In the California building and construction industry, the “Preliminary Notice” is a prerequisite for Subcontractors and Suppliers to protect their right to be paid for work performed and materials provided to a construction project. Without proper drafting and service of a Preliminary Notice, Subcontractors and Suppliers cannot protect their right to payment using such effective collection remedies as the Mechanics Lien, Stop Payment Notice and Payment Bond Claim. Unfortunately, despite the importance of the Preliminary Notice, Subcontractors and Suppliers often make common mistakes in regard to the Preliminary Notice. These mistakes often prevent Subcontractors and Suppliers from pursuing these claims. The purpose of this article is to list some of these common mistakes in the hope of avoiding the following fatal mistakes as it concerns the Preliminary Notice:
Not Sending out the Preliminary Notice Within 20 Days After Supplying Labor or Materials:
The protection of a Preliminary Notice begins 20 days before it sent out. This means that if you delivered $100,000 in materials on February 1, you must serve the Preliminary Notice on or before February 21 (the sooner the better), or you will not be able to pursue an enforceable Mechanics Lien, Stop Payment Notice or Payment Bond claim for that $100,000. There are very few exceptions. Best practice: Send out the Preliminary Notice as soon as you have an agreement to provide work or materials to a California construction project (See California Civil Code 8204).
Not Sending the Preliminary Notice by Certified, Registered or Express Mail Service:
A Preliminary Notice cannot be effectively be sent by regular US mail, or by Fax, or by e-mail. While it is true that a Preliminary Notice can legally be “hand delivered”, the problem with hand delivery is that months or years later, when it comes time to “prove” that the document was actually served, reliable proof of hand delivery usually comes up short. More reliable methods of delivery authorized by the law include certified mail – return receipt requested, registered mail, express mail and overnight delivery by an express service carrier like UPS or FedEx. If you cannot prove you used an authorized method of service, you might as well not send out the Preliminary Notice at all. Best Practice: Serve your Preliminary Notice by certified mail, return receipt requested or by Registered mail or by Express Mail or through overnight delivery by an express service carrier like UPS or FedEx (See California Civil Code 8110).
Failure of “Direct” Contractor to Send a Preliminary Notice When There is a Construction Lender:
The service of a Preliminary Notice is generally an issue for Subcontractors and Suppliers. However, there does exist a circumstance when the “Direct Contractor” (the contractor who has a contract directly with the owner of the property) must also serve a Preliminary Notice in order to make an enforceable claim involving construction funds. Under California Civil Code 8200(e)(2) a Direct Contractor must serve the “Construction Lender” with a Preliminary Notice. Failure to do so will generally forfeit claims against funds held by the lender, including the right to record a fully enforceable mechanics lien. If you are the Direct Contractor and there is a construction loan, always be sure to serve that lender with a Preliminary Notice.
Failure to Safeguard Proofs of Service:
It is important to safeguard proofs of service of the Preliminary Notice. Each proof of service document should bear a common number that matches the document served to the particular proof of service that accompanied that document. The proofs of service must be retained whether or not anyone signed for them on delivery. It does not generally matter if the intended recipient signed to indicate receipt. What generally matters is that each proof of service was properly addressed and delivery was properly attempted, even if service was refused. Keep your return receipts and records of service attempts even if no one signed for the document.
Failure to Use the Proper Current Preliminary Notice Form:
The Preliminary Notice form was changed by statute in 2012 (SB 189). New language has been added to the form. Failure to use the proper current form puts any claim based on the Preliminary Notice at risk. Be sure to use the most current form available or you will risk your right to pursue a Mechanics Lien, Stop Payment Notice or Payment Bond Claim to secure your payment.
Overstating the Preliminary Notice:
Overstating the amount listed in the Preliminary Notice can impact the enforceability of any later Mechanics Lien, Stop Payment Notice or Payment Bond Claim on which the Preliminary Notice is based. List on the Preliminary Notice the proper dollar amount of the contract, subcontract or purchase order for the project. Do not anticipate change orders, interest which might or might not be accrued, or attorney fees which might or might not be incurred. Use only the principal amount of the contract, subcontract or purchase order or other correct amount based on a rational determination. Failure to do so may result in loss of later collection rights.
There are many other mistakes that can be made in processing and serving the Preliminary Notice. These include not putting the correct information into the correct locations on the form, accidentally including an incorrect address, inadequately describing the work performed or material supplied, failure to indicate the method of service or not signing the document. Every failure exposes the claimant to the possibility that the Preliminary Notice will be challenged in court. With a document so vital to the success of a claim for payment on a construction project, take your time and do the best job possible. If you have a question, contact a knowledgeable construction attorney or reliable source, like AppliedLegal.com.
Article by William L. Porter, Esq. in 2019. Mr. Porter is a principal in The Porter Law Group, Inc. in Sacramento, California. He can be reached by phone at (916) 381-7868.