SECTIONS 8720-8730 - California Statutes

CIVIL CODE

SECTION 8720-8730

8720. An owner shall provide security by any of the following
means:
(a) A bond that satisfies Section 8722.
(b) An irrevocable letter of credit that satisfies Section 8724.
(c) An escrow account that satisfies Section 8726.

8722. A bond under this chapter shall satisfy all of the following
requirements:
(a) The bond shall be executed by an admitted surety insurer that
is either listed in the Department of the Treasury's Listing of
Approved Sureties (Department Circular 570) or that has an A.M. Best
rating of A or better and has an underwriting limitation, under
Section 12090 of the Insurance Code, greater than the amount of the
bond.
(b) The bond shall be in an amount not less than 15 percent of the
contract price for the work of improvement or, if the work of
improvement is to be substantially completed within six months after
the commencement of work, not less than 25 percent of the contract
price.
(c) The bond shall be conditioned for payment on default by the
owner of any undisputed amount pursuant to the contract that is due
and payable for more than 30 days.

8724. An irrevocable letter of credit under this chapter shall
satisfy all of the following requirements:
(a) The letter of credit shall be issued by a financial
institution, as defined in Section 5107 of the Financial Code,
inuring to the benefit of the direct contractor.
(b) The letter of credit shall be in an amount not less than 15
percent of the contract price for the work of improvement or, if the
work of improvement is to be substantially completed within six
months after the commencement of work, not less than 25 percent of
the contract price.
(c) The maturity date and other terms of the letter of credit
shall be determined by agreement between the owner, the direct
contractor, and the financial institution, except that the owner
shall maintain the letter of credit in effect until the owner has
satisfied its payment obligation to the direct contractor.

8726. An escrow account under this chapter shall satisfy all of the
following requirements:
(a) The account shall be designated as a "construction security
escrow account."
(b) The account shall be located in this state and maintained with
an escrow agent licensed under the Escrow Law, Division 6
(commencing with Section 17000) of the Financial Code, or with any
person exempt from the Escrow Law under paragraph (1) or (3) of
subdivision (a) of Section 17006 of the Financial Code.
(c) The owner shall deposit funds in the account in the amount
provided in Section 8728. This chapter does not require a
construction lender to agree to deposit proceeds of a construction
loan in the account.
(d) The owner shall grant the direct contractor a perfected, first
priority security interest in the account and in all funds deposited
by the owner in the account and in their proceeds, established to
the reasonable satisfaction of the direct contractor, which may be by
a written opinion of legal counsel for the owner.
(e) The funds on deposit in the account shall be the sole property
of the owner, subject to the security interest of the direct
contractor. The owner and the direct contractor shall instruct the
escrow holder to hold the funds on deposit in the account for the
purpose of perfecting the direct contractor's security interest in
the account and to disburse those funds only on joint authorization
of the owner and the direct contractor, or pursuant to a court order
that is binding on both of them.

8728. The following provisions govern a deposit to or disbursement
from a construction security escrow account under this chapter:
(a) Before the commencement of work the owner shall make an
initial deposit to the account in an amount not less than 15 percent
of the contract price for the work of improvement or, if the work of
improvement is to be substantially completed within six months after
the commencement of work, not less than 25 percent of the contract
price.
(b) If the contract provides for a retention to be withheld from a
periodic payment to the direct contractor, the owner shall deposit
to the account the amount withheld as retention at the time the owner
makes the corresponding payment to the direct contractor from which
the retention is withheld.
(c) The amount required to be maintained on deposit shall not
exceed the total amount remaining to be paid to the direct contractor
pursuant to the contract or as adjusted by agreement between the
owner and the direct contractor. If the amount on deposit equals or
exceeds the total amount remaining to be paid to the direct
contractor, the owner and the direct contractor shall authorize
disbursement to the direct contractor for progress payments then due
the direct contractor, but a party is not obligated to authorize
disbursement that would cause the amount remaining on deposit
following the disbursement to be less than the total amount remaining
to be paid to the direct contractor.
(d) The owner and the direct contractor shall authorize the
disbursement to the owner of any funds remaining on deposit after the
direct contractor has been paid all amounts due pursuant to the
contract. The owner and the direct contractor shall authorize the
disbursement of funds on deposit pursuant to a court order that is
binding on both of them. The owner and the direct contractor may
agree in the contract to additional conditions for the disbursement
of funds on deposit, except that the conditions may not cause the
amount remaining on deposit to be less than the amount required under
this section.

8730. If the contract price for a work of improvement is not a
fixed price, the amount of security provided under this chapter shall
be the guaranteed maximum price or, if there is no guaranteed
maximum price, the owner's and direct contractor's good faith
estimate of the reasonable value of the work to be provided pursuant
to the contract.