California Lien Laws
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The Importance of the 20-Day Preliminary Notice on Private Jobs
Contrary to popular belief the California 20-day Preliminary Notice was not designed to benefit Subcontractors and Suppliers or to upset General Contractors. It was designed to protect the property owner.
In most cases the owner has no direct contractual relationship with anyone performing work on their property other then the General Contractor. As far as the owner is concerned, when they pay the General Contractor at the completion of the job they assume that's the end of it. They believe that all parties involved have been paid and no one has any claim on their property. However, if the owner doesn't know who the parties are, how can they be certain that they have been paid? That's where the preliminary notice comes in. By sending a 20-day preliminary notice you are making the owner of the property aware of the fact that you are performing work or supplying materials and that they have a legal responsibility to make sure your company receives payment from the General Contractor.
In California Subcontractors are required to send a 20-day preliminary notice on all jobs over $400.00 (refer to civil code 3098 section b). Suppliers are not required to send a 20-day preliminary notice, but if they fail to do so, they waive all rights to file a mechanics lien at a later date. Once again, the requirements for the 20-day preliminary notice are designed to protect the property owner by making them aware of other companies performing work or supplying materials for their property. In saying this the 20-day preliminary notice process can also be a very effective means of collection, by encouraging the owner to assure your payment while at the same time protecting his/her property.
When your company sends a 20-day preliminary notice to an owner you are giving them clear directions on how to protect their property from future lien claims. By following these directions they are guaranteeing that you receive payment. The only way the owner of the property can completely protect themselves from lien claims is to obtain releases from all parties from the General Contractor, the only way the General Contractor can obtain releases from all parties is to make sure all parties have been paid in full.
Unfortunately the 20-day preliminary notice alone will not work on all your jobs. Some property owners do not know their requirements and will not take the time to educate themselves on their responsibilities. Some General Contractors will refuse to contract with you unless you agree to sign an egregious contract. Sill, you will see that this is a minority in the construction industry. The majority of the General Contractors are very honorable and understand that this is just a way for your company to protect itself. They will understand that they have other options, such as a joint check agreement. In some cases you will find General Contractors requesting a release from your company even if you never filed a 20-day preliminary notice.
The construction industry has a unique advantage in collections that other industries do not. That is the Mechanics Lien Process. This can be very effective if used consistently by your company. So, send your 20-day preliminary notices on every job, large or small. Protect your company from losses that could have been avoided. You might make some of the companies you do business with a little unhappy, they'll understand. If they don't, do you really need that kind of business anyway?
Written by Thomas Crouch of Lien Writer.Com LLC, makers of
the Lien Writer Mechanic's Lien Program. You can visit
their website at
Phone (916) 941-9961.
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Effective January 1, 2000, additional language was added to the 20-Day Preliminary Notice that affected all users of this law. The revised wording for the Notice to Owner added a third statement that reads, "You may wish to protect yourself against this consequence (a foreclosure) by "(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."
The problem with this required wording was that we were required to change the Notice to Owner and purport to give them some rights that didn't exist. The practical problem is that, if the owner follows the directions on the 2000 form, will a court in a foreclosure action attempt to enforce it against the contractor or supplier. This is why a contractor or supplier shouldn't use the new form and, as of the 17th of April 2000, they aren't required to use it.
After considerable pressure from the construction industry, the legislature agreed to undo the requirements in the new 2000 20-day Preliminary Notice Form. Legislative Bill AB 576 was introduced, passed, and signed into law by the Governor on April 14, 2000 and filed with the Secretary of State April 17, 2000. This was an urgency bill which means that it takes effect immediately.
What this means to you is that you should stop using the 2000 form and return to the 1999 version. The 1999 version doesn't have the same language in the Notice to Owner. If you have used the old form by mistake, the bill, AB 576, declares that it is valid even if it was used while the new 2000 form was required. In other words, throw away all the new forms which are now old and use the old forms which are new....got it?
Now for the bad news, Assembly Member, Honda is once again attempting take away your Mechanics' Lien rights. This time through his Bill AB 2113. Without going into detail, if passed, it would require any person, other than the original contractor, dealing with a single family residence to file a statement of claim with the Contractor's State License Board. If the CSLB finds that the owner hasn't paid the original contractor in full, a claimant may proceed with their foreclosure suit. If the CSLB determines that the owner has paid the original contractor in full, you would have to be paid out of a "Contractor Default Recovery Fund." This fund would be funded by charging all home improvement contractors an annual fee of $200.00. The maximum amount that a claimant could receive from this fund is $75,000 per residence for all claims brought against that property and $500,000 per a claimants lifetime. If there are multiple claims against the property, the maximum payout is $75,000 to be shared between all claimants.
If you don't like Mr. Hondas approach to helping owners at the expense of contractors and suppliers, I suggest that you become acquainted with this bill and discuss it with your legislator. The industry handled the problem the first time around and you can do it again.
This article was submitted by the Law Offices of Rowley, Grace & Artz, LLP, P.O. Box 7, Loomis, CA 956505 (916) 652-7235. If you need further information, please contact an construction attorney in your area.
(Page updated March, 2012)