Will a Notice of Non-Responsibility Prevent Enforcement of a California Mechanics Lien?

William L. Porter | Porter Law Group

The “Notice of Non-Responsibility” is one of the most misunderstood and ineffectively used of all the legal tools available to property owners in California construction law. As a result, in most cases the answer to the above question is “No”, the posting and recording of a Notice of Non-Responsibility will not prevent enforcement of a California Mechanics Lien.

The “Notice of Non-Responsibility” is one of the most misunderstood and ineffectively used of all the legal tools available to property owners in California construction law. As a result, in most cases the answer to the above question is “No”, the posting and recording of a Notice of Non-Responsibility will not prevent enforcement of a California Mechanics Lien.

The mechanics lien is a tool used by a claimant who has not been paid for performing work or supplying materials to a construction project. It provides the claimant the right to encumber the property where the work was performed and thereafter sell the property in order to obtain payment for the work or materials, even though the claimant had no contract directly with the property owner. When properly used, a Notice of Non-Responsibility will render a mechanics lien unenforceable against the property where the construction work was performed. By derailing the mechanics lien the owner protects his property from a mechanics lien foreclosure sale. Unfortunately, owners often misunderstand when they can and cannot effectively use a Notice of Non-Responsibility. As a result, the Notice of Non-Responsibility is usually ineffective in protecting the owner and his property.

The rules for the use of the Notice of Non-Responsibility are found in California Civil Code section 8444. Deceptively simple, the rules essentially state that an owner “that did not contract for the work of improvement”, within 10 days after the owner first “has knowledge of the work of improvement”, may fill out the necessary legal form for a Notice of Non-Responsibility and post that form at the worksite and record it with the local County Recorder in order to prevent enforcement of a later mechanics lien on the property.

What commonly occurs however is that early in the process the owner authorizes or even requiresits tenant to perform beneficial tenant improvements on the property. This authorization is often set forth in a tenant lease or other written document. The dispositive factor for determining whether the Notice of Non-Responsibility will be enforceable though is that the owner knows that these improvements will be made to the property and intends that they be made, usually long before the work begins. Indeed, the owner has usually negotiated these very terms into the lease contract. The owner then mistakenly believes that once work on the property commences it has 10 days to post and record a Notice of Non-Responsibility and thereby protect itself from a mechanics lien.

The usual error is two-fold. First, the statute states that the Notice is available when the owner “did not contract for the work of improvement”. The fact though is that the owner did contract for the work of improvement. It did so through the lease contract. This is true even though the owner’s contract was not with the contractor or supplier directly. Secondly, the 10 day period to post and record the Notice begins when the owner first “has knowledge” of the work of improvement. This knowledge was of course gained when the lease was negotiated and signed, providing knowledge typically many days before the work has begun. Thus, the 10 day period can also seldom be met. The Notice of Non-Responsibility will therefore fail both rules because the owner has in fact contracted for the improvement and because he does not act within 10 days of gaining this knowledge.

The next event in the typical scenario occurs when the tenant does not pay its contractor. The contractor then has nothing to pay its subcontractors. Material suppliers also go unpaid. Mechanics liens are then recorded by the unpaid claimant, followed by foreclosure actions within ninety days thereafter. Owners will typically point to the Notice of Non-Responsibility they posted and recorded, claiming its protection. Claimants then in turn point to the lease or other evidence that the owner knew of the pending improvements and contracted in some way that the improvements be performed, often also more than 10 days before they posted the Notice. Judges generally agree with the unpaid mechanics lien claimants and the Notice of Non-Responsibility is deemed ineffective.

The fact that the Court does not enforce the Notice of Non-Responsibility under these circumstances is not an unfair result. Since the owner authorized the work to be performed and it received a substantial benefit in the form of those improvements, it is not unfair that the owner should pay for those benefits. It would be inequitable for the owner to obtain the benefit of the improvements which it authorized but for which it did not pay, while allowing those who provided the benefit to go unpaid. Moreover, without such a system in place the door would be open to owners setting up sham “tenants” who would enter into contracts to have work performed, only to disappear when the work is completed, leaving the contractor without a source of payment. The system in place as described above prevents such duplicity. Owners would do well to arm themselves with proper knowledge of when the Notice of Non-Responsibility will and will not protect them and then responsibly use the Notice of Non-Responsibility.

For the legal eagles among you, the following cases illustrate view of the courts, consistent with the above: Baker v. Hubbard (1980) 101 Cal.App.3d 226; Ott Hardware v. Yost (1945) 69 Cal. App.2d 593 (lease terms); Los Banos Gravel Co. v. Freeman (1976) 58 Cal.App.3d 785 (common interest); Howard S. Wright Construction Co. v. Superior Court (2003); 106 Cal.App.4th 314 (participating owner).

