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Coronavirus Mechanics Liens & UCC Filings: Answers to 3 Legal Questions That Trip Up California Contractors

I recently joined Levelset's Expert Center, a Q&A platform to help construction businesses get payment answers from lawyers and other industry experts. Contractors seek help by asking interesting, unique, and sometimes complex questions ranging from mechanics lien law, to the ever-changing Prompt Payment Act of California, and everything in between. The construction industry is rapidly changing and I feel it's very important to take time to help them navigate the complexities of this industry.

Here are three recent questions from construction companies in California that I thought was worth sharing. Hopefully, these answers will help you in a similar situation. If you have a construction payment question you can visit the Expert Center to ask a question for free.

1. How do I get a small business loan for a Coronavirus-induced delay?

A general contractor who lost their business after the 2008 global recession was worried about history repeating itself as a result of the COVID-19 crisis. In order to pay off debts their business will not be able to afford on the originally agreed timeline, they asked: How do I get a small business loan for Coronavirus delays to keep my business alive?

Right away, I pointed out that the SBA is giving disaster loans to businesses affected. In California, some cities or counties are providing disaster loans directly themselves too.

Another option I recommended was asking their banker to increase their line of credit, especially if they use a community bank such as Five Star in Sacramento, which is particularly well prepared to support clients with loans.

These are great ways to get cash as this contractor requested, but this is also a great time to negotiate terms you have with a private lender. They'd rather work out a deal that involves payment at a later date than foreclose on a property they'll have trouble selling during a recession.

2. How do I get paid on common private road work?

A general engineering contractor whose neighborhood road needed some work volunteered to do the work himself, with an agreement among him and his neighbors to split the costs. After one neighbor refused to pay the amount they agreed to, the contractor asked: Can I file a mechanics lien on a common private road?

First off, I noted that any property you've provided permanent labor or materials to is protected by mechanics lien rights, so long as you've followed California's lien requirements.

However, the contractor followed up to let me know that this non-paying neighbor claims their property does not touch the parcel of land that the road covers. Lien rights would not apply if this is the case as the work was not done on the parcel. I suggested they confirm this with a county records search to determine if another course of action would be necessary.

There are still other ways to get paid if the property is not connected to the parcel they worked on. For example, filing a lien on the parcel that was worked on could incentivize the rest of the neighbors to push the non-paying one to pay up.

Bottom line: If the property of the person you want to pay is not technically on the parcel your work touched, do not file a fraudulent mechanics lien on their property, but filing one of the other parties with interests in the common private road may be a good tactic.

3. How can I keep materials from being sold if I can't pick them up on time?

A contractor had a great deal on aggregate materials that they, unfortunately, could not pick up due to project delays. The supplier quoted a high fee to hold these materials for longer, with no guarantee that this fee would protect them against the materials being sold to someone who paid more. The contractor asked: Can a UCC filing secure undelivered aggregate materials?

The simple answer is no. A UCC filing can protect against a very specific security interest, but not a general quantity of fungible goods.

Instead, a written statement from the supplier explicitly agreeing to hold the materials would be more powerful, as it would allow them to legally collect a refund in the event of an issue fulfilling the agreement.

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Shawn Krogh, Krogh & Decker, LLP, Business Attorneys (916) 498-9000 or www.kroghdecker.com/contact

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