This is the seventh part in our series of articles on lien and bond claim laws, and general construction law in Arizona.
- Part 4: Bad Checks and Credit Card Chargebacks – How to Deal with Them in the Context of Construction Debts
- Part 7: A Contractor's, Subcontractor’s & Supplier's Step By Step Guide to Getting Paid
Contractor and Supplier Remedies Repayment Claims
Typically, in Arizona like in most states, contractors and suppliers have various remedies available to them in the event of nonpayment.
a. Two of the most effective remedies in case of nonpayment
Two of the most effective remedies are:
b. Contractors and suppliers must timely serve a Preliminary 20-Day Notice
Step 1 – Serve a Preliminary 20-Day Notice
That brings us to Step 1 which is a top step for subcontractors and material suppliers to ensure that they get paid, and this is to serve a Preliminary 20-Day Notice. If you take one thing away from this article, let it be to serve a Preliminary 20-Day Notice early. Serve it when you begin work or begin furnishing materials to a construction project.
a. Every lien claimant and some Little Miller Act bond claimants must serve Preliminary 20-Day Notice
Except for laborers for wages, every lien claimant and some Little Miller Act bond claimants in Arizona must serve a Preliminary 20-Day Notice within 20 days of beginning work.
i. Not serving a 20-Day Notice
What happens if you do not serve a 20-Day Notice? You forfeit all lien rights, and you may forfeit bond rights.
ii. Not serving a timely 20-Day Notice
If you do not timely serve a 20-Notice, you can forfeit a portion of your property lien or bond rights. So you want to get those preliminary notices served and you want to get them served within 20 days of beginning work on a project.
a. What Preliminary 20-Day Notices are designed to do
Preliminary 20-Day Notices are designed to give homeowners advanced information of the identities of any unpaid claimants who may perfect liens against the property or assert bond claims, in the case of the contractor furnishing a payment bond if their debt remains unsatisfied.
So the idea behind Preliminary 20-Day Notices is that they put everyone on notice that you as a contractor or supplier are out on the construction project, you are performing work or delivering materials, and you have a right to payment.
Contents of an Arizona Preliminary 20-Day Notice
This will be a refresher of one of the previous articles covered on Arizona lien laws. Pursuant to A.R.S. § 33-992.01(C), 20-Day Notices must contain the following information:
- You need to include a description of the labor or materials that will be furnished and an estimate of the total price thereof;
- The name and address of the person furnishing the labor or materials;
- The name of the person who contracted for the purchase of the labor or materials;
- An adequate description of the jobsite for identification; and
- A specific statutory ‘Notice to Property Owner,’ prescribed by A.R.S. § 33-992.01(C)(5).
Those are the general contents of a Preliminary 20-Day Notice.
a. Where to find a copy of the Arizona Preliminary 20-Day Notice
You can find a sample copy at A.R.S. § 33-992.01(D).
b. Claimants are obligated to substantially follow statutory form
Claimants and those furnishing 20-Day Notices are obligated to substantially comply with the statutory form that you can find in § 33-992.01.
20-Day Notices – Who to Serve
The most important thing you can take from today is to serve a Preliminary 20-Day Notice if you are performing construction work in Arizona.
c. Who do you need to serve 20-Day Notices on?
You need to serve 20-Day Notices on the owner or the reputed owner, the original contractor or the reputed contractor, the construction lender or reputed construction lender, and the person with whom you as the claimant contracted.
d. Who should 20-Day Notices be addressed to?
As set forth in this excerpt of § 33-992.01, it should be addressed to the recipients at their residence or businesses addresses and served via either: (1) first class mail with a certificate of mailing; or (2) registered or certified mail with postage prepared.
e. When are 20-Day Notices deemed to be served?
The 20-Day Notices are deemed served when they are deposited in the mail.
Serving Preliminary 20-Day Notices – When to Serve
Above, we spoke about the timing requirements of 20-Day Notices.
a. Serve within 20 days of first commencing work or furnishing materials
It is really important if you want to preserve all your lien rights and bond claims on a project that you serve your Arizona 20-Day Notice within 20 days of first commencing work or furnishing materials on a project.
