How Important is a Preliminary Notice? By: Chris A. McCandless

How Important is a Preliminary Notice? By: Chris A. McCandless

HOW IMPORTANT IS A PRELIMINARY NOTICE?

By Chris A. McCandless, Esq.

 

Contractors and others contributing to construction projects possess potent remedies when it comes to getting paid for their work or materials.  In fact, a contractor’s right to lien private property as security for payment is so strong it is set forth in California’s Constitution.[1]  For most public works construction projects, direct contractors are required to obtain payment bonds for the benefit of subcontractors and others contributing to a project to ensure they are paid for their work.  Stop payment notices also can be an effective and powerful remedy to ensure payment.  To take advantage of such remedies, however, there are certain conditions that a claimant must satisfy and, for many claimants, having properly and timely served a statutory “preliminary notice” is one such condition. 

So, how important is a preliminary notice?  It is critical because it can make the difference between getting paid or not.  Moreover, for most subcontractors, a failure to serve a preliminary notice is grounds for disciplinary action by the Contractors’ State License Board.[2]   

 

What is a Preliminary Notice?         

The “preliminary notice,” formerly referred to as a “preliminary 20-day notice,” is a written notice given by potential claimants to owners, lenders, and direct (prime) contractors prior to the assertion of any claim on a construction project.  The notice contains information about the potential claimant, its anticipated work on the project, as well as an estimate of the value of anticipated work.  Generally, the preliminary notice serves to alert owners and lenders to the potential for claims arising from contracts to which they are not a party.  

For owners and lenders, the preliminary notice serves a valuable purpose in that it provides information that can be used to monitor a prime contractor’s performance with respect to the various subcontractors and suppliers that anticipate working on the project.  Since the preliminary notices contain estimated values for the work of subcontractors and suppliers, collectively they can serve as a tool for an owner or lender to confirm the prime contractor’s subcontracts will not patently exceed the contract price for the work.  Where values stated on preliminary notices appear overstated, an owner has an opportunity to ask its contractor about the anticipated work before it happens.  Similarly, where subcontractors or suppliers submit additional or revised preliminary notices during the course of construction, thereby increasing the value of their respective estimates, this too can provide an owner an opportunity to question the reason for any increased amounts, if appropriate.  

For most claimants, the preliminary notice is a necessary condition for enforcing a mechanic’s lien, a stop payment notice, or a claim on a payment bond.  Thus, the significance of a preliminary notice cannot be overstated.  In other words, those who fail to properly serve a preliminary notice as required will be precluded by law from pursuing a mechanic’s lien, a stop payment notice, or a payment bond remedy.  In some cases, such remedies may provide the only means for a claimant to obtain payment for its work.  For example, where a prime contractor becomes insolvent, a subcontractor’s only chance of being paid may depend upon its right to record a mechanic’s lien, its right to serve a stop payment notice, or its rights to make a claim on a payment bond.  As such, those who serve preliminary notices should keep copies and accurate records, including the dates and manner of service of the preliminary notice.  If a claim later is presented, it will be the claimant’s burden to establish timely and proper service of the preliminary notice.

Proper service of a preliminary notice also can benefit a claimant on a private works project with respect to the time within which the claimant must pursue a mechanic’s lien, stop payment notice, or payment bond remedy.  That is, if a notice of completion or cessation is recorded on a private project, the owner must, within 10 days of the date the notice of completion or cessation is filed for record, give a copy of such notice to all claimants that served a preliminary notice.[3]  If the owner does not provide that notice within 10 days, the timeline within which claimants can record mechanic’s liens and serve stop payment notices is extended. Thus, owners also should keep accurate and complete records of the preliminary notices received, not only to review and monitor those expected to work on the project but, for a private works owner, so the owner can ensure any recorded notice of completion or cessation is not invalidated as a result of failing to give notice to all those who served a preliminary notice.

 

Who Should Serve a Preliminary Notice?

The short answer?  Everyone.  While service of a preliminary notice is not required in all cases, the best practice is to always serve a preliminary notice on every project.  Far too often, a claimant believes it is exempt from the preliminary notice requirement when it is not.  For some projects, a claimant may not be technically required to serve the notice, but on that same claimant’s next project it may very well be required to serve the notice to fully preserve its rights.  Service of a preliminary notice is not difficult, nor is it time consuming or expensive, and there is no detriment to having served the notice even if it technically may not be required.  It is for these reasons we recommend that all suppliers and contractors, of all tiers, make service of a preliminary notice a part of their standard practice for every construction project, private and public. 

The general rule is that all potential “claimants” must serve the preliminary notice.  A “claimant” is defined as anyone with a right to record a claim of lien, to serve a stop payment notice, to assert a claim against a payment bond, or any combination thereof.  Following that general rule is the best and most conservative practice.  With that said, there are certain limited statutory exceptions to the rule.  So, if a contractor finds itself unpaid and it has not served a preliminary notice, all is not necessarily lost.  The exceptions depend in part upon whether the project is public or private.

For private works, there are two exceptions to the preliminary notice requirement:

  • A laborer is not required to give preliminary notice; and
  • A claimant with a direct contractual relationship with an owner or reputed owner is required to give preliminary notice only to the construction lender or reputed construction lender, if any.

