Legal Question in Construction Law in California

Re: Can a contractor file a lien when he agreed to mediate before utilizing any

I understand your concern that the contractor has "jumped the gun" by recording his claim of lien prior to mediating the dispute. However, I doubt that you could successfully argue that the "mediation first" provision acts as a waiver of his right to record the claim a mechanics lien. Since the contractor has a limited amount of time in which to record a claim of lien or lose it forever, I think a court would just view his action as a prudent reservation of his rights in the event mediation fails.

However, the contractor must file suit to foreclose the lien within 90 days of recordation. This muddies the waters, somewhat, because filing a lawsuit is inconsistent with a contractual agreement to mediate. Probably, if apprised of the contract provision requiring mediation, the court would order the foreclosure lawsuit stayed until mediation is completed.

The refinance issue is troublesome. It may be necessary to "bond around" the lien, i.e., purchase a Mechanics Lien Release Bond (MLRB). Once issued and recorded, the bond becomes substitute security for the contractor's claim and releases your property from the lien. The contractor must then file suit against the surety to enforce liability against the bond.

Be aware that surety companies do not like writing MLRBs, as they are a sure bet for a lawsuit. They usually charge a healthy premium and demand "full +" collateralization of the bond. You would be required to sign an indemnity agreement under which you would agree to make good any and all losses the surety might incur as a result of issuing the bond.

I'd suggest that you write the contractor immediately, reminding him of his obligation to mediate any disputes, and work very quickly to get mediation underway prior to his deadline to file suit. If mediation is underway, and the deadline to file is drawing near, you and the contractor can always agree to what's called an Extension of Credit. Under an extension of credit, the parties can agree to extend the time in which the contractor must file suit to foreclose. This presumes that you and the contractor are making progress in the mediation and a settlement seems likely.

This is but a broad-brush treatment of some of the issues involved. You should consult with an attorney knowledgeable of construction law and specifically the mechanics lien laws.

Now the inevitable caveat:

The foregoing information is provided as an accommodation only, and does not constitute specific legal advice or a biding legal opinion based on a comprehensive review of all relevant facts, nor can provision of such information be construed as creating an attorney-client relationship.

Best Regards - I hope this helps.