In the California building and construction industry, service of a “Preliminary Notice” is a prerequisite for Subcontractor and Supplier claims for payment through the Mechanics Lien, Stop Payment Notice and Payment Bond Claim process. Without proper drafting and service of a Preliminary Notice, these extremely valuable claims cannot be protected. Unfortunately, despite the vital importance of the Preliminary Notice, Subcontractors and Suppliers often make common self-defeating mistakes that make their Preliminary Notice efforts completely ineffective, resulting in loss of their claims rights. The purpose of this article is to list some of these common mistakes in the hope that the reader will avoid such mistakes, preserve the integrity of the Preliminary Notice, and protect the claims rights it makes available:
Not Sending out the Preliminary Notice Within 20 Days After Supplying Labor or Materials:
The protection of a Preliminary Notice begins 20 days before it sent out. This means that if a Subcontractor or Supplier claimant delivered $100,000 in materials on February 1, that same claimant must serve the Preliminary Notice on or before February 21 (the sooner the better), or the claimant will not be able to pursue an enforceable Mechanics Lien, Stop Payment Notice or Payment Bond claim for that $100,000. There are very few exceptions. Best practice: A Subcontractor or Supplier must send out the Preliminary Notice as soon as an agreement to provide work or materials to a California construction project is in place (See California Civil Code 8204).
Not Sending the Preliminary Notice by Certified, Registered or Express Mail Service:
A Preliminary Notice cannot be effectively be sent by regular US mail, or by Fax, or by e-mail. It is true that a Preliminary Notice can be effectively “hand delivered”, but the problem with hand delivery is that months or years later, when it comes time to “prove” that the document was actually delivered, reliable proof of hand delivery usually comes up short. More reliable methods of delivery authorized by the law include certified mail – return receipt requested, registered mail, express mail and overnight delivery by an express service carrier like UPS or FedEx. If you cannot prove you used an authorized method of service, you might as well not send out the Preliminary Notice at all. Best Practice: Subcontractors and Suppliers should serve the Preliminary Notice by certified mail, return receipt requested or by Registered mail or by Express Mail or through overnight delivery by an express service carrier like UPS or FedEx (See California Civil Code 8110).
Failure of “Direct” Contractor to Send a Preliminary Notice When There is a Construction Lender:
The service of a Preliminary Notice is generally an issue for Subcontractors and Suppliers. However, there does exist a circumstance when the “Direct Contractor” (the Contractor who has a contract directly with the owner of the property) too must serve a Preliminary Notice in order to make an enforceable claim for construction funds. Under California Civil Code 8200(e)(2) a Direct Contractor must serve the “Construction Lender” with a Preliminary Notice. Failure to do so will generally forfeit the Direct Contractor’s claims against funds held by the lender, including the right to record a fully enforceable mechanics lien. If you are the Direct Contractor and there is a construction loan, always be sure to serve that lender with a Preliminary Notice (See California Civil Code 8200(e)(2)).
Failure to Safeguard Proofs of Service:
It is important to safeguard proofs of service of the Preliminary Notice. Each proof of service document should include an identification number matching an identical number on the document to be served. The proofs of service must be retained, whether anyone signed for them on delivery or not. It does not generally matter if the intended recipient signed to indicate receipt. What generally matters is that each proof of service was properly addressed and delivery was properly attempted, even if service was refused. Keep your return receipts and records of service attempts, even if no one signed for the document. You will need those proofs of service later to prove procedures were followed.
Failure to Use the Proper Current Preliminary Notice Form:
The Preliminary Notice form was changed by statute in 2012 (SB 189). New language has been added to the form. Failure to use the proper, current form puts any claim based on the Preliminary Notice at risk. Be sure to use the most current form available or you will risk your right to pursue a Mechanics Lien, Stop Payment Notice or Payment Bond Claim to secure your payment.
Overstating the Preliminary Notice:
Overstating the amount listed in the Preliminary Notice can impact the enforceability of any later Mechanics Lien, Stop Payment Notice or Payment Bond Claim on which the Preliminary Notice is based. List on the Preliminary Notice the proper dollar amount of the contract, subcontract or purchase order for the project. Do not anticipate change orders, interest which might or might not be accrued, or attorney fees which might or might not be incurred. Use only the principal amount of the contract, subcontract or purchase order or other correct amount based on a rational determination. Failure to do so may result in loss of later collection rights, including loss of Mechanics Lien and Stop Payment Notice rights (see California Civil Code 8422 and 8504).
There are many other mistakes that can be made in processing and serving the Preliminary Notice. These include not putting the correct information into the correct locations on the form, accidentally including an incorrect address, inadequately describing the work performed or material supplied, failure to indicate the method of service or not signing the document. Every failure exposes the claimant to the possibility that the Preliminary Notice will be challenged in court. With a document so vital to the success of a claim for payment on a construction project, Contractors, Subcontractors and Suppliers must take the time and do the best job possible. Finally, if you have a question, contact a knowledgeable construction attorney or reliable source, like www.AppliedLegal.com.
Article by William L. Porter, Esq. in 2019. Mr. Porter is a principal in The Porter Law Group, Inc. in Sacramento, California. He can be reached by phone at (916) 381-7868.