Contractor and Supplier Remedies Repayment Claims
Contractors and material suppliers who furnish labor and/or materials to Arizona construction projects have various remedies available to them in the event of nonpayment. Without question, two of the most effective remedies are mechanic’s liens and payment bond claims.
We will discuss both in detail and the situations where each applies. Because with mechanic’s liens and payment bond claims, they are mutually exclusive, you are not going to have a situation where both apply.
Pro-Tip #1: Timely serve a proper Preliminary 20-Day Notice
The single most important early step that a contractor or supplier can take to ensure payments on a construction project is to serve a Preliminary 20-Day Notice.
Preliminary 20-Day Notices in Arizona go by many names. Some people call them pre-liens, some call them prelims, some call them 20-Day Notices. But however you refer to them, in common parlance, the most important thing to remember is that they are absolutely critical.
They are so important because in most situations contractors and suppliers must serve a proper Preliminary 20-Day Notice to preserve either mechanic’s liens or payment bonds claims. They are the key that opens the door to the world of mechanic’s liens and payment bond claims.
So, get into the habit of timely serving adequate Preliminary 20-Day Notices at the outset of the construction projects that your companies are working on. And that is our Pro-Tip #1.
Arizona Preliminary 20-Day Notices
In most situations, contractors and suppliers must timely serve 20-Day Notices.
a. Every lien claimant and some Little Miller Act bond claimants must serve notice
With respect to lien claimants, with the exception of laborers for wages, every lien claimant in Arizona must serve a Preliminary 20-Day Notice to have lien rights on a project. Some Little Miller Act bond claimants also must serve this notice to preserve their bond claims.
b. Not serving a 20-Day Notice means you forfeit all your lien rights
If you do not serve a 20-Day Notice at all, and it is in one of the circumstances described above, where you need to serve one, you will forfeit all lien rights and all bond claims on the project.
c. Not serving a timely notice means you forfeit a portion of your lien rights
If you do not timely serve a 20-Day Notice, in those situations, you forfeit a portion of your lien rights or bond claims. So, it is best practice to serve a 20-Day Notice at the outset of beginning work or furnishing materials to a project. You have to, but if you serve it late, you are going to give up a portion of your rights.
d. It lets the owner know about you
The idea behind Preliminary 20-Day Notices is to give the owner advance information of the identities of any unpaid claimants who may perfect lien rights against the property if their debts remain unsatisfied. In short, this notice lets the owner know who is working on the project and who is expecting to get paid.
Contents of an Arizona Preliminary 20-Day Notice
Now we will talk about the content of a Preliminary 20-Day Notice.
a. Content of A.R.S. § 33-992.01(C)
Pursuant to A.R.S. § 33-992.01(C), 20-Day Notices must contain the following information:
1. A description of the labor or materials that will be furnished and an estimate of the total price thereof;
2. The name and the address of the person furnishing the labor or materials;
3. The name of the person who contracted for the purchase of the labor or materials;
4. An adequate description of the job site for identification; and
5. A specific statutory ‘Notice to Property Owner’ prescribed by A.R.S. § 33-992.01(C)(5).
This notice can be looked up in the statute, but basically what it does is it advises the owner that the Preliminary Notice is not a lien, about the effects of nonpayment, and about the steps it can take to protect the property from liens.
b. Content of A.R.S. § 33-992.01(D)
This section includes a sample of a Preliminary Notice, and it is a good reference point in preparing notices and ensuring your notice is correct.
c. Claimants are obligated to follow the statutory form
You can refer back to what is in the statute because as a matter of law, claimants are obligated to substantially follow the statutory form. So, you can go to the Arizona legislature’s website, pull up 33.992.01 and see what a Preliminary 20-Day Notice should look like and what it should contain.
d. Get the ‘estimate of the total price,’ of the labor or materials to be furnished correct
The ‘estimate of the total price’ is a particularly important component of a Preliminary 20-Day Notice, and that is because a lien claimant or a bond claimant is limited to 130 percent of the estimated amount in the 20-Day Notice.
