Does Your California 20-day Preliminary Lien Notice Include A Proper Estimate? If Not, It May Be Invalid

Does Your California 20-day Preliminary Lien Notice

Include A Proper Estimate? If Not, It May Be Invalid

By William C Last, Jr.

Attorney At Law

The statutory prerequisites for an enforceable Mechanic's Lien, Stop Notice and/or Payment Bond claim is the presentation of a valid 20-day Preliminary Lien Notice. If you fail to meet the statutory requirements relative to the form of the notice, timing of the notice and service of the notice your lien, bond and/or stop notice claim may be denied. Thus, following the 20-day notice requirements is critical to a successful claim.

In a recent California Court of Appeal case, the court examined what happens if the amount set forth on the preliminary lien notice is materially less than the actual materials and/or services provided. The case is entitled Rental Equipment, Inc. v. McDaniel Construction (2001) 91 Cal. App. 4th 445. This article will first discuss the significance of the Rental Equipment case and then discuss the requirements for a valid preliminary notice.

The Rental Equipment Case

In the Rental Equipment case, Rental Equipment, Inc. rented equipment to a subcontractor on a private project. Rental Equipment sent two preliminary lien notices which included estimates for the rented equipment in the amount of $10,000. The subcontractor failed to complete the project and pay Rental Equipment, Inc. Rental Equipment, Inc. ultimately recorded a $160,000 mechanic's lien against the project site. Subsequently, Rental Equipment, Inc. filed a lawsuit to foreclose on the lien. The court held that the preliminary lien notice was fatally defective.

The Rental Equipment court concluded that the estimate does not have to be exact since the requirement is for an estimate. However, the estimate cannot be based on a guess as to the ultimate amount of services that will be provided to the project. Specifically, the trial court ruled that the statute requires "a derived figure, arrived at by rational analysis," and that while estimate does not mean "precision or exactness," it does mean more than "guess, conjecture, or surmise," and that the statute is a "simple and straightforward call for an estimated total price of its labor, services and equipment."

The appellate court further found that the amounts appellant estimated on the preliminary notices was a figure "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. The purpose of the Preliminary Notice is to advise owners of potential lien claims against their property. If the owner has an estimate of the potential value of services it can protect itself by obtaining lien releases for similar sums. If the estimated amount has no reasonable basis the owner cannot fully protect its rights.

A Review Of The Preliminary Lien Notice Requirements

Anyone providing labor, services, equipment or materials actually used and consumed in a construction project acquires potential Mechanics' Lien and Stop Notice rights. Those rights, if properly perfected, allow a contractor to look to the project property to satisfy a judgment for the value of the goods and services provided. The Mechanic's Lien, Stop Notice and Payment Bond procedures involve three basic steps: (a) Serving a preliminary 20-day notice; (b) recording the Mechanic's Lien, serving the Stop Notice or making the claim on the payment bond; and (c) Filing a lawsuit to: (1) foreclose the Lien; (2) enforce the Stop Notice, or (3) enforce the claim against the surety. This article will focus on the first requirement.

The 20-day notice requirements are applicable to private and California public works projects. It should be noted that a contractor on a federal public works project is generally limited to making a Miller Act Bond claim. The notice requirements for the Miller Act claim are different then the 20-day notice requirements.

While most contractors are familiar with the 20-day preliminary notice, they may not fully understand the many legal nuisances associated with the required notice. The remainder of this article will thus serve as a checklist on when to serve a notice, who to serve it upon, and the content of the notice.

California Private Works Preliminary Notice Project Checklist

1. Who Must Serve a Preliminary Notice

With the exception of the following claimants you must serve a 20-day notice:

1. If you have a direct contractual relationship with the owner of the project and there is not a project construction lender.

2. You are performing labor for wages.

The notice must be served on the project owner, project construction lender (if any) and general contractor if you are a:

1. Subcontractor

2. Sub-Subcontractor

3. Material supplier

4. Design professional

5. If there is a construction lender for the project, a contractor, even if in direct contract with the owner, must serve a notice if it is providing all the work.

2. When To Serve a Preliminary Notice

The notice must be served no later than 20 days after first furnishing the labor, services, equipment or materials for which the lien is claimed.

A notice can be served after the initial 20 day period, but the amount of the lien is limited to the labor, services, equipment or materials furnished 20 days before the service of the notice and those furnished thereafter.

3. Content of the Preliminary Notice

Most trade associations and many stationers have pre-printed 20-day notices. However, over the last five years the legislature has made changes in the required language. Thus, it is advisable to review the pre-printed forms language to ensure that it meets the following requirements:

A general description of the labor, services, equipment or materials furnished.

The name and address of the person to whom the labor, service, equipment or materials are furnished.

The name and address of the claimant.

An estimate of the total price of the labor, service, equipment or materials are furnished.

A description of the job site sufficient for identification.

The following statement in bold type: "NOTICE TO PROPERTY OWNER

"If bills are not paid in full for the labor, services, equipment, or materials furnished or to be furnished, a mechanic's lien leading to the loss, through court foreclosure proceedings, of all or part of your property being so improved may be placed against the property even though you have paid your contractor in full. You may wish to protect yourself against this consequence by (1) requiring your contractor to furnish a signed release by the person or firm giving you this notice before making payment to your contractor, or (2) any other method or device that is appropriate under the circumstances."

