Originally I hired a contractor in March 2015 for a job that he claimed would take no more than ten days. Three months later in March, he completed 80% of the work and had been paid 90% of balance. He claimed to be on-site five days week from 7 am to 7 pm. In reality he made cameo appearances and outsourced the work. Moreover, he demanded regular payments during the job in order to pay his crew. In actuality, he asked me to pay one of his subcontractors out of the monies owed to him ahead of schedule to cover the subcontractors cost. I did so, but this subcontractor had to travel from San Diego to Orange County to get paid. This contractor left his tools and paint sprayer outside of my property unattended for weeks on end after these tools were no longer needed. Regrettably, the tools are missing. 

Due to the describe issues with the contract, I wrote the contractor outlining the fact that the remaining work to be completed exceeded the balance owed, and that we would rather end the contract now and move forward with another contractor.

He had tentatively agreed to this, but when he discovered that his tools were missing he threatened to place a lien on the property for $3900 this week. If he does this, as he pointed out, it would foil the sale of the property. As an out he is willing to accept $1200 in payment in order not to file the lien. 

This lien claim is wholly unwarranted and this offer, in my humble opinion, is borderline extortion. 

What should I do?