This means that if you have an estimate of your Preliminary 20-Day Notice, that the value of the labor or materials you are going to furnish to a project is $100,000, you have lien rights up to $130,000. So, there is a little wiggle room built in within the statutes to account for changes and increases to contract prices that may occur during construction.
e. If contract amount increases beyond limit, preliminary notice should be supplemented
If, however, the amount of the labor or materials furnished to the project increases beyond this 130 percent threshold, the Preliminary 20-Day Notice should be supplemented right away, but no event later than within 20 days of furnishing the additional labor or materials.
Pro-Tip #2: Supplementation of Preliminary 20-Day Notices
The supplemental notice must set forth the new estimated total price of labor and materials furnished to the project, and it should not include a piecemeal supplementation. What is meant by that is, let us say if you have a contract that is $100,000 and there is a change order for $50,000 that would put you over the 130 percent threshold.
You will see supplemental notices being sent out that just include an estimated total price of $50,000. So, they are capturing the amount of the change work. And that is technically incorrect as a matter of statute. The way that the Preliminary 20-Day Notice should read would be that the estimated total price for the labor and materials furnished is $150,000.
So, you want to have that estimated total price be the total full amount including the change order of the labor and materials that are going to be furnished to the project.
We have identified a number of things that must go into Preliminary 20-Day Notices and things to be on the lookout for when you are having those completed at the outset of a project hopefully. But what if you do not have the requisite information?
Well the statute recognizes this, and it provides that if you do not have the information you need to properly complete a 20-Day Notice, as a potential lien or bond claimant, you can request the necessary information in writing from the owner. The owner and/or other interested parties are required to provide the necessary information to you as a lien claimant within 10 days of your request.
Also, upon receipt of a 20-Day Notice, owners or other interested parties have 10 days to furnish information to correct any inaccuracies. Failure to correct inaccurate information prohibits the use of those inaccuracies later on by owners or other interested parties to invalidate lien claims.
So, unless the owner or other interested party speaks up, they will be unable to use perceived inaccuracies in a 20-Day Notice to invalidate a lien or bond claim later on.
Whom to Serve a Preliminary 20-Day Notice to
Now we will talk about serving a Preliminary 20-Day Notice.
a. The 20-Day Notice must be served on specific parties
The individuals that need to receive a copy of your 20-Day Notice when it is sent out are:
- The owner or reputed owner;
- The original contractor or reputed contractor;
- The construction lender or reputed construction lender; and
- The person with whom the claimant contracted.
b. Should be addressed to the recipients through one of two methods
The notice should be addressed to the recipients at their residence or business address and served via two methods:
i. First class mail with a certificate of mailing; or
ii. Registered or certified mail, with postage prepaid.
c. 20-Day Notice Deemed served when deposited in the mail
Preliminary 20-Day Notices are deemed served when they are deposited in the mail. That is the old legal concept of the mailbox rule – that once it is put in the mail, it is deemed served.
When to Serve a Preliminary 20-Day Notice
It is best to serve your Preliminary Notice at the beginning of work on a project.
a. Serve within 20 days of first commencing work or furnishing materials
Preliminary 20-Day Notices have this name because they catch back 20 days, so they reach back 20 days. So, if you serve a 20-Day Notice at the outset of work on a project or any time within the first 20 days of work being performed on a project, it will reach back to the beginning of when work was performed. And it will cover going forward assuming the amounts are correct, and all the labor and material is furnished to the project.
b. The 20-Day Notice can be served later than 20 days after furnishing to the project
Preliminary 20-day Notices can be served 20 days from when work commences, or materials are furnished to the project. But in that situation, you are going to lose your lien rights or bond claim for the portion of the work or materials that were furnished in the time frame before you serve the 20-Day Notice.
A simple example is when you have a subcontractor who furnishes labor and materials to a project beginning on May 1, and they do not serve a 20-Day Notice until May 30. That notice will catch back 20 days, so it will reach back to May 10, and the lien claimant will have lien rights or a bond claim for the materials or labor furnished from May 10 going forward.
So that first chunk of time is not going to be covered and the claimant will not have rights for that labor and materials. As you can imagine, as you are moving down on a construction project, the longer you wait, the bigger gap you are going to have in your lien or bond claim coverage.
