SENATE BILL REPORT

SB 6238

BYSenator Lee

Revising the right to a construction lien.

Senate Committee on Economic Development & Labor

Senate Hearing Date(s):January 11, 1990; January 25, 1990

Majority Report:  That Substitute Senate Bill No. 6238 be substituted therefor, and the substitute do pass.

      Signed by Senators Lee, Chairman; McMullen, Murray, Smitherman, Warnke, Williams.

Senate Staff:David Cheal (786-7576)

                  February 2, 1990

AS REPORTED BY COMMITTEE ON ECONOMIC DEVELOPMENT & LABOR, JANUARY 25, 1990

BACKGROUND:

A number of consumer protection problems relating to construction lien claims have been brought to the attention of the Legislature.  The most common problem seems to be in the home repair or remodeling area, and typically occurs as follows:  a homeowner engages a general contractor to accomplish the remodel or repair.  The contractor assembles the necessary materials and hires the necessary subcontractors.  The homeowner may make periodic payments with full payment made upon completion and then later discovers that a material supplier or a subcontractor with whom he or she has never dealt directly has placed a lien on the homeowner's property.  This occurs because the prime contractor has failed to make proper payment to the lien claimant.  Numerous problems of this nature have also been made to the consumer protection program of the Attorney General's office.

The construction lien laws have not been substantially amended or modernized during this century.  Virtually all industry segments have reported problems with the current law.  For example, the preclaim notice of right to lien that subcontractors must give is alarming to owners and a source of continuing friction between many prime contractors and subcontractors.  The current stop-notice procedures, whereby a subcontractor who is not getting paid can notify a lender to withhold funds from subsequent draws, result in widely disparate treatment and practices by lenders because the current language is very unclear.

Last July, the chair of the Senate Committee on Economic Development and Labor appointed an industry task force to review the current law and recent reform proposals, and to see if consensus could be reached on the major issues.  The charge to the task force was to develop a legislative proposal that would enhance the level of consumer protection for homeowners and also make the lien laws work better for the construction industry and related services.  This bill represents the proposal of the task force.

SUMMARY:

Note:  Due to the length and complexity of this bill, a full detailed summary is not provided here.  Following is a general description concentrating on the changes the bill would make in current law.  A full section-by-section commentary is available from the committee staff.

Most of the current construction lien chapter is repealed (Chapter 60.04 RCW).  Also repealed are Chapters 60.20 and 60.48 RCW, relating to landscaping and engineering services respectively, because the lien rights relating to those activities are incorporated in a single proposed construction lien act.  A comprehensive definitional section is included, making the lengthy repetitions which appear in the current statute unnecessary.  The following are the major substantive changes:

      1.Lien claims of subcontractors and suppliers who participate in residential remodeling projects, and who do not contract directly with the owner, are limited to amounts not yet paid to the prime contractor by the homeowner at the time the subcontractor or material supplier gives notice of their activity. "Notice" means that the subcontractor or supplier sends the notice set forth in the bill indicating that they are part of the project and either have performed or are about to perform services or furnish supplies which would entitle them to make a lien claim.

      2.For new residential construction, participants who do not contract directly with the owner may give notice of their involvement at anytime, but their right to claim a lien is limited to activity following a date which is 60 days prior to the notice.

      3.In commercial construction, anyone who contracts directly with the owner, including material suppliers, is not required to give notice of their activity prior to making a lien claim.  Also excused from the preclaim notice are individual laborers (no change from current law), and subcontractors.  Suppliers of material or equipment and those furnishing professional services must give preclaim notice in order to protect their lien rights.  Notice may be given at anytime, but only protects lien rights for activity occurring after a date which is 60 days prior to giving notice.

      4.Lien rights are given to persons furnishing labor, professional services, materials or equipment for the improvement of real property.  The definition of "labor," excludes operated equipment and professional services.  These services are covered under supplying equipment or providing professional services and in some cases will have a different priority than under current law.  Currently, a subcontractor who performs work under a contract with an unregistered contractor has no lien rights.  This is to provide some industry enforcement of the contractor registration law.  Also under current law, a subcontractor who performs pursuant to a contract with a registered subcontractor who in turn contracts with an unregistered contractor has no lien rights.  This last feature is changed so that lien rights are not lost if the entity with which the lien claimant contracts is registered or licensed.

      5.The priority of the lien in relation to other claims against the property is determined at the time of the commencement of labor, professional services, delivery of material or equipment by the lien claimant.  To the extent that the lien claim may be for professional services of engineers, this changes a current rule established by a recent Court of Appeals case, which held that engineers' liens attach at the time they are recorded. 

      6.The need to record liens separately on the Torrens register for registered land is eliminated.  Liens are to be recorded the same as other instruments of title and are effective against registered and unregistered land.

      7.Some changes are made with respect to the parties required to be joined in a lien foreclosure action.  Other lien claimants with respect to the same property are not required to be joined, but unless they are, their interest cannot be foreclosed. 

      8.When a property owner files a bond to guarantee the payment of a lien claim, the property is automatically released from the lien.  Currently, the lien claimant has the option of rejecting the bond. 

      9.When a lender who is supplying interim or construction financing receives a notice from a supplier or subcontractor that timely payment has not been made to them by the prime contractor or owner, the lender will be required to withhold the full amount due which is indicated in the notice from subsequent draws against the loan.  Currently, the lender is required to only withhold a percentage of the amount indicated in the notice.  If a lender fails to properly withhold these amounts, the security that the lender has been given on the loan is subordinated to the lien claim.  Language is added to make it clear that in some cases this subordination could include an amount for attorneys fees.

      10.Prompt payment remedies and penalties are provided.  Time limits for the payment of undisputed amounts are specified for contracts with owners and for contracts between one contractor and another.  When these time limits are exceeded, the person entitled to payment also becomes entitled to a penalty fee, and in the proper case, interest, costs and attorneys fees.

      11.Building permit applications are required to contain the information which is currently required to be posted at job sites.  This includes the legal description, street address, owner's name, prime contractor's name and the lender involved.  This information must be made available to anyone on request. 

EFFECT OF PROPOSED SUBSTITUTE:

The number of days that a notice of right to lien relates back is shortened from 60 to 45.

The provision for giving notice to construction lenders to withhold funds from future draws is made non-applicable to projects where a contractor has posted a performance bond of at least 50 percent of the total amount financed.

The prompt payment provisions are removed.

Certain information to be supplied with building permit applications can now be supplied any time prior to issuance of the permit.  The penalty for failing to post certain information at the job site is changed from a gross misdemeanor to a civil fine of $42,500.

Subcontractors of subcontractors must give notice of right to lien to the owner and prime contractor.

Appropriation:    none

Revenue:    none

Fiscal Note:      none requested

Senate Committee - Testified: Barbara Sarkis (for); Kerry Lawrence, (pro); Phil Schmuck (for); Dave Morgan (for); Lance Colvin (for); Sherry Grapp (for); Larry Heiberg (for); Lois Couglan (for); Duke Schaub; Don Brazier (for); Mark Triplett; Irv Dellinger (for); Mel Kaug (for); James Middlebrooks (con); Cliff Webster (for); Doug Bohlke; Betty Schall