Sweet News for Yum Yum Donuts: Lost Goodwill is Not an All or Nothing Proposition

Josh Cohen | California Construction Law Blog | August 12, 2019

Last month a California Court of Appeals clarified that a property owner facing eminent domain is only required to prove partial loss of goodwill, not total loss of goodwill, to be entitled to a trial on the amount of goodwill lost.

Yum Yum Donuts operated a shop in Los Angeles that was subject to eminent domain by the Los Angeles Metropolitan Transportation Authority (MTA) to make way for light railway track. At trial, Yum Yum sought loss of goodwill as part of its condemnation damages under Code of Civil Procedure section 1263.510.

At trial the MTA’s expert testified that Yum Yum could have reduced its goodwill loss if it relocated to one of three alternative locations rather than simply closing the shop. But the expert conceded that even if Yum Yum had relocated, it would have lost some goodwill.  Yum Yum refused to relocate, arguing that its relocation costs would render the move unprofitable.  The trial court found that Yum Yum’s failure to mitigate its damages barred Yum Yum from having a jury trial to recover any goodwill damages.

Yum Yum appealed, and the Court of Appeal reversed, finding that a condemnee is entitled to a jury trial on the amount of lost goodwill if it can establish that it will still lose some of its goodwill if it relocates.  Reviewing the legislative history the Court found section 1263.510 was intended to displace “judicial stinginess” about compensating condemnees.  The Court concluded the statute provides a two-step process; the trial court determines if the condemnee meets its burden of establishing that the condemnation caused loss of goodwill, that the loss is unavoidable and that the condemnee will not be obtaining double recovery.  If the condemnee meets this burden, it’s entitled to a jury trial on the amount of lost goodwill.

The Court remanded the matter for a jury trial as to the amount of goodwill lost by Yum Yum, but given that Yum Yum failed to mitigate its goodwill loss, the matter is hardly a slam dunk.

California’s Insurance Adjuster Act of 2019 Is Coming

Derek Chalken | Property Insurance Coverage Law Blog | August 5, 2019

California’s Senate Bill 2401 is making its way through the legislature and will hopefully bring some important changes to the way insurance companies train their out of state adjusters who handle California based policyholder’s claims. The bill, also known as the Insurance Adjuster Act of 2019, was created by Senator Bill Dodd to eliminate confusion and delays caused by out-of-state or unaware adjusters.

Of significance, the bill will require the California Department of Insurance (DOI) to produce an annual notice describing the most significant California laws pertaining to property insurance policies (including those regarding declared states of emergency) and require the out-of-state adjusters to submit a signed certification, under penalty of perjury, that they have read the most recent notices issued by the DOI, as well as a handbook for adjusting claims prepared by the DOI.

Another part of the act requires that carriers assign a primary point of contact for insureds during a state of emergency. This law was drafted with the hope that it would limit confusion created when carriers assign multiple adjusters to a single claim. For example, insurers often have a desk adjuster, independent field adjusters, contents adjusters and even ALE adjusters working on a single claim. The new bill will require the DOI to provide training standards for these adjusters and require the carrier provide a single point of contact. Insureds simply do not know which person to contact. The new law aims to streamline these communications with the insurer through one person.

These guidelines will hopefully increase the accountability insurers have when they assigned out-of-state adjusters to deal with increased claims activities following catastrophic disasters. If you feel your carrier is not abiding by their obligations to you, contact a Merlin Law Group attorney for a consultation.
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1 https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201920200SB240

Feeling the Heat: Do California’s Health and Safety Regulations Increase the Value of Your Insurance Claim?

Daniel Veroff | Property Insurance Coverage Law Blog | July 11, 2019

California summers can get hot. To protect workers, the state requires employers to take extensive precautions. California’s regulations on heat safety are promulgated by the Department of Industrial Relations’ Division of Occupational Safety, which is often referred to as Cal/OSHA.

Cal/OSHA summarizes these requirements as follows:

  • Plan – Develop and implement an effective written heat illness prevention plan that includes emergency response procedures.
  • Training – Train all employees and supervisors on heat illness prevention.
  • Water – Provide drinking water that is fresh, pure, suitably cool and free of charge so that each worker can drink at least 1 quart per hour and encourage workers to do so.
  • Shade – Provide shade when workers request it and when temperatures exceed 80 degrees. Encourage workers to take a cool-down rest in the shade for at least five minutes. They should not wait until they feel sick to cool down.1

These regulations raise the cost of work, and thus the value of a claim. But they are “easily missed in the fervor of expedited claims handing,” says public adjuster Corey Locke, who had decades of experience adjusting claims for insurance companies.

