Have You Reviewed Your Preliminary Lien Notice Form?

Have You Reviewed Your Preliminary Lien Notice Form?
New Law Changes Preliminary Lien Notice Language

By
William C. Last, Jr.

Effective January 1, 2000, a new law goes into effect that, in addition to changing the rights of construction laborers and trust funds, changes the language in the statutorily mandated “Notice to Property Owner” statement. The statement is required to be included in the Twenty Day Preliminary Lien Notice. As a result of the new law, as of January 1, 2000, contractors should immediately cease using their old Preliminary Lien forms and change to a form that incorporates the new statutory language.

The new law is intended to reinstate the ability (effectively eliminated by case law, as federal statutes) of laborers and employee trust funds to use state mechanics' liens and creditor priorities to obtain payment of unpaid wages and fringe benefits. Nonetheless, the most significant aspect of the new law is the change to the “Notice to Property Owner” language which is found in the Twenty Day Preliminary Lien Notice. As of January 1, 2000, the bold face type “Notice” section should be changed to the following:

NOTICE TO PROPERTY OWNER

If bills are not paid in full for the labor, services, equipment, or materials furnished or to be furnished, a mechanics’ 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, (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 (3) any other method or device that is appropriate under the circumstances.

The primary change to the “Notice” is the addition of item number two, which states: “....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...”

The California Senate’s legislative analysis describes the other aspects of the new law as follows:

“1. Revisions to the mechanics' lien law's definition of "laborer" to include an express trust fund to whom a portion of a worker's compensation is paid pursuant to either an agreement with the worker or with the worker's collective bargaining agent, and entitles the fund to assert the same rights and claims as the worker.

2. Revisions to the mechanics' lien law related to express trust funds to: (a) include funds that are created by both collective bargaining agreements and employment agreements, (b) apply the fund's mechanics' lien to the total compensation of the laborer, including both wages and fringe benefits, and (c) entitle the fund to assert the same rights and claims as the worker to the total compensation owed the worker.

3. Revisions to the contractor's license bond provisions relative to express trust funds to: (a) include claims for all forms of compensation and not just fringe benefits, (b) include claims made on behalf of any employee with whom the fund has an agreement to receive fringe benefits on behalf of (not just those resulting from a collective bargaining agreement), and (c) provide that the liability on the bond is limited to actual employer payments required to be made on behalf of employees without regard to whether the work was performed on public or private project.”

Comment

While the changes are intended to benefit construction laborers and union trust funds, the changes to the “Notice” language require contractors to change their preliminary lien forms. The legislative analysis of the new law states, in part, that the new law is generally not intended to alter the substantive law governing mechanics' liens or claims against a contractor's bond. Yet the failure to include the new “Notice” language may place a non-complying contractor’s mechanics’ lien rights in jeopardy.

Lobbyists for the construction industry are currently urging the legislature to pass an emergency law that will prevent a non-complying contractor’s mechanics lien claim from being invalidated. Until the new law is changed, contractors should immediately change to new Twenty Day Preliminary Lien Notice forms which comply with the “Notice” statement changes.

This article, ©2000, was written by William C. Last, Jr., a partner in the firm of Last, Harrelson & Faoro. Mr. Last is an attorney who has specialized in construction law for over twenty years, he also holds an “A” and “B” contractors license. He can be contacted at 650-425-7679. This bulletin provides only general information about current legal issues, and is not a substitute for proper legal counsel. If you have a specific legal question or need legal advice, you should contact an attorney.