to clearing the title directly from the Contractor’s bond instead of chasing the contractor for years. This will automatically require the contractor to settle with the bond company or lose their license.
As a professional builder, I had to face this situation on my own projects when a failed contractor was fired from the job, and then kept recording mechanics’ liens on several of my properties for almost two years, trying to prevent me from refinancing or selling the properties. I spent tens of thousands of dollars in legal costs, and through my own experience found out that any unscrupulous contractor has an upper hand and unlimited control over your properties, and there is absolutely NO PROTECTION for any property owners in California, doesn’t matter if you are builder like me, or some grandma with a little house and no means to protect herself. I spoke with many homeowners and builders who found themselves in similar situations; nobody got any help from the CSLB or any other state agency, and it appears to be a large-scale problem that requires serious legislative help.
Alex Lisnevsky