That is because 20-Day Notices reach back only 20 days. So if you serve it within the 10th day of performing work or furnishing materials, it will reach back 20 days and then carry forward from that point going forward.
So you have effectively covered your entire time on the project, provided the amount of the 20-Day Notice is correct. If you wait until say, Day 30, then what happens in that situation is the 20-Day Notice reaches back 20 days.
It would take you back to Day 10 and you would have lien rights and bond claim rights from Day 10 going forward on the project, again providing that the amount in the 20-Day Notice is correct. But in that circumstance, you have a situation where from Days 1 to 10, the labor or materials furnished within those 10 days would not be covered.
That brings us to the next couple of points you will see below.
b. 20-Day Notices can be served later than 20 days after labor and/or materials are first furnished
If you do not serve the notice within the 20 days after labor and materials are first furnished, you could potentially pick up some lien rights or bond claims if you serve a late 20-Day Notice. But you are not going to have rights for the entire time on the project.
Step 2 – Supplement the Preliminary 20-Day Notice if Necessary
It has been mentioned several times above, but one of the things you need to make sure of is that the amount of the 20-Day Notice is correct. So, the first step is to serve the 20-Day Notice. You want to make sure that it complies with the statute and has all of the requirements of the statute in terms of contents. Then you serve it in accordance with the statute
One of the requirements of the statute is to have an estimate of the total price, and it is important to get this right because in Arizona a lien is limited to 130 percent of the estimated amount in the 20-Day Notice. So if you serve a 20-Day Notice and the estimate of the total price of the work on the project is $100,000. That notice would confer upon you, lien rights or bond claim rights of up to $130,000.
i. Supplemental 20-Day Notice should be served within 20 days of furnishing additional labor or materials
If the scope of the work changes and the value of the labor and materials increases, you would have up to $130,000 in lien rights without having to serve a supplemental 20-Day Notice. If the construction contract amount is increased beyond that 130 percent threshold, it is incumbent upon the claimant to serve a supplemental 20-Day Notice.
Again, you want to serve that as early as possible, and you want to serve that within 20 days of first furnishing additional labor or materials.
ii. Supplemental Notice must set forth the new estimated total price
One key point on this is that when you supplement a 20-Day Notice, you do not want to do a piecemeal supplementation.
When you serve a 20-Day Notice because the construction contract amount is $100,000. The scope of the contract increases to $150,000. So this is a circumstance where the total value of the work is now above 130 percent of the amount of the Preliminary 20-Day Notice.
It is incumbent upon the contractor or material supplier in that situation to supplement the 20-Day Notice, but the correct way to supplement in that circumstance is to send out a supplemental 20-Day Notice. That has an estimate of the total price now listed at $150,000.
You want to do that and include that total amount rather than a piecemeal supplementation where it says that the estimate of the total price is just $50,000 or the difference between the increased amount and the amount in the original 20-Day Notice.
Because there is an argument that if you just list the increased amount, you are telling the people who need to be put on notice by your 20-Day Notice that the total amount of the labor or materials you are furnishing to the project is $50,000.
That could lead to a situation where the supplemental Notice is deemed no good, and you have in effect, not supplemented notice to preserve your lien rights. So the big takeaway is that if you are supplementing your 20-Day Notice, you want to make sure that you do it and include the new aggregate amount of the labor and materials and not a piecemeal supplementation.
Step 3 – Know your Deadline to Record a Mechanic’s and Materialman’s Lien or Make a Payment Bond Claim
Once you get the 20-Day Notice served, you start going on the project, and work starts being performed, you want to bill in accordance with the contract. In Arizona’s Prompt Pay Statutes, you want to make sure that you get paid and doing that is one of the easiest ways to make sure that you get paid, and you do not have payment issues.
a. On private projects, mechanic’s liens assert ownership interest in real estate
This is a little bit of a review on mechanic’s liens – they apply to private projects. By virtue of a lien, the claimant is asserting an ownership interest in the real estate on the grounds that it provided services or materials to improve the property and has not been paid.