This is why it is important at the outset of construction projects, to get Preliminary Notices served from the jump.
Mechanic’s and Materialmen’s Liens
So, provided that a lien claimant, or bond claimant, in a situation where it is required, serves an operative 20-Day Notice and has not otherwise waived lien rights, there will be an ability to record a mechanic’s lien. Mechanic’s liens assert an ownership interest in real estate on the grounds that the claimant provided service or materials to improve their property but has not been paid.
If you think about it, this is a special protection that is furnished to those in the construction industry on the recognition that essentially you provide credit to get construction projects off the ground. Until your first payment you are working and providing materials on the promise that you are going to be paid. That is how jobs get off the ground and get working.
The law recognizes this and says that because those in the industry are sticking their necks out and extending this credit, they should be protected with security interests in the project for the work and materials that they furnish.
a. Mechanic’s lien statutes are intended to balance the playing field
Arizona mechanic’s lien statutes are intended to balance the playing field by giving those who provide labor, materials, and equipment to improve an owner’s property security for payment that is due.
b. Arizona’s lien statutes are remedial and liberally construed
Arizona lien statutes “are remedial and are to be liberally construed to effect their primary purpose of protecting laborers and materialmen.” This is consistent with what we discussed above about the statutory purpose of protecting those who are extending credit to get construction projects going.
Strict adherence to statutory deadlines is still necessary
That said, strict adherence to the applicable statutory deadlines, which are both complex and numerous, is necessary to perfect a mechanic’s lien. In order to secure a mechanic’s lien on a project aside from serving the Preliminary 20-Day Notice (which as mentioned earlier, is a precondition to any lien rights in Arizona), an Arizona lien claimant must timely record a Notice and Claim of Lien within the county where the work is being performed. A copy of that Notice and Claim of Lien must be served within a reasonable time.
Limitations on Mechanic’s Liens
Now Arizona lien statutes are remedial and are to be liberally construed to protect those providing labor and materials to projects. But that does not mean that all contractors have lien rights. And pursuant to Arizona law there are certain exceptions to mechanic’s lien claims.
a. Liens cannot be recorded on public property
You cannot file a lien on public property, and in those situations, payment bonds are substituted for liens rights. If you are working on a public project, just know that in most circumstances, you are not going to have lien rights.
b. Owner-occupied residence cannot be liened unless contractor or supplier has direct contract with owner
The second exception in Arizona is an owner-occupied residence. These properties cannot be liened unless the contractor or supplier has a direct contract with the owner. This is one that catches people off guard on a regular basis.
In short, it means that if you are a subcontractor performing residential work, unless you have an agreement directly with the owner, you do not have lien rights.
c. If project is built for tenant, lien rights may only be against tenant improvements
A third and more complicated exception is in the case of tenant improvements. If you are doing this work and know that you may not have lien rights against the entire property, you may only have lien rights against the tenant who you are performing work for.
That gets fairly complicated in terms of ascertaining whether a contractor has lien rights against the entire project or the leasehold interest. But just bear in mind if you are doing that type of work, you may not have lien rights for the entire scope of work.
d. Purchase money and construction loans almost always have priority over mechanic’s liens
Purchase money and construction loans in most instances will have priority over mechanic’s liens. Not in all instances, but in most cases, that will be the case. So, lien claimants will fall in behind construction lenders in most situations.
e. If contractor’s license is required to work, unlicensed contractor has no lien rights
Lastly, if a contractor is required to be licensed to perform work, and a contractor does not have a license, that contractor will not have mechanic’s lien rights.
Generally, a Lien Must be Recorded within 120 Days after Project Completion
A Notice and Claim of Lien must be recorded with the county recorder in the county where the project is located in a timely manner. The rule is that it must be done within 120 days after project completion.
a. Completion usually occurs 30 days after issuance of certificate of occupancy (A.R.S. § 33-993(C))
Pursuant to A.R.S. § 33-993(C), this is the most common definition of completion. It occurs 30 days after a certificate of occupancy is issued. So, in that circumstance, if a certificate of occupancy is issued on a project, as a lien claimant, you will have 150 days.
