LAYING DOWN THE LAW SUBCONTRACTOR MECHANIC’S LIENS DO NOT APPLY TO PRIMARY RESIDENCES

Christopher J. Charles, Esq.

The residential housing market, including residential construction, continues to thrive. Because most contractors don’t get paid until a job is complete, the law affords contractors specific rights and remedies to ensure that they get paid. But, as the Arizona Court of Appeals recently held, contractors’ rights are not without limitations. Perhaps most importantly, Arizona law limits contractors’ rights concerning owner-occupied dwellings.

Generally, contractors can record mechanic’s liens against the subject property in order to secure payment for their labor and materials (A.R.S. §§ 33-981– 33-1021). This statutory remedy motivates owners to pay their bill because the contractor can foreclose if the owner fails to pay.

To preserve its lien rights, the contractor must first serve a written preliminary 20-day lien notice on the owner of the property after the contractor first furnishes services or materials to the jobsite (A.R.S. § 33-992.01[B]). Then the contractor must record a notice of claim of lien with the county recorder’s office after the work is completed, preserving its right to foreclose if payment is not received (A.R.S. § 33-993[A]).

Arizona law prohibits contractors from filing liens against “owner-occupied” dwellings, unless the contractor has a written contract with the owner.

Importantly, Arizona law prohibits contractors from filing liens against “owner-occupied” dwellings, unless the contractor has a written contract with the owner. Consequently, the above lien rights do not apply to subcontractors in most instances.

In a recent decision, Marco Crane & Rigging Co. v. Masaryk, et al., 1 CA-CV 13-0467 (Ariz. Ct. App. Dec. 30, 2014), the Arizona Court of Appeals explained the requirements for owners who claim protection under this “owner-occupied” status. To receive “owner-occupied” status, a person must hold title to the home that has been recorded with the county recorder before commencement of the construction, alteration, repair, or improvement (Id. [citing A.R.S. § 33-1002(A)(2)]). The person must also reside or intend to reside in the home for at least 30 days during the 12-month period following completion of the construction, alteration, repair, or improvement.

“Occupancy” in the dwelling is demonstrated when the person places personal belongings and furniture in the home and the person, or a family member, occupies the home (Id.). It is incumbent on the contractor to discern whether the property owner is an “owner-occupant” before recording its lien¹ (Masaryk, 1 CA-CV 13-0467 [Dec. 30, 2014][quoting Guarriello v. Sunstate Equip. Corp., Inc., 187 Ariz. 596, 598, 931 P.2d 1106, 1108 (Ct. App. 1996)]).

In the Masaryk case, the subcontractor sued the owner to foreclose its mechanic’s lien when the subcontractor did not receive payment for the structural steel that it provided for the project. The owner argued that the lien was invalid because she was an “owner-occupant.” On the other hand, the contractor argued that the owner-occupant exception did not apply because the owner had conveyed the legal title to her entity LSM, LLC, which she solely owned to hold personal investments. The contractor essentially argued that the owner-occupant exception does not apply to properties that are not owned by natural persons.

The Court of Appeals ruled in favor of the owner and held that the lien was invalid for two primary reasons: (1) the property was owned by a natural person when the contractor commenced its work (she conveyed the property to her entity LSM years later); and (2) the owner “intended to live in the property for at least 30 days following the completion of the work” because she actually moved into the house one month after construction was completed and lived there for more than one year.

The Court of Appeals did not directly address the issue of whether the owner waived the owner-occupant exception when she transferred title to her LLC because she held title in her name personally at the time of the construction. But the Court of Appeals also noted that the owner did not convey the title to others; rather, she merely changed the form in which she owned the property.

Most construction projects go smoothly. But on the rare occasion of a dispute, contractors will be glad that they meticulously followed the process for perfecting their mechanic’s liens.

Mr. Charles represents contractors and owners regarding construction issues and most other real estate–related matters. If you or someone you know has questions regarding mechanic’s liens or any other real estate issue, please call today to schedule a consultation with Mr. Charles.

¹If the contractor discerns wrong, it could subject itself to liability for wrongful lien and slander of  title damages.

Christopher J. Charles is the founder and managing partner of Provident Law^®. He is a state bar–certified real estate specialist and a former “Broker Hotline Attorney” for the Arizona Association of REALTORS^® (the “AAR”). He also serves as an arbitrator and mediator for the AAR regarding real estate disputes, and he served on the State Bar of Arizona’s Civil Jury Instructions Committee, where he helped draft the Agency Instructions and the Residential Landlord/Tenant Eviction Jury Instructions. Christopher is a licensed real estate instructor and he teaches continuing education classes at the Arizona School of Real Estate and Business. He can be reached at chris@providentlawyers.com or at 480.388.3343.