Subcontractor Mechanics’ Liens Don’t Apply to Owner-Occupied Residences

Subcontractor Mechanics’ Liens

The Valley’s real estate market has officially rebounded, and construction is booming again. Because most contractors don’t get paid until the job is complete, Arizona 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 curtails contractors’ rights in connection with owner-occupied dwellings.

Generally, contractors can record mechanics’ liens against the subject property in order to secure payment for their labor and materials. A.R.S. §§ 33-981–1021. This statutory remedy motivates owners to pay their bills because contractors who obtain mechanic’s liens can foreclose on the property.

To preserve its lien rights, the contractor must first serve a written preliminary twenty-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).

Importantly, Arizona law prohibits contractors from filing liens against “owner-occupied” dwellings unless the contractor has an express written contract with the owner. Consequently, these lien rights don’t 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 enjoy “owner-occupied” status, a natural person must hold legal or equitable title to the dwelling by deed or contract for the conveyance of real property 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 natural person must also reside or intend to reside in the dwelling for at least thirty days during the twelve-month period following completion of the construction, alteration, repair, or improvement and must not intend to sell or lease the dwelling to others. Id. Residence in the dwelling is demonstrated when the person places personal belongings and furniture in the dwelling and the person, or a family member, occupies the dwelling. Id. It is incumbent on the contractor to discern whether the property owner is an “owner-occupant” before recording its lien. 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 mechanics lien when the subcontractor didn’t get paid 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 didn’t apply because the owner had conveyed the legal title to her entity LSM, L.L.C., which she solely owned to hold personal investments. Essentially, the contractor argued that the owner-occupant exception can’t apply to properties that are not owned by natural persons.

The Court of Appeals ruled in the 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 didn’t 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 didn’t 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 where a dispute arises, contractors will be glad that they meticulously followed the process for perfecting their mechanics liens.

Mr. Charles represents contractors and owners in regard to mechanics liens and other construction law issues. If you or someone you know has questions regarding mechanics liens or any other real estate issue, please call today to schedule a consultation with Mr. Charles.