California "Contractor Licensing Laws: the Sword and the Shield"

In my last post I discussed that even though a home improvement contract is required to be in writing, a contractor could recover compensation even if it was not. In such a case, the court will consider the equities -- whether the homeowner will be unjustly enriched if the contractor is not paid -- if the contractor provided labor and materials without obtaining a written contract.

The story is very different if the contractor never had a contractor's license before the labor and materials were provided. A landscaping contractor faced such a dilemma last year in Alatriste v. Cesar's Exterior Designs, Inc. (2010) 183 Cal.App.4th 656. There the contractor began the job without a landscaping contractor's license, but obtained a license from the State Contractors Licensing Board during the course of the project. The homeowner paid $57,500 to the landscaping contractor before it left the job because of non-payment. The homeowner then sued to get his money back from the landscaping contractor on the basis that it was not licensed when it began the project. The Court of Appeal held that the California Contractor's License Law is both a sword and a shield in the hands of a homeowner who has hired an unlicensed contractor.

A person who utilizes the services of an unlicensed contractor is shielded from lawsuits by that contractor to collect payment for unlicensed work by Business & Professions Code section 7031(a). The California Legislature complemented the shield in section 7031(a) by adding a sword that allows recovery of all compensation paid to a contractor for performing unlicensed work. Section 7031(b) provides in pertinent part: a person who utilizes the services of an unlicensed contractor may bring an action in any court of competent jurisdiction in this state to recover all compensation paid to the unlicensed contractor for performance of any act or contract.

The landscaping contractor in Alatriste v. Cesar's Exterior Designs, Inc. made several arguments that the Court of Appeal rejected: the homeowner knew it was unlicensed when it began the job; the homeowner would be unjustly enriched; and some of the labor and materials were provided after the landscaper was licensed. This was a case where the five letter synonym for justice applied: "tough."

The Court of Appeal followed a line of California cases which have held that section 7031 embodies an “all-or nothing” philosophy aimed at deterring persons from offering or providing unlicensed contractor services for pay. Section 7031 does not permit an unlicensed entity to recover partial compensation by narrowly segmenting the licensed and unlicensed portions of their performance. Where applicable, section 7031 bars a person from recovering or retaining compensation for any work performed in connection with an agreement for services requiring a contractor's license unless proper license was in place at all times during such contractual performance. In Alatriste v. Cesar's Exterior Designs, Inc. , the landscaping contractor even had to refund the money paid for materials retained by the homeowner!

The story might have had a happier ending for the landscaping contractor if it previously had a license which expired and which was being reinstated. But that will have to be the subject of another post.

The Tale of a Home Improvement Contract -- What If It is Not in Writing?

Business and Professions Code section 7159 requires that a home improvement contract be in writing. However, in a series of cases dating back to 1980, the Court of Appeal has judicially created an exception to this statute based on the sophistication of the homeowners and whether they would be unjustly enriched if the contractor is not paid. The most recent example of this is Hinerfeld-Ward, Inc. v. Lipian (2010) 188 Cal.App.4th 86. There the Court of Appeal affirmed a judgment by trial court which enforced an oral agreement between the general contractor and the homeowners. The homeowners failed to show they were the type of persons who came within the protection of section 7159 for three reasons: the project was a complex, high-end remodel on which the design continued to evolve over the years of planning and construction; the owners' architect and designer had extensive involvement in the project as their representative; and the owners would be unjustly enriched if contractor was denied recovery. The contractor recovered approximately $202,000 that the homeowners had failed to pay.

To make matters worse for the homeowners, the homeowners had to pay the contractor's attorney's fees ($200,000) and 2% per month of the progress payments withheld (more than $54,000) because the homeowners violated Civil Code section 3260.1, a statute which governs withholding of progress payments on a construction contract. The violation resulted from the homeowners withholding an amount exceeding 150% of the disputed amount from progress payments to the contractor.

California Real Estate Licensing Cases -- 2010

In California, a person acting as a real estate broker without a license cannot recover for services for which a license is required. For example, if a CPA acts as a property manager without a real estate license and collects rents, he may be required to disgorge his management fees even if his services were impeccable. Likewise, a company that arranges financing for real estate is normally required to have a real estate broker's license. But in two cases reported in 2010, the California Court of Appeal held that a person could recover for property management and services to arrange a credit facility for a "bridge" lender to the extent a license is not required to perform the services for which they sought compensation.

In MKB Management, Inc. v. Melikian (2010) 184 CA 4th 796, the plaintiff entered into a property management agreement with the owner of several apartment buildings. The Court of Appeal held that the trial court erred in finding that a property management agreement that called on plaintiff to perform multiple services, some of which required a broker’s license and some of which did not, could not be severed as a matter of law. Even if entire contract was illegal and unenforceable, plaintiff could still recover the reasonable value of services rendered provided that those particular services were not legally prohibited. Similarly, plaintiff’s lack of a contractor’s license would preclude recovery of compensation for acts that require license but not for those actions for which such a license was not required.

In Greenlake Capital, LLC v. Bingo Investments, LLC (2010) 185 CA 4th 731, the Court of Appeal relied on MKB Management, Inc. v. Melikian in holding that a finance company's lack of a real estate broker's license did not bar the company from recovering compensation for indentifying and procuring a credit facility for a lender under a contract to assist in obtaining financing. The contract did not have as a central purpose the provision of illegal services and the parties do not intend at the outset that the financing would take a form that would necessarily violate the license requirement.

So what is the moral to the story of these cases? Get a real estate broker's license (or another appropriate license) if you will be performing services for which a license may be required. But if you don't have a license, read the two cases cited above and argue that some or all of the services for which compensation is sought do not require a license.