A few limitations on liens are as follows:
- Liens cannot be recorded on public property.
- An owner-occupied residence cannot be liened unless the contractor or supplier has a direct contract with the owner.
- If the project is being built for a Tenant, contractor/supplier may only have lien rights against tenant improvements.
Because public property cannot be liened, federal and state construction law requires payment bonds on projects of a certain size and type, and qualified subcontractors and materialmen may have claims against the bond if they satisfy those notice requirements.
In short, if you have a private project and you take the steps to serve a Preliminary 20-Day Notice, you are going to preserve your lien rights provided you take the next steps that are required to preserve those.
b. Public property cannot be liened, so federal and state law require payment bonds
Then if you are doing work or furnishing materials on a public project, you are probably going to have a claim on the bond if you serve a 20-Day Notice. It is a Little Miller bond situation in Arizona and then you take the steps that may be required after service of that 20-Day Notice to preserve your lien and bond claim rights.
Lien Must be Recorded Within 120 Days After Project Completion
Generally, a lien must be recorded within 120 days after project completion and what is project completion?
a. What is project completion
Project completion can vary, and it is dependent upon numerous things. ‘Completion’ pursuant to A.R.S. 33-993(C) occurs 30 days after a Certificate of Occupancy (CFO) is issued. If a CFO is issued on the project, you have 30 days. That is when ‘completion occurs.’ Then you have 120 days after that to record your construction lien.
b. If no Certificate of Occupancy is issued
If no Certificate of Occupancy is issued, completion occurs on the last day when labor or materials are furnished.
So, in this situation, it confers on the claimant the shortest amount of time to record their mechanic’s liens absent the recording of a Notice of Completion and that time frame is 120 days when labor or materials are last furnished to the project.
Again, with respect to mechanic’s liens, one thing to bear in mind is that while talking about completion in this context, it is completion of the entire project, not completion when you as a particular contractor, trader, or supplier last delivered labor or furnished materials to the project.
That is one way that the timing requirements on lien claims, and bond claims differ.
c. Completion occurs if work stops for 60 days, and the stoppage is not due to an act of God
The third circumstance is completion occurs if work stops for more than 60 days, and the stoppage is not due to an act of God. So if work stops for 60 days, then that 60th day is deemed when completion occurs. You have 120 days after that to record your lien in that circumstance.
d. If Notice of Completion is recorded, lien recording deadline expires 60 days after notice is recorded
The shortest time frame you have to worry about as a contractor or supplier is the circumstance when a Notice of Completion is recorded and the lien recording deadline in that circumstance requires 60 days after the notice is recorded.
In that circumstance, the owner must serve a copy of the Notice of Completion to every person who served a Preliminary 20-Day Notice. So in that circumstance, you should be served a copy of the Notice of Completion. That is one way that an owner can short-circuit the deadline to record a lien on the project.
I Have Recorded My Lien – What Happens Next?
Those are the circumstances that set forth the time frame for recording a lien on a project. It is very important to be mindful of those things. If you are not sure what is going on in a project, you furnish labor or materials and are done, one good rule of thumb is to calendar 120 days from when you last furnished labor or materials to record your construction lien.
That should protect you in most circumstances except for the recording of a potential Notice of Completion. But in other circumstances that should give you enough time to get your lien recorded. If you recorded in that time frame, you will have preserved your lien rights.
a. Must serve the Notice and Claim of Lien
So what happens after the lien is recorded? You must serve the Notice and Claim of Lien.
b. Lienors obligated to serve copy of Notices and Claims of Lien within reasonable time of recording
The basic takeaway is that it should be served within a reasonable time of recording. The phrase ‘reasonable time of recording’ is not defined in Arizona law. But the good rule of thumb is you want to serve it under the constraints set forth and you want to do that as promptly as possible.
Payment Bond Claim Notice Requirements
Part of the third step on getting paid in Arizona is to assert a bond claim. We will discuss the deadlines to assert bond claims.
