Lien Pre-Notice Requirements Can Have a Drastic Impact on Lien Claims

For contractors or subcontractors seeking past-due payment, mechanics’ liens are often a necessary part of the collection process. The ability to encumber title to a property — and potentially foreclose on the land to satisfy debt — is a uniquely powerful tool claimants can utilize to collect final payment or favorably settle an account, allowing contractors to close out their project files and move on. Each state’s requirements differ, and precision and accuracy are typically imperative to success. For example, missing the state statutory deadline or inaccurately describing the subject property will usually invalidate the lien. Satisfying all of the requirements is very important, as the mechanics’ lien is often the only way to give real teeth to a contractor’s claim for past-due payment.

Accordingly, most subcontractors and suppliers frown upon anything that would make it more burdensome to successfully make a lien claim. For this reason, the emerging trend of “pre-notice” or “pre-lien” requirements — and their potential deterrent effect on lien claims — deserves attention. Twenty-five states require lien claimants to provide the project owner (or the owner’s agent) with a “pre-notice,” which is a written notice in which the claimant identifies itself, the party with whom it contracted, and what labor or materials it will be furnishing on the project. (States requiring a pre-notice in at least some circumstances include Arizona, Arkansas, California, Florida, Georgia, Indiana, Maine, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, Ohio, Oregon, Tennessee, Utah, Virginia, Washington, Wisconsin, and Wyoming.)

A key characteristic of the pre-notice is that it is a prerequisite to the later filing of a mechanics’ lien under at least some circumstances. Pre-notice requirements usually require contractors and subcontractors to take action at the beginning of a project to secure their future right to file a mechanics’ lien — even if at this stage they are owed no money or have no reason to believe they would ever need to file a lien. In nearly every state with such a requirement, failing to file the pre-notice is a complete bar to ever filing a mechanics’ lien on the project in question. The pre-notice step is typically in addition to the other steps claimants already have to take to successfully make a lien claim. These other steps usually include filing and serving the lien and filing a lawsuit to enforce the lien by the required deadlines.

Proponents of pre-notice requirements often point to the positive consequences they can have for both claimants and project owners. Often, the purpose of these requirements is to place the project owner or its title insurer on notice of all parties who are furnishing labor or materials on the property. Notice of potential lien claimants helps owners avoid liens from emerging retroactively through the doctrine of “relation back,” which makes mechanics’ lien effective as of the date of the contractor’s first date of furnishing of labor or materials, even if the lien is not filed until later. Theoretically, if an owner knows who all of the subcontractors and suppliers are beforea closing or refinance occurs, the owner will have an incentive to pay any unpaid parties who could later file liens that would relate back to the parties’ first date of work on a project and cloud the title afterthe sale or refinance. Also, in many states the pre-notice will validate the lien even when the pre-notice is served after the statutory deadline as long as it is served before the property refinances or conveys to a new owner.

Potential Pitfalls

Because they add steps to the administrative and legal procedure for lien filing and potentially deter claimants from being successful, pre-notice requirements are generally unpopular among lien claimants. A less obvious, but significant, consequence of pre-notice requirements is the negative impact they can have on customer relationships. For many general contractors, pre-notices going from their subcontractors or suppliers to an owner feel overly aggressive because they come at the beginning of a project, when no money is likely to be owed yet. General contractors do not want their customers — the owners — to think that their subcontractors are worried about being paid promptly. General contractors also don’t enjoy the idea that a subcontractor or supplier is litigious or intends to one day file a lien on a project, and some of them make this known to their subcontractors. The result? Many potential lien claimants will refrain from filing or serving a pre-notice in an effort to satisfy the general contractors. But if the general contractor or owner encounters financial trouble or fails to make contract payments down the road, these would-be claimants will have jeopardized or eliminated their ability to assert a lien claim.

North Carolina’s statute is an example. The statute has long required that lien claimants file and serve their liens within 120 days of the last date of furnishing on a project and perfect their lien claims with a lawsuit within 180 days of the last date of furnishing. In 2013, North Carolina’s legislature added a pre-notice requirement that lien claimants file and serve a “Notice to Lien Agent” within 15 days of commencement or before a sale or refinance takes place. A Lien Agent is the title insurance company assigned to the project. The Notice to Lien Agent is typically served using an approved statewide electronic filing system that transmits notice not only to the Lien Agent but also to the general contractor. In addition to North Carolina, another 10 of the other states with pre-notice requirements also require the notice to be sent to the prime contractor. (These states include California, Georgia, Michigan, Minnesota, New Mexico, Ohio, Utah, Wyoming, and Virginia.)

For many general contractors, this sends a message that subcontractors or suppliers either don’t trust them to make timely payments, or, worse, that they intend to file a lien on the project. One North Carolina concrete supplier reported that as a regular practice, his company files and serves a Notice to Lien Agent on every project where it furnishes material, but that “we’ve lost customers over it.” He said that he understands why some suppliers don’t file the Notice to Lien Agent but said that for his company, protecting prospective lien rights and the right to full payment outweighs appeasing customers who are offended.

An impending change to the North Carolina statute may complicate the pre-notice procedure further. Beginning October 1, duly filed and served Notices to Lien Agent will expire after five years and will have to be renewed at that time. Furthermore, lien claimants will be required to “cancel” their Notice to Lien Agent “a reasonable time after the potential lien claimant has confirmed its receipt of final payment.”

Because North Carolina’s only approved electronic filing system for Notices to Lien Agent, www.liensnc.com, currently has no mechanism for canceling a Notice to Lien Agent, under the current system if a lien claimant has served the Notice, there is no official way to un-serve it. When the new law is passed and the electronic system is changed accordingly, general contractors who make their displeasure known to their subcontractors could potentially influence their subcontractors to cancel the pre-notice prematurely — thereby potentially eliminating their ability to file a mechanics’ lien, even if non-payment occurs.

Whether subcontractors and suppliers want to make a regular practice of filing and serving mechanics’ lien pre-notices is a judgment call for them. But in an increasing number of states, this could mean effectively waiving any lien rights they have.