The Project “Completion” Paradox in California

Butt kick

We’ve written before about why the date of “completion” on a California construction project is important, and why, if I may be blunt, determining that date can be as frustrating as a one-legged man in a game of kickass.

You see, in California the deadline to record a mechanics lien, serve a stop payment notice, or make a payment bond claim – important construction payment remedies the California State Legislature saw fit to help you get paid – often depends on when a project is “completed.” So, for example, the deadline for direct contractors to record a mechanics lien is 90 days from completion of the project.

But what constitutes “completion”?

The “Completion” Paradox

For private works projects, Civil Code section 8180 provides that “completion of a work of improvement occurs upon the occurrence of any of the following events”:

  1. Actual completion of the work of improvement;
  2. Occupation or use by the owner accompanied by cessation of labor;
  3. Cessation of labor for a continuous period of 60 days;
  4. Recordation of a notice of cessation after cessation of labor for a continuous period of 30 days; or
  5. If a work of improvement is subject to acceptance by a public entity, completion occurs on acceptance.

For public works projects, Civil Code section 9200 provides that “completion of a work of improvement occurs at the earliest of the following times”:

  1. Acceptance of the work of improvement by the public entity; or
  2. Cessation of labor on the work of improvement for a continuous period of 60 days.

But the definitions themselves raise further questions:

  • What is “actual completion”? Is it receipt of O&M manuals and warranties? Is it receipt of a final pay application? Is it the owner saying “yup, you’re done”?
  • What is “occupancy or use”? Is it turning on the utilities? Watering the landscape? Moving furniture in? Or do people have to be using the facility for its intended purpose?
  • What is “cessation of labor”? Does in only include physical labor at the site? How about work performed off site? How about work performed at the office?
  • What is “acceptance by a public entity”? Is it receipt sign off by the building department? Is it receipt of a certificate of occupancy? Or is it something else?

And therein lies the paradox. The definitions need definitions.

Picerne Construction Corp. v. Castellino Villas

The next case – Picerne Construction Corp. v. Castellino Villas, California Court of Appeals for the Third District, Case No. C071197 (February 18, 2016) – highlights the difficulties in determining when project completion occurs.

Note: Picerne involved the predecessor statute to Civil Code section 8180 – Civil Code section 3086 – but it is still instructive of the disagreements which can arise over the definition of “completion.”

General contractor Picerne Construction Corp. (“Picerne”) entered into a construction contract with Castellino Villas (“Castellino”) for the construction of an apartment complex in Elk Grove, California (“Project”). The Project consisted of 11 apartment buildings, separate garages, a clubhouse and other facilities.

The case mentions a few important dates:

  • The City of Elk Grove issued several certificates of occupancy, the first of which was issued on May 3, 2006, and the last of which was issued on July 25, 2006. Picerne and several of its  subcontractors, however, continued to work on the Project after July 25, 2005. This included straightening out some of the valleys in the roofs, installing nailers and hips on the roof ridges, and nailing trim.
  • On August 28, 2006, Castellino signed a document accepting buildings 1, 3, 4 and 6 through 11 as being complete. At the time, Picerne was still completing punch list work on buildings 2 and 5, including the installation of grip tape on stair treads.
  • On September 8, 2006, Castellino issued a document entitled “Owner’s Acceptance of Site” and Castellino began renting apartments in October 2006.
  • On November 28, 2006, Picerne recorded a mechanics lien against Castellino after it was not paid its retention. Later, on December 29, 2006, Picerne filed suit to foreclose on its mechanics lien.
  • On April 30, 2007, Picerne recorded a notice of completion stating that the Project was completed on April 20, 2007.

Following trial, the trial court entered judgment in favor of Picerne and ordered that the property be sold to satisfy Picerne’s mechanics lien. Castellino appealed.

The Court of Appeals Decision

On appeal, Castellino argued that Picerne had not timely recorded its mechanics lien because Picerne did not record its mechanics lien within 90 days of “substantial completion” of the Project, which it argued was the date the City of Elk Grove issued its final certificate of occupancy, on July 25, 2006.

At the time, former Civil Code section 3115 provided:

Each original contractor, in order to enforce a lien, must record his claim of lien after he completes his contract and before the expiration of (a) 90 days after the completion of the work of improvement as defined in Section 3106 if no notice of completion or notice of cessation [of labor] has been recorded, or (b) 30 days after recordation of a notice of completion or notice of cessation [of labor]. (Emphasis added).

Former Civil Code section 3106 in turn provided:

“Completion” means, in the case of any work of improvement other than a public work, actual completion of the work of improvement. Any of the following shall be deemed equivalent to a completion:

(a) The occupation or use of a work of improvement by the owner, or his agent, accompanied by cessation of labor thereon.

(b) The acceptance by the owner, or his agent, of the work of improvement.