You could run into two types of bond claims in Arizona.
a. Federal Miller Act
Laborers and materialmen who no direct relationship to the general contractor furnishing the payment bond, [must] give a written request of notice to the contractor within 90 days from the date on which the person did or performed the last of the labor or furnished or supplied the last of the material for which the claim is made.
b. Arizona Little Miller Act
Any claimant who has a direct contractual relationship with the subcontractor of the contractor furnishing the payment bond, but not a contractual relationship expressed or implied with the contractor has a right of action on the payment bond on giving the contractor the following notices:
- A written Preliminary 20-Day Notice pursuant to A.R.S. § 33-992.01
- A written 90-Day Notice given within 90 days after the claimant last performed work or furnished material stating the (a) amount claimed and (b) the party to or for whom the material was supplied, or the labor was performed.
So there are two potential notice requirements to preserve bond claims. You have to have the Preliminary 20-Day Notice and you have the 90-Day Post-Completion Notice. Those who have a direct contractual relationship with the contractor furnishing the bond are not obligated to give those notices.
Subcontractors and Suppliers Protected by Miller Act & Arizona Little Miller Act Payment Bonds
Below is a brief chart that covers who is protected and what notices they have to give.
So in the circumstance of a Little Miller Act project, it is going to be your general contractor that is likely to have furnished the payment bond on the project. Then the first-year subcontractors and suppliers are certainly protected in Arizona. They do not have the notice requirements.
If you think about it, that is the same thing with the mechanic’s lien. You want to put everyone, including the homeowner, on notice of those out there being paid in a bond situation. The idea is to put the general contractor, who is furnishing the bond on notice of the potential bond claimants.
So those subcontractors and suppliers who have a direct relationship with that general contractor. Presumably, the general contractor is going to be aware of their existence and so the 20-Day Notice and 90-Day Post-Completion Notices are not required.
The second-tier subcontractor and the second-tier supplier listed on the left side of the image above are not in contractual privity with the general contractor furnishing the bond. They are protected but they are protected provided they give the notices that were discussed above.
Step 4 – Know Your Deadline to File Suit to Foreclose on the Lien or Recover Against the Bond
Step number 4 is you want to know the deadline to file suit to foreclose on the lien or recover against the bond.
a. A claimant must sue to foreclose its lien within 6 months
So once you get a mechanic’s lien recorded, you have six months to sue to foreclose on that lien.
i. Foreclosure asks court to order sale of property to satisfy liens
A foreclosure asks the court to order the sale of the real property to satisfy the lien. Claimants with valid mechanic’s liens share the proceeds.
ii. If no foreclosure action filed, lien expires by operation of law.
If no foreclosure action is filed within six months, the property lien expires by operation of law. One important point to take into consideration is that when we talk about the deadline to record your lien, it has to be done with the county recorder in which the project is located. The usual time frame is 120 days, and those time frames can be up to 180 days.
The deadline to sue to foreclose on a line is 6 months. Six months is different from 180 days. So that is something that needs to be considered when you reach the point of serving your 20-Day Notice. You should have built in accordance with the contract and Arizona’s Prompt Pay Statutes.
If you have not been paid then you should have recorded your mechanic’s liens against the property with the right county recorder, and now you are in the situation where you are suing to foreclose, you want to be able to calendar that accurately.
So pay attention – it is six months and not 180 days from the date that the lien is recorded.
b. Payment bond claim deadlines
With respect to payment bond claims, if you have a Miller Act or a Little Miller Act claimant situation and you are claiming on a bond in that context, you may not bring a lawsuit to recover on the bond until 90 days after the last of the labor was furnished or materials supplied.
i. Must wait 90 days
This allows the circumstance where you have to give a 90-Day Post-Completion Notice if you are one of those subcontractors or suppliers that has to give that notice. After that time is up, you can go ahead and sue to collect on the payment bond.
ii. The statute of limitations for filing suit on a bond claim expires
But you only have a year after the date that you last furnish materials or supplied labor to a project. This is different from the circumstance on calendar deadlines for mechanic’s liens because in that circumstance, you have 120 days from the completion of the entire project.
In a payment bond circumstance, you have a year after you last furnish materials or labor to a project.