Payment disputes can occur at any time during a construction project. When this happens, a construction party gets embroiled in payment negotiations just to make sure that they get compensated for all their hard work.
One way to earn your leverage during a payment dispute in a Washington construction project is to serve a document called Notice to Lender. This guide will answer all the basic questions that you might have about the Washington Notice to Lender.
What is a Washington Notice to Lender?
A Washington Notice to Lender is a document served by a potential lien claimant on the party who provides interim or construction financing to a project. Serving the Notice to Lender obligates a lender to withhold funding to the property owner until the payment dispute is settled.
A construction lender will be required to withhold the amount that has not been disbursed to the owner. This means that lenders can only withhold from the funds that are yet to be handed to the owner.
If, for example, your payment claim is $20,000 and the remaining amount is only $10,000 on the day that they receive your Notice to Lender, the lender is only obligated to withhold a maximum amount of $10,000.
Who can serve a Washington Notice to Lender?
All potential lien claimants in Washington can serve a Notice to Lender. These claimants include general contractors, subcontractors, and material suppliers who provide services for the improvement or construction of a property.
Note that a construction lender will be obligated by law to withhold funding upon receiving a Notice to Lender, but only if the project does not have a payment bond of at least 50 percent of the amount of the construction financing.
When to serve a Washington Notice to Lender
A Notice to Lender must be served after 5 days of not receiving a scheduled payment from your client, but no later than 35 days after that payment deadline. As stated in Washington RCW 60.04.221(1):
“Any potential lien claimant who has not received a payment within five days after the date required by their contract, invoice, employee benefit plan agreement, or purchase order may within thirty-five days of the date required for payment of the contract, invoice, employee benefit plan agreement, or purchase order, give a notice as provided in subsections (2) and (3) of this section of the sums due and to become due, for which a potential lien claimant may claim a lien under this chapter.”
Say, for example, that the deadline for your client to pay your invoice falls on January 1. If by January 6 – five days after the payment deadline – you still do not receive payment, you can serve a Notice to Lender to get the lender to withhold the amount equal to your invoice. You have until 35 days after January 1, the agreed-upon payment deadline, to serve the Notice to Lender.
Serving a Notice to Lender beyond these dates will invalidate your Notice to Lender. A lender or a property owner can question its validity based on your failure to comply with the rules, and you may have to pay penalties for doing so.
Why serve a Washington Notice to Lender?
Serving a Washington Notice to Lender allows you to build your leverage during payment negotiations. When a payment is delayed, one way to get your client to pay up is to limit the funding that they will receive from the lender. If the owners want to continue receiving funding, they will have to settle the dispute with you by releasing the payment.
Once a lender receives a Notice to Lender and withholds the requisite amount, they will only be allowed to disburse the withheld amount after a written agreement has been formed between you as the potential lien claimant, the property owner, and the general contractor. The lender is required to prescribe the form of such an agreement.
Note that a property owner can also question the validity of your Notice to Lender by applying a motion before a superior court to have you appear in court and prove that the Notice to Lender is valid and hence must not be declared void. This prohibits potential lien claimants from abusing the Notice to Lender by making frivolous payment claims.
You must, then, serve a Washington Notice to Lender only if your payment claim is reasonable. Make sure that you can back up the payment delay that you are questioning with relevant documents, such as contracts, affidavits, and other signed agreements, to avoid having your Notice to Lender invalidated and potentially paying fines.
How to serve a Washington Notice to Lender
1. Prepare your Washington Notice to Lender form
The Washington Notice to Lender form must include the following pieces of information:
(a) The name of the general contractor
(b) The street address of the property being improved or the legal description of the real property
(c) Your name, business address, and telephone number
You are allowed to include more details, but the Washington Notice to Lender must be of substantially the following format:
You are advised to stick to Washington’s prescribed form as shown above. Since this form is recommended by the law, it is best to stick to it and simply fill in the required information.
2. Serve the Notice to Lender on the appropriate parties
Once your Washington Notice to Lender form is ready, you then have to serve it on the following parties:
- The construction lender
- The property owner
- The prime contractor
Serving the Notice to Lender may be done using the following methods:
- By mailing the Notice to Lender via registered or certified mail with return receipt requested
- By delivering or serving the Notice to Lender personally and obtaining evidence of delivery in the form of a receipt or other acknowledgment
Remember to choose the return receipt option if you are mailing the Notice to Lender. If you are delivering the notice in person, make sure that you get the recipient to sign an acknowledgment of receipt as proof that you have duly served the notice.
Also note the time frame within which you must serve the Notice to Lender. You must serve the Notice to Lender at least 5 days after the intended payment deadline, but no later than 35 days after this date.
Failing to serve your Notice to Lender in the manner specified above could be grounds for its invalidation. When a court declares a Notice to Lender null and void, either because the payment claim is frivolous or due to failure to comply with the rules, the potential lien claimant who served the Notice to Lender incorrectly may be forced to shoulder the attorney fees incurred by the property owner.
You must, therefore, serve a Notice to Lender in Washington properly if you want to avoid having to shell out more money for simply wanting to get paid the amount that you worked hard for.
Best practices when serving a Notice to Lender in Washington
1. Keep track of the payment deadlines
You have to monitor your payment schedule as stated in the initial agreement with your client. Make sure that they know when the payment deadlines are. By keeping track of these deadlines, you will be able to know by which date must you serve a Notice to Lender.
Always be aware that a Notice to Lender in Washington will not be valid unless you serve it at least 5 days after a scheduled payment deadline has passed, but no later than 35 days after that deadline.
2. Ensure that you can back up your payment claim with relevant documents
A property owner is allowed to question the validity of your claim in court, so you always have to be ready to prove that your payment claim is reasonable. Be ready to present relevant documents that will verify your payment claim. These documents include a detailed contract, a schedule of values, a dated invoice, and other signed agreements with your client.
3. Use the state-prescribed Notice to Lender form
Washington requires a Notice to Lender form to be substantially in a specific format (shown above). The safest way to prepare your Notice to Lender form is to stick with the state-prescribed format and simply fill it out with the information that the form requires. As with all construction-related forms, it is always a good practice to make sure that the details you write in the form are spelled correctly and are accurate.
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