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Protect Your Lien Rights: 15 Questions on the California Preliminary 20-Day Notice

Protect Your Lien Rights: 15 Questions on the California Preliminary 20-Day Notice

January 11, 2019

Protecting your right to file a mechanics lien starts with the Preliminary Notice.

Filing mechanics liens on delinquent client accounts is part and parcel of a contractor’s Getting Paid Toolbox. As much as we would like for vetting and pre-screening clients to keep late payments at bay, there are so many factors that come into play when it comes to getting timely payments.

Contractors need to be proactive when it comes to protecting their ability to demand payment in case the client, for whatever reason, couldn’t make progress payments or retention payments on time and in full.

On top of the list of tools in the box is the Preliminary Notice, formerly known in California as the preliminary 20-day notice. Any contractor would need to know the ins and outs of this document and make sure it’s included in their routine.

Preliminary Notice for Construction Projects: What is it?

The Preliminary Notice is a legal document that contractors, subcontractors, and suppliers must serve to give them the ability to record a mechanics lien. In other words, not serving a preliminary notice stops the contractor from pursuing further solutions to demand the retainage in case of non-payment.

Contractors are obliged to send the Preliminary Notice to the property owner prior to recording a mechanics lien. If and when a client neglects to settle payments for work already performed or when subcontractors are not compensated even after the direct contractor is paid, the preliminary notice kicks off the series of steps a contractor, supplier, or subcontractor can take to get paid.

The Preliminary Notice gives the property owner an opportunity and the time to do the right thing and pay what is owed.

Preliminary notice reminder

Does the Preliminary Notice apply to all construction projects?

Yes, but the type of preliminary notice varies based on the nature of the project. There is a particular Preliminary Notice required for private contracts and another for public contracts. The language in the legal statement portion of the notice varies depending on the type.  The first portion of the notice will contain the same information both for public and private works.

Preliminary Notice - Form Sample

Here’s the legal statement for Preliminary Notices for Private Works:

Preliminary Notice Legal Statement

Who can serve a Preliminary Notice?

It depends.

For private contracts, all subcontractors and suppliers can serve the Preliminary Notice. If the contract is financed through a lender, direct contractors serve the Preliminary Notice. For the latter, when the direct contractor is in contact with the owner, they may only need to serve a Preliminary Notice addressed to the lender.

For public contracts, subcontractors and materials suppliers second-tier and below serve the Preliminary Notice.

Preliminary notice service

*Laborers are not required to send a Preliminary Notice, as well as entities that served work with a value under $400.00.

*It’s typical that General Contractors are the one getting served the Preliminary Notice from sub-tier parties like their subcontractors and material suppliers. However, California requires general contractors to send a Preliminary Notice to the property owner and the lender if any.

When should the Preliminary Notice be served?

While there is no hard deadline for the Preliminary Notice, it only covers work rendered within 20 days before it was served. This means that serving the Preliminary Notice right away once the project goes underway is good practice.

Here’s an example:

The project started on December 1st. The Preliminary Notice was served on December 28. It only covers the work from December 9 to December 28. To cover the work furnished from the start of the contract, the Preliminary Notice must be filed on December 20, at most.

Preliminary notice coverage

Per California Civil Code section 8204, “[a] preliminary notice shall be given not later than 20 days after the claimant has first furnished work on the work of improvement.”

Shouldn’t I wait to give the client a chance to pay on time before threatening to file a lien through the Preliminary Notice?

No. The Preliminary Notice is a document served in good faith and is meant to benefit everyone involved in the project. It is, in a way, a reminder to the owner and/or the lender that the contractor, subcontractor, or supplier has the right to file a mechanics lien against the property in case of a delay of payment or non-payment. It is not a threat!

No matter how the payment scheduling in your contract is structured, waiting to send the Preliminary Notice until an invoice is triggered will not be effective in securing a contractor’s lien rights. The Preliminary Notice only secures lien coverage for services and supplies furnished 20 days preceding the date the Preliminary Notice was served. Send the notice within 20 days of furnishing materials or rendering work on a project.

Successful contractors and suppliers always send a Preliminary Notice on time. Companies that send Preliminary Notices get paid faster and avoid payment disputes from escalating. It promotes visibility within a project and lets the project owner know that they are dealing with consummate professionals. Don’t fear that sending this notice will create animosity—it will not. It prevents animosity instead.

What information must be included in the Preliminary Notice?

Notices and documents involved in the process of getting paid in construction must be as close to perfect as possible. Any missed piece of information or a lapse in the schedule can lead to invalidating the document and losing the ability to claim the rights granted by said document.

