Credit management professionals know that finding some way to secure an extension of credit goes a long way to ensuring payment. A company that routinely secures its receivables is better able to make credit decisions and is able to feel more secure in its extensions of credit.

Depending on the industry, securing a debt can be accomplished in many ways, including taking a UCC security interest in accounts receivable, fixtures, inventory or other goods, or obtaining a personal guarantee from the debtor. In the construction industry, a powerful way to secure accounts receivable is built directly into the law on every project, through the use of mechanics liens.

However, certain steps must be taken for a company to fully avail itself of those protections. An integral step in implementing a comprehensive mechanics lien policy is making sure that preliminary notices are being sent routinely and correctly.

Most states require preliminary notice

Most states require some form of preliminary notice in order to preserve lien rights, whether the required notice is a traditional preliminary notice, a notice of intent to lien, or a notice that is a little more obscure. Making sure that all required preliminary notices are sent, whatever they happen to be, is crucial to any lien policy so that the ability to file a mechanics lien is not lost.

The problem with complete preliminary notice compliance, however, is that the various rules and regulations all throughout the country are exceedingly complex and difficult to manage. This complexity can result in "hidden" notice requirements that remain unseen until a subsequent lien filing is challenged, and potentially ruled invalid.

Hidden notice requirements and the risk of invalid liens

No preliminary notice requirement is truly hidden — each possible permutation of notice requirements and/or best practices can be found in the mechanics lien laws of each individual state. However, some requirements are harder to parse out than others. So, what exactly are these notice requirements that I’m labeling as hidden requirements?

In short, "hidden" requirements are contingent on the actions of another party. While the parties who are affected by that third party's action are typically supposed to get notice that the action has been taken, it can be easy for notification to slip by unheeded, or unlooked for.

For example, South Dakota requires that sub-subcontractors or suppliers to subcontractors must provide the general contractor with notice of furnishing labor and/or materials to the project within 60 days of the date on which the claimant last furnished labor and/or materials to the project. However, this notice requirement only applies when the general contractor has filed and posted a notice of project commencement.

This makes the actual requirement a bit trickier than is usually the case. If a sub-sub or supplier in South Dakota is unaware of whether a notice of project commencement has been filed and posted, that party is unable to determine if a preliminary notice is required prior to filing a valid mechanics lien on the project.

Many credit managers for construction companies are not routinely scouring the county records and/or looking over each physical jobsite for commencement notices. So the requirements may slip by unnoticed.

This type of situation is not as rare as it may seem. Many states other than South Dakota also have notice requirements that are contingent upon some action being taken by either a property owner or a general contractor. So what is a construction credit manager to do to make sure no lien rights are lost?

Lien rights may be controlled

There are a couple of solutions to a hidden notice situation: 1) research (either internally or through a third-party notice provider) to make sure potential hidden notices do not stay hidden; or 2) overnoticing.

The first solution is fairly straightforward. Hidden or contingent notice requirements are only unknown if the requisite research is not performed. Contacting the appropriate filing office (register of deeds, county recorder, clerk of court, etc.) or searching various online databases can provide the information needed to determine whether or not a notice is required as a prerequisite to the possibility of filing a valid lien.

The second solution is perhaps easier to implement, but potentially a bit more costly. Generally speaking, there is not a consequence to sending more notices than may be strictly required. If you are unsure about whether a particular project requires a preliminary notice be sent — send it.

The only way to protect your lien rights is to send preliminary notice whenever it's required, but you don't lose the right to lien if a notice is sent when it doesn't specifically need to be. Clearly, this solution requires a cost-benefit analysis on a business-by-business basis, as it entails at least some additional expense,

The takeaway is this: Notice compliance can be difficult, but essential to maintaining the ability to secure extensions of credit through mechanics liens, and secured debt is much more likely to be paid than unsecured debt.