Therefore, when a construction lender is involved, even a prime contractor is required to serve a preliminary notice and if it fails to serve a preliminary notice, the prime contractor will have lost its right to assert and enforce a mechanic’s lien if the owner refuses or is unable to pay. 

For public works projects, there also are two exceptions:

  • A laborer is not required to give preliminary notice; and
  • A claimant that has a direct contractual relationship with a direct contractor is not required to give preliminary notice.

Stated another way, on a public works project, as a practical matter, the only persons who must serve the preliminary notice are second and lower tier subcontractors, or material suppliers to subcontractors.

 Accordingly, in some contexts prime contractors must give preliminary notices, while in other contexts the preliminary notice requirement extends only to lower tier subcontractors and material suppliers.  Given the stark differences in the requirements based on circumstances, the extreme risk associated with having not properly served a preliminary notice when required, and the potential benefits associated with serving the notice, the best practice for any contractor or supplier is to serve a timely preliminary notice as a matter of course, on every project.

 

What Information Must Be Included in a Preliminary Notice?

The specific requirements for a preliminary notice are found in Civil Code sections 8200 through 8216, for private works, and sections 9300 through 9306 for public works.  A preliminary notice must contain specific information, including:

  • A general description of the work to be provided;
  • An estimate of the total price of the work provided and to be provided;
  • The name of the person to or for whom the work is provided;
  • The name and address of the owner or reputed owner;
  • The name and address of the direct contractor;
  • The name and address of the construction lender, if any;
  • A description of the site sufficient for identification (with street address, if any);
  • The name, address, and relationship to the parties of the person giving the notice;

 

Also, in cases where a subcontractor has not paid all compensation due to a laborer, the preliminary notice must include the name and address of the laborer and any person or entity to which a portion of a laborer's compensation is paid (e.g., a union trust fund).[4]

In addition to all of the information identified above, for a private works preliminary notice, the notice must also contain statutory language, in boldface type that states:

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.

 In reviewing the sufficiency of a preliminary notice, courts typically allow minor deviations or errors in the body of the notice itself, so long as the preliminary notice substantially complies with the requirements and the party affected by the error is not prejudiced.  In other words, courts will consider errors in a preliminary notice on a case-by-case basis and tend to allow minor errors that do not defeat the purposes or objectives of the preliminary notice requirement.

 

To Whom Must a Preliminary Notice Be Served?

For private works, the preliminary notice must be served on the following persons:

  • The owner or reputed owner;
  • The direct contractor or reputed direct contractor to which the claimant provides work, either directly or through one or more subcontractors; and
  • The construction lender or reputed construction lender, if any.

Often times, subcontractors may not know of the identity of a construction lender, or even the owner in some cases.  Prime contractors, however, are required by law to provide such information upon request so that potential claimants can prepare a preliminary notice.  Also, applicants for building permits should designate the name of the construction lender in the permit application which is available for public inspection.  Moreover, to the extent that the owner obtains a construction loan after the project begins, an owner is obligated to give the new lender’s information to each person that gave the owner preliminary notice. 

For a public works project, the preliminary notice must be served on the following:

  • The public entity; and
  • The direct contractor to which the claimant provides work.

Interestingly, a surety is not included as a necessary recipient of the preliminary notice.  If a surety is known, however, serving a copy of the notice on the surety is advisable, as it can only help to support a future payment bond claim.

In some contexts, determining who the “owner” is for purposes of a preliminary notice may not be so clear.  Where the work of improvement is being performed for a tenant, for example, the tenant might be identified in construction contracts as the “owner” while the fee owner of the underlying property itself is the landlord.  In those cases, therefore, it is best to serve both the contracting tenant as well as any known landlord/owner.  With that said, however, in some cases, absent the landlord/owner’s posting of a valid “Notice of Non-Responsibility,”[5] where the landlord/owner has knowledge of tenant improvements, and particularly if the tenant improvements are required to make the property suitable for its leased purpose, the tenant may be considered the agent of the property owner for purposes of subjecting the property to liens.  In such cases, therefore, where the preliminary notice is properly served on the contracting tenant, the preliminary notice requirements may be deemed satisfied as to the landlord/owner.

 

When Must the Preliminary Notice be Served?

A timely preliminary notice is given not later than 20 days after a claimant first furnishes work on a project.  However, it can be given at a later time.  As indicated above, the preliminary notice previously was referred to as a “preliminary 20-day notice.”  This is because any mechanic’s lien claim, stop payment notice, or payment bond claim can include only amounts due for work provided within the 20-days prior to giving the preliminary notice and thereafter. 

To illustrate this 20-day rule consider the following example.  If a subcontractor’s work will require three months to perform (90 calendar days), the subcontractor must serve the preliminary notice within its first 20 days on the job in order to have a right to claim a lien or stop payment notice for the entire subcontract amount.  If, however, the subcontractor fails to serve a preliminary notice within its first 20 days and, instead, remembers the preliminary notice requirement during its second month of performance, the subcontractor still can (and should) serve a preliminary notice in order to partially protect itself.  If the subcontractor serves its preliminary notice on day 50, for example, the subcontractor will not have lien rights for the first month of work, but it will enjoy lien rights for work performed during the second and third months, from day 30 forward. 