For the Preliminary Notice, here’s a checklist of the information that must be included:

  • A – Name of the owner (or reputed owner*)
  • B – Name of the contractor director and their address
  • C – Name of the lender and their address, if any
  • D – A general statement of the work provided
  • E – A financial estimate of the price of total work provided
  • F – The name and address of the person or entity who provided the work or materials
  • G – The name and address of the person or entity to or for whom the work or materials is provided
  • H -Description of the site for identification, including street address if possible

Preliminary Notice Form

  • I- A legal notice statement (in boldface type). The specific wording is as follows:

NOTICE TO PROPERTY OWNER EVEN THOUGH YOU HAVE PAID YOUR CONTRACTOR IN FULL, if the person or firm that has given you this notice is not paid in full for labor, service, equipment, or material provided or to be provided to your construction project, a lien may be placed on your property. Foreclosure of the lien may lead to loss of all or part of your property. You may wish to protect yourself against this by (1) requiring your contractor to provide a signed release by the person or firm that has given you this notice before making payment to your contractor, or (2) any other method that is appropriate under the circumstances. This notice is required by law to be served by the undersigned as a statement of your legal rights. This notice is not intended to reflect upon the financial condition of the contractor or the person employed by you on the construction project. If you record a notice of cessation or completion of your construction project, you must within 10 days after recording, send a copy of the notice of completion to your contractor and the person or firm that has given you this notice. The notice must be sent by registered or certified mail. Failure to send the notice will extend the deadline to record a claim of lien. You are not required to send the notice if you are a residential homeowner of a dwelling containing four or fewer units

¹In some cases, the property owner’s name may not be the same as the reputed owner, as in the case of projects initiated by tenants.

² Use the contract amount as your estimate. Do not add to the amount as a cushion because it can lead to the invalidation of your Preliminary Notice

How do I make sure that the information on the owner and the lender is correct?

Obtaining the names and addresses of the owner and the lender, if any, shouldn’t be challenging as it’s required for direct contractors to provide the names and addresses of the owner and the lender to all entities working on the project. The project owner must also provide the name and information of the construction lender.

Per California Civil Code:

8208. A direct contractor shall make available to any person seeking to give preliminary notice the following information: (a) The name and address of the owner. (b) The name and address of the construction lender, if any.

8210. If one or more construction loans are obtained after commencement of a work of improvement, the owner shall give notice of the name and address of the construction lender or lenders to each person that has given the owner preliminary notice.

Even so, there is little consequence to the owner in case they make an error on the information they share with the other parties in the project. However, for the contractor, subcontractor, or material supplier who serves the Preliminary Notice, a small error in the information included can invalidate the whole notice, removing their lien rights. The information will not be validated by the parties who receive the notice, nor will the county recorder. This means that the erroneous information, if any, can and will come back to bite you at the moment when the Preliminary Notice was meant to protect your lien rights.

Verifying this information yourself can be done but it is a tedious task that takes away your focus from business operations, especially for a routine document like Preliminary Notice, which must be sent for every contract. You would need to scan public records for lender information which you could only readily access with a trip to the county office. This involves both time and expense that you would need to incur for every contract. Of course, having correct information is crucial to make sure the Preliminary Notice is valid but it’s a huge inefficiency to make the trip for each contract. Using a software solution like Handle to prepare and serve your Preliminary Notices saves you time and secures your lien rights.

What should a contractor or supplier do if the contract amount changes after the Preliminary Notice is sent?

If the amount of the contract changes due to an addendum to work performed or added materials, there is no need to serve a new Preliminary Notice.

It is critical that Preliminary Notices are sent with the correct language and information, on time, and according to California’s statutory requirements. It’s also important to include a good-faith estimate that is based on your expertise and rational projection of what the total project amount would be.

A bad estimate is perfectly described in the case of Rental Equipment, Inc. v. McDaniel Builders, Inc. (2001) as one ”that was not derived by any rational process, that it had no bearing whatsoever on the actual work done and to be done on the project and that it was, in truth and in fact, made out of whole cloth.” In the case, the Preliminary Notice was deemed defective as the estimate in the notice was $10,000.00 but the ensuing Mechanic’s Lien was for $159,000.00.

But, what should be done if the project amount changes due to increases or decreases in the rate and value of labor or materials furnished? Often, nothing. The estimate in the Preliminary Notice doesn’t restrict you to only claiming that amount in case the situation escalates to needed to put a lien against the property, but you are opening your lien rights to question if the estimate is done in bad faith or “made out of whole cloth.”

