20-day preliminary notices — when is late ‘too’ late?

Question: We are a tiling contractor and have never been in the habit of sending out preliminary lien notices. In the past we have been fortunate to work with people we have done business with before, but with today’s shortage of projects, we are doing work with some new customers. We started a project about a month ago, but had not done a preliminary notice. Even though we were paid out first progress payment, which was about 20 percent of the value of our contract, we’ve heard through the grapevine that some of the other contractors have not been paid all of their progress payments.

So, I went ahead and had a preliminary lien notice sent out through a lien service that charges a minimal amount to prepare and serve the preliminary notice. That was the easy part. I was at the jobsite yesterday to look over the progress of our work and ran into an owner of a plumbing company I know. We got to talking about the recent difficulties of collecting payment on some projects and I told him that I just sent out our preliminary notice and he said “you shouldn’t have bothered, you’re too late. You had to send a preliminary notice within 20 days of first starting your work. Why do you think they call it a ‘20-day’ preliminary notice? Because you waited 30 days, you have no mechanics’ lien rights.”

I am not familiar with preliminary notices and liens because we’ve never had to use them to get paid, so that never occurred to me. But, it seems pretty unfair that I lose all my lien rights because I am a measly 10 days late. Is the plumber right — did I really blow it?

Answer: As usual, there are several possible answers to your question. The short answer is that the plumber is right and wrong. He’s right about the name — a 20-day preliminary notice means it should be served within 20 days of when you first provide materials, labor, equipment or any other services to the jobsite. But, all is not lost just because you waited 30 days. A late preliminary notice does have some effect, but it only covers the work provided in the previous 20 days and forward.

For example, let’s say you first provided some sort of work on February 29 (Friday). Perhaps that is when you had the first load of tile delivered to begin installation the next Monday (March 3). Because you first provided materials on Feb. 29, the 20-day clock starts to run on that day. Then, you wait 30 days, until March 28, to serve the preliminary notice. Because you were late, the notice only covers work provided in the previous 20 days, plus anything after you served the preliminary notice.

So, for our example, assume you have a contract worth $200,000. Your first load of tile was worth $35,000, and you had four tile setters working every day, five days a week for the last four weeks at $37 per hour. So, counting backwards from March 28, your lien rights only cover from March 8 forward. This means you lose lien rights for the $35,000 of tile and five days of labor costs for four tile setters, eight hours a day, working March 3, 4, 5, 6 and 7 - or about $5,920. So, out of a $200,000 contract, you would not have lien rights for $40,920. But, you are in luck because you said you were paid your first progress payment. So in my example, and probably in your real-life situation, you have already been paid for the materials and labor that you provided in the first 10 days. Thus, the fact that you may not have lien rights for what you provided in those first 10 days it doesn’t matter because you’ve been paid for that work.

I also noticed that you referred to yourself and other specialty trades as“contractors” instead of “subcontractors.” Does this mean that the property owner acted as an owner-builder and hired each of the trades directly? If that is the case, then a contractor who has entered into a contract directly with an owner (called an “original contractor” under the mechanics’ lien laws) does not have to serve a preliminary notice at all in order to have lien rights.

This is because the purpose of the 20- day preliminary notice is to alert the owner that you are out there providing a certain value of work and if you don’t get paid, you can lien the property. The theory is if the owner enters into the contract directly, the owner already has notice of the value of the work you are providing.

Another assumption I made was that you are talking about a private works project. For public works, a subcontractor with a direct contract with the prime or general contractor generally does not have to serve a preliminary notice in order to have “lien” rights. But, the “lien” rights referred to involve stop notices and payment bonds — which are better left subjects of future articles. In order to not have to worry about when you do or do not have to serve a preliminary notice, it is much better to just serve a preliminary notice for every project you work on. The lien service you mentioned that you used is a perfect low-cost way to preserve your lien rights.

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Disclaimer The information in this article is based upon California law and is for general information only. Any information or analysis presented here is intended solely to inform and educate the reader on general issues. Nothing presented or referenced to, regarding facts, documents or applicable laws, constitutes legal advice. Before acting or relying on any information, including any information presented here, consult with a qualified attorney for your specific situation.

Scholefield holds an active PE license in Colorado, an undergraduate engineering degree from the University of Florida, and received her JD from the University of San Diego. Source Code: 20080328tca

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