Serving the preliminary notice: 3 pitfalls contractors must avoid
Friday, March 13, 2020
The biggest challenge that the construction industry is experiencing right now is getting paid on time and in full. The persistence of payment issues has led many contractors, subcontractors, and other industry professionals to consider them the norm rather than the exception.
The root cause of this problem can be traced back to the nature of construction projects. Even just a single construction project can have multiple contracts signed by different parties. Each of these individual contracts follows the standard payment practice of retainage where part of the entire payment is paid upfront and the remaining is given only when the contracted job is finished.
Unfortunately, this is where the problem can arise. If the client thinks that the contractor was not able to accomplish what was agreed upon in the contract, they may choose to withhold the final payment. This can ultimately affect the project participants down the payment hierarchy. A project participant who wasn’t paid my also withhold payment from their own subcontractors and so on.
For these reasons, construction businesses need to be proactive when protecting their right to file a mechanics lien. The mechanics lien is a legal claim attached to a property as a way of seeking payment for unpaid labor or materials. Protecting this right starts with the sending of a preliminary notice. A preliminary notice is a legal document sent by a contractor to the property owner and/or prime contractor as a notification of lien rights. It also informs the property owner of the contractor’s participation in the project and reminds them of their right to get paid for their work.
The preliminary notice is an important part of the payment process, so contractors need to ensure they meet their state’s requirements. Here are some of the common pitfalls when making a preliminary notice.
1. Missing the deadline for serving the preliminary notice
A lot of states have strict deadlines for sending a valid preliminary notice. Missing the deadline in your state can cause you to lose your lien rights, or limit the amount of work that can be covered by your mechanics lien.
Mechanics lien laws, for example, require contractors to serve a preliminary notice in California within 20 calendar days of the date they first provided labor or furnished materials to get full protection. If a preliminary notice is sent late, the eventual mechanics lien will cover only the work done during the 20 days prior to the day of sending up to the end of the work.
So, if a contractor started their job on the 1st of January, they should send the notice on or before the 21st. Missing it by three days will mean the first three days of work will not be covered by the eventual lien.
Other states have their own specific preliminary notice laws. Contractors need to consult their respective mechanics lien laws, for the specific requirements and deadlines and ensure that they are met.
2. Failing to send the notice to the required parties
Aside from deadlines, most states also have requirements regarding the parties that should receive a preliminary notice. A contractor will be unable to enforce a mechanics lien if they fail to send the notice to any of these required parties.
For example, California’s preliminary notice laws state that contractors who have a direct contract with the property owner need to send a preliminary notice to the project’s lender. A 2012 case involving contractor Shady Tree Farms and lender Omni Financial highlighted this exact requirement. The direct contractor did not send a preliminary notice to the lender, thinking it was not required. On account of the statute, the lien costing $1,959,244.50, which they filed against the property owner was unenforceable.
3. Using the wrong format for the preliminary notice
Many states are strict with the formats for their preliminary notices as well as the information written in them. For instance, contractors need to ensure that they provide an accurate estimate of the work they did or risk having an unenforceable lien.
Some states also require their notices to be written using a specific font and include exact statements, as in the case of California’s legal notice statement that needs to be written in boldface type. As always, contractors need to consult their respective state laws regarding format to ensure compliance.
The preliminary notice is an important document that ensures the right of contractors to file a mechanics lien is protected. Failing to follow the guidelines in sending a preliminary notice invalidates this right, so it is every contractor’s job to fulfill the requirements as prescribed by state laws.
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