For various reasons, subcontractors and suppliers often fail to serve the preliminary notice.  As described above, however, the notice can be served anytime, even mid-contract performance.  Thus, it should be served as soon as a claimant discovers its prior oversight.  If a claimant’s work already is finished, though, a preliminary notice might not be effective.  In such cases, the Legislature created one exception with respect to projects where a payment bond exists to protect claimants. 

 

The Payment Bond Exception

A payment bond is not required by law for private projects.  Nonetheless, some private owners, particularly on larger projects, may require a payment bond as part of their prime contract. For virtually all public works construction projects, however, a payment bond is required by law.  In either private or public works, a claimant must have provided a preliminary notice in order to avail itself of a payment bond remedy.  However, if a preliminary notice was not given, a claimant usually still can enforce a bond claim by giving written notice to the surety and the bond principal within 15 days after recordation of a notice of completion. If no notice of completion has been recorded, the claimant can give written notice to the surety and the bond principal within 75 days after completion of the project and likely still have a remedy under the bond.[6]   These exceptions apply to the payment bond remedy only, and sometimes are referred to as a claimant’s “second bite at the apple.”

 

How Must the Preliminary Notice be Served?

The preliminary notice can be personally delivered or, more commonly, it is sent by mail.  If mailed, it must be sent by registered or certified mail, express mail, or overnight delivery by an express service carrier.  For a private project, the owner’s address should be obtained from either the direct contract, a building permit, or a construction trust deed.  For a construction lender, the notice must be sent to the manager or other responsible officer or person at the office or branch of the lender administering or holding the construction funds.  The lender’s address can be found on the construction loan agreement or construction trust deed. 

For a public project, the preliminary notice must be served personally or by mail (registered or certified mail, express mail, or overnight delivery) at the office of the public entity or another address specified by the public entity in the prime contract or elsewhere for service of notices, papers, and other documents.  For state contracts, the person to be served is the director of the department that awarded the contract.  For other public entities, the person to be served is the office of the controller, auditor, or other disbursing officer whose duty it is to make payment under the contract, or the commissioners, managers, trustees, officers, board of supervisors, board of trustees, common council, or other body by which the contract was awarded.

Those serving preliminary notices also must maintain “proof of service” to show exactly when, how, and to whom notice was given.  Claimants must prepare a “proof of notice declaration” that describes the notice given, indicates the date, place, and manner of notice, and identifying the name and address of the person to which notice was given.  If served by mail, the declaration also must include either (1) the documentation provided by the mail carrier showing that payment was made to mail the notice using registered or certified mail, express mail, or overnight mail, or (2) a return receipt, delivery confirmation, signature confirmation, tracking record, or other proof of delivery or attempted delivery, or in the event of non-delivery, by the returned envelope itself.

 

Conclusion

Preliminary notice forms are easy to prepare, inexpensive to serve, and can be a dispositive factor in determining whether one can recover payment for work provided on a construction project.  While there are exceptions to the preliminary notice requirement, the risks associated with not serving a preliminary notice when it is required far outweighs any detriment to serving a preliminary notice when it was not required.  Moreover, determining whether an exception to the preliminary notice requirement applies is not always clear.  Therefore, do your company a favor and establish a policy of preparing and timely serving a preliminary notice on every project, whether you are a prime contractor, subcontractor, or supplier.  At some point, one way or another, you will be relieved that you did.

 

For additional information about preliminary notices, mechanic’s liens, construction claims, or any other construction laws, feel free to contact:

Chris A. McCandless

cam@diepenbrock.com

916-492-5068

 

[1] Cal. Const., Art. 14, Sec. 3 (contractors, laborers and suppliers “shall have a lien upon the property upon which they have bestowed labor or furnished material for the value of such labor done and material furnished”).

[2]  Civ. Code §§ 8216 and 9306 (for subcontracts over $400, a subcontractor’s failure to give a preliminary notice “constitutes grounds for disciplinary action under the Contractors' State License Law”).

 [3]  Similarly, a claimant may record the preliminary notice in the applicable recorder’s office and the county recorder will be obligated to mail notice of any recording of a notice of completion or cessation for the project to the claimant.  However, unlike an owner’s failure to provide notice, any failure of the county recorder to provide such notice does not affect the lien recording period.

 [4]  Some pre-printed forms have a designated space for this information and others do not.  As a practical matter, a preliminary notice should be served at the outset of the work, before any payment would be due any laborers.  To the extent payment is owed for a laborer’s work, however, it is important to remember that this additional information must be included in the preliminary notice. 

 [5]  See Civil Code § 8444 (allowing an owner to provide notice indicating that person shall not be responsible for claims arising from a work of improvement and that the persons interest in the real property shall not be subject to any such lien therefor). 

 [6]  This exception is set for in Civil Code § 8612, and specifically limits its application in certain circumstances where it can be demonstrated that progress payments had been made to first tier subcontractors.