(c) After the commencement of a work of improvement, a cessation of labor thereon for a continuous period of 60 days, or a cessation of labor thereon for a continuous period of 30 days or more if the owner files for record a notice of cessation. (Emphasis added).

Note: Current Civil Code section 8180, which went into effect on July 1, 2012, eliminated the “acceptance by an owner” trigger of “completion.”

In support of its argument, Castellino argued that cases construing the predecessor statute to Civil Code section 3115, Code of Civil Procedure section 1187, had held that “any trivial imperfection in the said work, or in the construction of any building, improvement, or structure, or of the alteration, addition to, or repair thereof, shall not be deemed such a lack of completion as to prevent the filing of any lien.” And, here, argued Castellino, after the City of Elk Grove issued its final certificate of occupancy on July 25, 2006, only minor, trivial work (i.e., the roof work and installation of grip tape on the stair treads ) was left to be completed by Picerne.

The Court of Appeals disagreed. Civil Code section 3106 defines “completion” as “actual completion” not “substantial completion,” held the Court, and:

As we have explained, the mechanic’s lien statute is intended to inure primarily to the benefit of persons who perform labor or furnish materials for works of improvement, and it is to be liberally construed for the protection of laborers and material suppliers, with doubts concerning the meaning of the statute generally resolved in favor of the lien claimant. Interpreting completion as actual completion gives lien claimants the maximum amount of time to assert their rights before such rights are cut off, whereas interpreting completion as substantial completion could cut off mechanic’s lien rights much earlier.

And here, explained the Court of Appeals: (1) Picerne was installing grip tape on the stair treads after July 25, 2006, which was original contract work not merely corrective or repair work; and (2) the roofing work performed after July 25, 2006 could not be warranty work because Castellino did not begin renting the apartments until October 2006. In short, explained the Court, “the roof and stairway work performed after July 25, 2006, is not comparable to adding a few strokes of paint or turning a screw.”

The Take Away

There are a few take-aways from Picerne:

  1. What constitutes “completion” for purposes of determining deadlines under the construction payment remedy statutes is often unclear. This is true both under the former statute as well as the current statute.
  2. Determining when “completion” occurred is often extremely fact dependent, requiring parties to show  among other things what work was included in the original contract; whether the work performed was uncompleted contract work or merely corrective, repair, or warranty work; and, as seems suggested by the Court of Appeals with its “few strokes of paint or turning a screw” comment, the substance of the work performed.
  3. When there’s doubt, given that California’s construction payment remedy statutes are “liberally construed for the laborers and material suppliers,” doubts will generally be resolved in favor of the claimant.

2 Responses to “The Project “Completion” Paradox in California”

  1. Marty Wilson

    Notice of Completion – Potential Side Effects

    As a 25 year former commercial GC and now a 3rd Party PM/CM representing project clients I know and utilize the benefits of filing Notices of Completion on behalf of those clients. But those Notices also come with unintended side effects that you need to be prepared for . . .

    As readers of your excellent column know, a properly filed Notice limits subcontractors’ lien “windows” to 30 days from the recordation date. But to also recall this column’s previous advice, subs that haven’t been paid had better file liens before that window closes; i.e. use it or lose it.

    However it is the very, very rare project in which the GC and his subs have received (or are even eligible to receive) 100% final payment including retention within 30 days of the completion of their project. For example AIA Contracts stipulate that GC’s must bill in arrears of progress completion; then those same contracts typically allow a full 30 days for the Owner to make a payment. So assuming that the project is 100% complete on the last day of the month and a Notice of Completion is filed on that same date, the GC can’t bill for his work until the first of the new month and contractually may not be paid for another 30 days. And when he is paid the GC will take about a week to pay his subs — again all within the terms of everybody’s contract.

    But with the filing of a Notice of Completion on the date of completion, the sub knows he must lien within 30 days to preserve his ability to lien if he hasn’t been paid; yet it is highly unlikely he will be paid in full prior to the end of that 30 day period. So sometimes subs lien just to preserve their rights to lien in case they don’t get paid.

    When that happens the real fun begins, especially if several subs follow that same approach: the filing of a Lien on the project usually causes a tenant to go into default on their lease; or give a developer/bank the right to withhold any payments due because of the lien filing, requiring a clearing of the Lien(s) before they release payments to the GC . . . messy.

    Unfortunately I’ve been on the messy end of that stick a few times. There are proactive measures to take in advance of the above scenarios and resolutions to pursue if they hit, but they all require anticipation of the “what if” and preparation.

    And those messy events are what I get engaged to avoid and Garret Murai gets engaged to untangle 🙂

    Reply
    • Garret Murai

      Marty. Thanks for the insight on the unintended consequences of recording a notice of completion by a project owner particularly as a tenant or an owner with a construction loan.

      Reply

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