Per California Civil Code § 3097(g):

A person required by this section to give notice to the owner, to an original contractor, and to a person to whom a notice to withhold may be given, need give only one notice…with respect to all materials, services, labor, or equipment he or she furnishes for a work of improvement, that means the entire structure or scheme of improvements as a whole, unless the same is furnished under contracts with more than one subcontractor, in which event, the notice requirements shall be met with respect to materials, services, labor, or equipment furnished to each contractor.

If a notice contains a general description required by subdivision (a) or (b) of the materials, services, labor, or equipment furnished to the date of notice, it is not defective because, after that date, the person giving notice furnishes materials, services, labor, or equipment not within the scope of this general description.

Sending a revised or additional Preliminary Notice in California is unnecessary. Only one Preliminary Notice is required unless there is a separate contract with a separate entity.

Who should the Preliminary Notice be served to?

Preliminary notice service

The Preliminary Notice must be served to the property owner, the general contractor, and the construction lender, if any. 

For public works where there is a bond on the project, the Preliminary Notice must be served to the bonding company.

If a public project is constructed by the Department of Public Works in California, deliver the notice to the disbursing officer of the department involved in the project.

What is the correct way to serve the Preliminary Notice?

There are several options when it comes to delivering the notice.

  • In person, leaving the notice at the place of residence of the intended recipient with a person in charge
  • Send via registered or certified mail

For both cases, it’s crucial that you keep a record of the date of delivery, the method of delivery, the person who received the delivery, and any other details that corroborate the fact that the notice was delivered.

How do I keep my record that I served a Preliminary Notice?

Given that not keeping a record can be fatal to your lien rights, this step is very crucial in the process of ensuring payments in construction.

There is no protocol but here are some documents that you can secure:

    • a copy of the return receipt card
    • a copy of any record of U.S. postage delivery
  • an affidavit of delivery

Keeping these allows the claimant to prove that they indeed served the Preliminary Notice, which will come in handy in the event that case escalates and they’re required to prove that they acted in pursuance of statutory requirements to secure their right to lay claim on a property through the mechanics lien.

In a case shared by the California Litigation Blog, a claim on the property was not granted even when all steps and notices were served and recorded because the Preliminary Notice was sent through ordinary first-class mail as opposed to what the code spelled out, which is registered mail, certified mail, or in person.

Follow the law to a T because code cannot be bent backward and any error will be taken against you in case the dispute escalates to litigation.

Using a professional service to serve the Preliminary Notice eliminates the possibility of losing out on a lien claim because of minor errors.

What happens when a Preliminary Notice is not filed?

Failure to file a Preliminary Notice denies contractors, subcontractors, and suppliers the right to file mechanics. It also denies them the right to pursue other payment remedies like giving stop notices or claiming against a bond. This is the reason why Preliminary Notices are required in California.

Aside from being a tool for timely payments, it is also a way to promote a transparent working relationship within the project as it makes sure all entities involved are aware of who’s working for whom, which can get complicated especially for larger projects.

What is the benefit of the Preliminary Notice to the property owner?

Preliminary Notices give the property owner the chance to make things right and settle any payment disputes before the claimant resorts to filing a mechanics lien against their property. It is not a document meant as a threat—rather, it’s a document that facilitates clear communication between parties in a project, keeping small payment disputes that could just be a clerical error from developing into more significant issues requiring more aggressive action like filing liens.

Should the Preliminary Notice be recorded with the county?

It’s not a requirement but it is a best practice. Once a Preliminary Notice is recorded with the county where the project is situated, the recorder is obliged to send the entity that filed a notice when the owner records a Notice of Cessation or a Notice of Completion. When a property owner files either of these notices, the time a contractor, subcontractor, or supplier has to record a mechanics lien is reduced. There are some contractors, subcontractors, and suppliers who think this step is not essential since the owner is required to send everybody who served a Preliminary Notice a copy of a Notice of Completion or a Notice of Cessation within 1o days of recording either notice with the county.

How many times can you file a Preliminary Notice?

It’s best to file the Preliminary Notice once when the project starts, but some material suppliers may have multiple contracts in the project. This requires them to send separate Preliminary Notices for each contract to cover their claim for each one.

Conclusion

The Preliminary Notice is an essential document in the whole cycle of getting timely payments as a contractor. Serving the Preliminary Notice is a crucial step for California contractors, subcontractors, and suppliers to secure their earnings and their right to put a lien against the property in case the owner fails to settle their progress payments and retention.

Construction businesses must have a smooth and error-free workflow that allows them to serve Preliminary Notices for all their contracts to protect their business—and as the facts show, doing so manually exposes businesses to a lot of financial and legal risks.