Please note that during 1999 the statutory language was changed. However, companion legislation was not passed and as a result the changes were subsequently deleted during 2000. Specifically, the following language was added and then deleted: "(2) requiring your contractor to furnish a receipt to establish that you paid the contractor in full and recording no later than 30 days from receipt of this preliminary notice an affidavit that you paid the contractor in full, or." When that statement was deleted, the statute was also apparently amended to effectively state that any preliminary lien notices served with the additional language would not invalidate the notice. Irrespective, you should use a form that has the most current language.

If the notice is given by a subcontractor who has failed to pay all compensation due to his or her laborers on the job, the notice shall also contain the identity and address of any laborer and any express trust fund to whom employer payments are due.

If an invoice for materials or certified payroll contains the information required by this section, a copy of the invoice, transmitted in the manner prescribed by this section shall be sufficient notice.

Identify the trust fund into which you are required to pay fringe benefits.

4. How the Notice Must Be Served

Personal service

Registered or Certified Mail, with return receipt requested.

The serving party should prepare a proof of service and keep the copies of the returned receipts.

5. Who Must the Notice be Served Upon

Any claimant who must serve a notice must serve it upon the following parties as applicable:

1. The owner;

2. The construction lender, if any;

3. The general contractor who has the direct contract with the owner; and/or

4. A subcontractor if you are furnishing labor, services, equipment or materials to that party.

6. How Many Notices That Must Be Served

If you have only one contract with the party with whom you contracted, you only need to serve one 20-day notice.

If you are furnishing labor, services, equipment or materials under more than one contract, then you must serve a separate notice for each contract.

7. Miscellaneous Issues:

The claimant has the option of recording the 20-day notice. If the notice is recorded and the appropriate fee paid the county recorder should send notices of completion and/or Cessation to the party who records the notice.

Every contract between a general and subcontractor or between two subcontractors must contain a space for the name and address of the owner, general/sub contractor and the construction lender. This requirement is intended to provide the information necessary for preparing and serving of the notice.

California Public Works Project Preliminary Notice Checklist

1. Who Must Serve a Preliminary Notice

With the exception of the following claimants, you must serve a 20-day notice:

1. If you have a direct contractual relationship with the project prime contractor.

2. You are performing labor for wages.

The notice must be served on the public agency that is involved and general contractor if you are:

1. Sub-Subcontractor

2. Material supplier

3. Design professional

2. When To Serve a Preliminary Notice

The notice must be served no later than 20 days after first furnishing the labor, services, equipment or materials for which the lien is claimed.

A notice can be served after the initial 20 day period, but the amount of the lien is limited to the labor, services, equipment or materials furnished 20 days before the service of the notice and those furnished thereafter.

3. Content of the Preliminary Notice

Most trade associations and many stationers have pre-printed 20-day notices. However, over the last five years the Legislature has made changes in the required language. Thus, it is advisable to review the pre-printed forms language to ensure that it meets the following requirements:

With substantial accuracy a general description of the labor, services, equipment or materials furnished.

The name and address of the person to whom the labor, service, equipment or materials are furnished.

An estimate of the total price of the labor, service, equipment or materials are furnished.

A description of the job site and project sufficient for identification.

The name of claimant.

It is advisable to use the same form that you use on a Private Works project on a Public Works project, since the Private Works form contains all the requisite information.

4. How the Notice Must Be Served

Personal service

Registered or Certified Mail, with return receipt requested.

The serving party should prepare a proof of service and keep the copies of the returned receipts.

5. Who Must the Notice be Served Upon

1. The public agency

Service must be served on the public agency, rather than the public entity, that contracted for the work. Irrespective, it is recommended that the notice be served on both.

Service on the California Department of Public Works and the Department of General Services must be addressed to the office of disbursing agent.

2. The general contractor who has the direct contract with the owner; and/or

3. A subcontractor if you are furnishing labor, services, equipment or materials to that party.

6. How Many Notices Must Be Served

If you have only one contract with the party with whom you contracted, you only need to serve one 20-day notice.

If you are furnishing labor, services, equipment or materials under more than one contract, then you must serve a separate notice for each contract.

Conclusion

Generally, courts require strict compliance with the 20-day notice statutory provisions. Defects in the form of the notice can result in the loss of valuable lien, stop notice and/or payment bond rights. It is strongly recommended that contractors, on an annual basis, review the 20-day notice form to ensure that it complies with any recent statutory changes to information required in the notice as well as the Notice To Owner language. Finally, you should make it a practice to review the information that is placed on the notice to ensure that it is accurate and complete.

This article, ©2002, was written by William C. Last, Jr. Mr. Last is an attorney who has been specializing in Construction Law for over 20 years.. In addition to belonging to a number of construction trade associations, Mr. Last holds a California "A" and "B" license. He can be contacted at 415-764-1990 or 650-425-7679. A number of his past articles can be found on his website (lhfconstructlaw.com). This bulletin is published periodically to provide general information about current legal issues. The articles are not intended to be a substitute for the advice of an attorney as to a specific problem. If you have a specific legal question or need legal advice, you should contact an attorney.