Another important pieces not to miss is that heat illness prevention regulations may apply to “indoor” workplaces as well as outdoor ones. According to Cal/OSHA’s July 2018 “Heat Illness Prevention Enforcement Q&A,” if an indoor workplace lacks insufficient ventilation, cooling, or does not protect workers from exposure to direct sunlight, it is treated as “outdoor” under the rules.2 According to Cal/OSHA’s Q&A:

[T]hese structures may actually be hotter than the environment outside of them because of heating by the sun and conditions inside like limited air circulation or lack of insulation. A structure in this category may be considered an outdoor workplace if it does not significantly reduce the net effect of the environmental risk factors that exist immediately outside of the structure.

Including these rules are sure to drive up claim costs, so expect carriers to push back. But including costs for these aspects is not optional. “Starting in June, our temperatures in California soar into the triple digits for weeks on end,” says Locke. Thus, he says these costs are simply “part of an accurate estimate.” So, do not settle your claim without considering whether these regulations will apply to your loss. At the Merlin Law Group, we have attorneys in California available to discuss your situation.
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1 http://www.oesnews.com/cal-osha-reminds-employers-to-protect-outdoor-workers-from-heat-illness-as-temperatures-rise-across-the-state/
2 https://www.dir.ca.gov/dosh/heatillnessqa.html

Accessory Dwelling Units Authorized in New Construction

Charles Higley and Katy Tang | Farella Braun + Martell | June 20, 2019

New legislation passed by the San Francisco Board of Supervisors on June 18 now authorizes the addition of Accessory Dwelling Units (ADUs) in new construction projects for single-family homes and multi-family buildings.

The City offers two ways to build an ADU. Under the Local ADU program, also referred to as the “Waiver” program, the creation of an ADU would need one or more waivers from the Planning Code for requirements such as exposure, open space, or rear yards. Under the “No-Waiver” program, which is the City’s State Mandated ADU program, one ADU is permitted within existing single-family homes that strictly meet the state law’s ADU requirements without requiring waivers from Planning Code requirements.

Under the newly passed legislation, ADUs would be permitted in new construction of single-family or multi-family buildings under the local “Waiver” program. The number of new ADUs authorized would be based on the size of either the existing building or what the zoning would permit for new construction.

Buildings with four or fewer units may construct one ADU. For buildings with four or more units, there will be no limits on the number of ADUs permitted, subject to the buildable area of the lot, and so long as there was no tenant who was served an eviction notice on that site within 10 years prior to filing the application for a building permit to construct an ADU. Where permitted by the Planning Code and/or state law, project sponsors may seek waivers from Planning Code requirements that set limits on the physical nature of the project, such as rear yard, open space, and height requirements. Coupled with the newly adopted legislation, ADU projects under the “Waiver” program are no longer restricted by density controls in the base zoning.

Buildings undergoing mandatory seismic retrofit work also will not be capped in the number of ADUs that may be added. Buildings undergoing voluntary seismic retrofit work are eligible to add more than one ADU. The local program still requires neighborhood notification and allows for the opportunity for Discretionary Review by the Planning Commission.

To conform with state law, the legislation requires that ADUs under the “No-Waiver” program be approved ministerially. The ADU can be located within the existing building, in addition to the existing building, or in a new construction building. When the ADU involves expansion of the built envelope of an existing primary dwelling, or an expansion of the built envelope of an existing and authorized stand-alone garage, storage structure, or other auxiliary structure on the same lot, or the construction of a new detached auxiliary structure on the same lot, the total floor area of the ADU cannot exceed 1,200 square feet under the new legislation. The “No-Waiver” program does not require neighborhood notification, nor provide the opportunity for Discretionary Review, as per state law.

There is a pending amendment to the “No-Waiver” program which would require that the total area of floorspace of an ADU within new construction of a single-family dwelling be not less than 50 percent of the proposed primary dwelling living area, unless it is an efficiency unit (as defined in Section 1208.4 of the San Francisco Building Code).

The newly adopted legislation is available here. The duplicated file with the pending amendment is available here. For additional resources on ADUs, visit the Planning Department’s website here.

Summary
(under newly adopted legislation)

Local ADU Program (Planning Code Sec. 207(c)(4) – “Waiver” ProgramState Mandated ADU Program (Planning Code Sec. 207(c)(6) – “No-Waiver” Program
ADUs allowed in new construction of single-family dwelling or multi-unit building.One ADU allowed in either existing or new construction of single-family dwelling.
Buildings with 4 units or less: One ADU authorized.Ministerial approval process – no Discretionary Review.
Buildings with 4 units or more, or undergoing mandatory seismic retrofit: No limit on ADUs (subject to tenant eviction history within 10 years of filing building permit and other Planning Code requirements, which may be waived).If ADU involves expansion of built envelope of existing building or standalone garage/structure, total floor area of ADU cannot exceed 1,200 square feet.
Subject to Discretionary Review.No neighborhood notification.
Neighborhood notification required.Pending amendment: Total area of floorspace of ADU within new construction of single-family dwelling cannot be less than 50 percent of proposed primary dwelling living area (unless it is an efficiency unit).