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Should You Send a Preliminary Notice to the Construction Lender?

Should You Send a Preliminary Notice to the Construction Lender?

December 15, 2020

Preliminary notices serve many purposes in a construction project. For one, they help stakeholders communicate with one another and share pertinent information. They also inform a property owner about a construction professional’s participation in their project. Most importantly, sending a preliminary notice protects its sender’s lien rights.

Different states have different kinds of preliminary notices, including the Notice to Owner, the Notice of Furnishing, and the Notice of Right to Lien, among others. All of these are generally served at the beginning of a project, and almost every state requires that they be served on specific stakeholders before a potential lien claimant can file a mechanics lien.

Every state has different rules on how a preliminary notice must be served, who needs to serve one, and on whom it should be served. Although most states require construction participants to serve a preliminary notice only on the property owner and the general contractor, California, Arizona, and Alabama require potential claimants to also serve the notice on the construction lender.

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Read on to know when you are required to serve a preliminary notice on a lender.

Which states require preliminary notices?

Note that even though serving a preliminary notice is not necessarily mandatory in these states, doing so may still be beneficial. Some of these non-notice states have optional preliminary notices that come with perks too. In Alaska, for example, you may choose to serve a Notice of Right to Lien to transfer the burden of proof to the property owner.

In which states are lenders required to receive a preliminary notice?

Only California and Arizona require construction participants to serve a preliminary notice on construction lenders. In California, general contractors are required to serve a preliminary notice only when a project is funded through a lender.

In Alabama, the statutes do not explicitly require preliminary notices to be sent to a lender as a required party, but there are prior court rulings that discuss how a lender should also receive one. In Ohio, a preliminary notice may be delivered to the construction lender, although doing so is not mandatory.

Sending a preliminary notice to the lender is done because you want them to be in the loop. You want them to know that you are part of the project that they are funding and that you can potentially file a mechanics lien against it if you do not receive your due payment.

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If payment disputes arise, it is possible for a construction lender to step in. A construction lender can, for instance, withhold the release of funds until payment issues are sorted.

Consequences of failing to send a preliminary notice to the lender

If you are working on a construction project in California, Arizona, or Alabama and that project has a lender, you must make sure that you serve the lender a copy of your preliminary notice. This is very important because failing to follow this simple rule can invalidate your mechanics lien claim.

In a 2012 case between Shady Tree Farms and Omni Financial, the general contractor lost nearly $2 million worth of payments just because they did not deliver a preliminary notice to the lender. They filed a mechanics lien but they were not able to enforce it. The court did not rule in their favor after they failed to deliver a simple document to the construction lender.

In other states where serving a notice on the lender is not required, there are no lien-related consequences if you do not send to the lender a preliminary notice.

How much does it cost to send a preliminary notice to the lender?

There are different valid methods for delivering a preliminary notice, but it is best practice to mail your preliminary notice to the intended recipients, including the lender.

If you use USPS, the following rates may apply:

  • Certified Mail: $3.55
  • Registered Mail: $12.60 or higher
  • Certificate of Mailing (add-on): $1.50

You can also do it all online by sending a preliminary notice through Handle. 

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Best practices for serving a preliminary notice

1. Familiarize yourself with the preliminary notice requirements that apply to you.

Some states have multiple preliminary notices depending on a participant’s role and the type of project they are working on. Furthermore, certain states have monthly notices instead of a one-time letter that is sent at the beginning of a project. Make sure that you are familiar with the rules that apply to you and that you understand them.

2. Prepare the preliminary notice early.

Preliminary notices often have deadlines associated with them, just like most lien-related documents. It is best practice to prepare your preliminary notice form early by researching the required information and using an effective template. Be sure to serve the preliminary notice early so you do not risk missing the deadline altogether.

3. Ensure that you serve the preliminary notice on all required recipients.

Failing to serve a preliminary notice on one important recipient can be fatal to your lien rights. If the rules say you must serve the preliminary notice on the lender, make sure that you actually serve your preliminary notice on the lender.

Keep in mind that serving a preliminary notice not only preserves your lien rights but also allows you to share information with higher-tier parties, which can help ensure that you receive your payment.

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