Increase the Value of your Mechanic’s Lien with an Attorneys Fees Clause

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By Robert B. Jacobs, Attorney at Law

The California Constitution provides contractors with a constitutional right to a mechanic’s lien. Mechanic’s lien rights are provided to make sure that contractors who improve the value of real property have a source of funds available for payment if the contractor isn’t otherwise paid for their work.
However, even though mechanic’s lien rights are based in the constitution, the right to a mechanic’s lien is limited. It’s easy to lose lien rights if liens are not recorded on time, or if 20 day preliminary notices aren’t properly given. The extent of a mechanic’s lien is also limited to the value of the labor and materials actually incorporated into the work of improvement.
This limitation can be very significant. If a contractor signs a written contract, but then the owner or a general contractor fails to pay the contractor as required by the contract, then the unpaid contractor will have to file a lawsuit in order to compel payment. Contractors who haven’t been through litigation might not realize that the attorneys fees involved in a lawsuit to foreclose a mechanic’s lien can be substantial. If an unpaid contractor must file suit in order to get paid, then the ability of that contractor to recover their attorneys fees and costs can be a substantial consideration.
Mechanic’s liens don’t include attorneys fees because an attorney’s services aren’t incorporated into the work of improvement. This means that if an unpaid contractor files suit to foreclose a mechanic’s lien, that contractor will never be entitled to include in their lien any of the attorneys fees paid by the contractor. Every dollar the contractor pays to the attorney is a dollar that the contractor will never see again. As a result, if the owner flatly refuses to pay the contractor, then the value of the contractor’s claim can be severely eroded if the contractor is required to vigorously litigate his mechanic’s lien claim before being paid.
However, even though a mechanic’s lien claim cannot include attorneys fees, there is a very practical approach to this attorneys fees issue that can substantially benefit the contractor. If the contractor has included an attorneys fees clause in the contract, then the contractor will have a contractual right to attorneys fees. This can work very effectively in tandem with a mechanic’s lien claim. If the contractor signs a contract with an owner, and then the contractor isn’t paid, the contractor can record a claim of lien, which will cloud title to the property. This lien may prevent the owner from selling or refinancing the property (unless the owner bonds around the lien). This cloud on title can sometimes result in an early settlement. If no early settlement is reached, then the unpaid contractor will at least have a lien on the property to secure any ultimate judgment obtained by the contractor. However, in any suit to foreclose the lien, the unpaid contractor will also have the right to assert a breach of contract claim. If the contract includes an attorneys fees clause, then the contractor will have a right to recover part or all of their attorneys fees following a trial. If the contractor receives an award of attorneys fees following a trial, then the contractor can promptly record a judgment lien against the property, and this judgment lien will include the attorneys fees awarded to the contractor. The net effect is that the contractor will end up with two liens on the property: a mechanic’s lien and a judgment lien. As a result, the mechanic’s lien clouds title up through trial, and then the judgment lien after trial includes the contractor’s attorneys fees. If the contractor wins at trial, then the property should be sold pursuant to the mechanic’s lien, and at any foreclosure sale the contractor will have the benefit of the judgment lien (which includes attorneys fees) in connection with their bidding at the sale.
The bottom line is that any contractor who ends up in litigation to enforce a mechanic’s lien should include an attorneys fees clause in their contract if they want to have the opportunity to recover their attorneys fees.
The Law Office of Robert B. Jacobs provides legal services in the areas of Construction, Business, and Real Estate Law. The office is located in Pleasanton, California and can be reached at (925) 847-8680. The foregoing article is not a complete discussion of the applicable law, and competent counsel should be consulted concerning any specific situation or issue. © 2008 Robert B. Jacobs. All rights reserved.