Preliminary Notice Update
A contractor or subcontractor typically will have (after breach) a claim for recovery against the party who agreed to pay for the work the contractor performs. For several years, we have recommended that contractors protect themselves by preserving their rights either to go against the property on which improvements are built (in public projects) or against a bond posted by the general contractor (typically in private projects). To do so, the contractor pursuing a claim had to have sent out preliminary notices for his work.
As you know, the law allows any contractor or professional working on an improvements project to send out preliminary notices on a job. If a contractor does not send out the preliminary notice at the beginning of its work, it can send out a preliminary notice anytime in the job, preserving claim for these alternative remedies for the work it performed within twenty days of the date it sends out the notice.
In several cases over the last few years, Arizona’s courts have reviewed preliminary notices. One case addressed how preliminary notices describe the property affected by construction. The statute requires the contractor to include within a preliminary notice the “legal description, subdivision plat, street address, location with respect to commonly known roads or other landmarks in the area or any other description of the jobsite sufficient for identification.” The contractor there constructed a building on one parcel in a commercial subdivision, but the work included a sewer line that crossed another lot. The preliminary notice specifically stated that the work was for the vertical construction and identified a specific address. When the contractor was unpaid, it filed to foreclose on both the parcel with the vertical building and the parcel with the sewer line (on which another owner had constructed another building). The court dismissed the second lot from the lawsuit, holding that the contractor had never perfected its lien rights because its preliminary notice failed to identify the separate parcel.
PRACTICE POINT: While you can be general about describing the property at issue, if you specify a parcel you are limited to that parcel.
The Court reviewed the statutory requirement that a claimant serve its preliminary notice on “the owner or reputed owner, the original contractor or reputed contractor, the construction lender, if any, or reputed construction lender, if any, and the person with whom the claimant has contracted.” In that case, a deed of trust purporting to secure a construction loan was signed not by the owner of the property – a trust – but by a settlor of the trust (who did not have authority to bind the trust). The contractor filed a mechanic’s lien against the same property when it did not get paid for its work, and it then filed an action to foreclose on the lien. While the Court found that the deed of trust was not a valid lien against the property on which the mechanic’s lien was recorded, it noted that the mechanic’s lien statutes required the contractor to provide a copy of its preliminary notice both to ‘construction lenders’ and ‘reputed construction lenders’. Despite the invalidity of the deed of trust, the Court held that the party claiming to be a lender under the invalid deed of trust was still entitled to notice as a “reputed construction lender.” The contractor’s mechanic’s lien was invalid because it had failed to provide the reputed construction lender a copy of its preliminary notice.
PRACTICE POINT A: Contractors (or their lien services) must search the County Recorder’s records for lenders and send copies of its preliminary notice to all persons asserting an interest in the property on which work is performed.
PRACTICE POINT B: If you have a lien service, check your agreement with the company (or its terms and conditions on its website). Many lien services limit a contractor’s claims for damages to the dollar amount the contractor paid to send the lien – anywhere from $20 – $40. While no Arizona court has addressed these limitation of liability clauses in disputes between lien services and their contractor clients, Arizona court typically hold that these types of clauses are enforceable as written. This is a particular risk where Arizona courts recognize contractors to be sophisticated parties in business transactions. While we always advise contractors to make business decisions about the threshold dollar value of jobs at which they send preliminary notices, contractors also need to consider what assurances they are getting from their lien service.