You will have the 30 days because completion is not defined until 30 days lapse after the certificate of occupancy is issued. And then you have the additional 120 days provided by the statute to record your lien.
b. If no certificate of occupancy is issued, completion occurs on the last day of furnishing (A.R.S. § 33-993(D))
If no certificate of occupancy is issued and if that is the type of work that is being performed, completion occurs on the last day when labor or materials are furnished. So, in that circumstance you have 120 days.
c. Completion occurs if work stops for 60 days and stoppage is not due to an act of God (A.R.S. § 33-993(C))
If the work is stopped or the work is abandoned for 60 days, then completion will have been said to have occurred 60 days after the work is abandoned or the work is stopped. So in that circumstance, you will have 180 days to record your Notice and Claim of Lien.
d. If Notice of Completion is recorded, lien recording deadline expires 60 days after notice is recorded
The last circumstance – and this is an outlier – is if the owner records a Notice of Completion. This notice must be recorded, and it must be served on those who furnish Preliminary 20-Day Notices on the project by the owner. And what that Notice of Completion does in pursuant to Arizona law is it accelerates the deadline for lien claimants to record their liens.
It bumps that deadline up to 60 days after the notice is required. So, unless you are working on a project where the owner furnishes a Notice of Completion, you will be alerted to that by virtue of the fact that if you serve a 20-Day Notice, you should get a copy of that Notice of Completion served upon you.
So, setting that circumstance aside, we come to Pro-Tip #3.
Pro-Tip #3: Calendar 120 Days After You Last Furnish Labor or Materials to a Project
You should calendar 120 days after you last furnish labor or materials to a project as your deadline to record your lien. You should also recognize that in most circumstances that is going to be early. Because one thing you will see with mechanic’s liens – and it is different from payment bond claims – is the deadline to record a lien starts from project completion.
So, if you think about that, there can be quite a disparity in time depending on what type of materials you furnish and what type of labor you provide to a project. The people doing the excavating work on the project are going to be out there early, whereas people doing painting work will presumably be out there late.
But in either case, the deadline to record a mechanic’s lien is 120 days after completion of the entire project. So, you will have a disparity depending on the type of work you do, when you have to, and how long you have to record your lien. But a safe rule of thumb is 120 days after you last furnish labor or materials to the project.
Requirements in Notice and Claim of Lien
Details required to be in a Notice and Claim of Lien
The first thing that is required to be included is a legal description of the land and the improvements to be charged with the lien. The following are also required:
- The name of the owner or reputed owner of the property concerned if known;
- The name of the person by whom the lienor was employed or to whom materials were furnished;
- A statement of the terms, time given, and conditions of the contract if it is oral, or a copy of the contract if it is written;
- A statement of the lienor’s demand after deducting just credits and offsets;
- A statement of the date of completion of the building, structure or improvement, or any alteration or repair of such building structure or improvement; and
- A statement of the date the Preliminary 20-Day Notice required by A.R.S. § 33-992.01 was given.
These are what are required to be in a Notice and Claim of Lien, which must be recorded within 120 days of completion of the project.
Claimant Must Sue to Foreclose the Lien Within 6 Months
Once you record your Notice and Claim of Lien, you then have six months to sue to foreclose. If no suit is filed within those six months, the lien expires by operation of law.
Pro-Tip #4: Know when to Record a Notice and Claim of Lien and to Sue to Foreclose
The difference between the deadline for knowing when to record a Notice and Claim of Lien and the deadline to sue to foreclose is the fourth pro-tip. The deadline in terms of recording the Notice of Claim of Lien is calculated in terms of days. You have from 60 up to 180 days to record the notice. But you have six months to file suit to foreclose, and that distinction between days and months in these two instances can be meaningful.
What the foreclose sale does is ask the court to order the sale of the property to satisfy the lien claimants with valid mechanic’s lien and share the proceeds of the sale of the pro rata. But each lien claimant is required to prove the validity of his or her lien, and the reasonable value of the materials or services provided.
Public Project Payment Bond Claims
When we discussed liens aove, we said that you do not have lien rights on public projects.
a. Public property cannot be liened
You only have lien rights on private projects, and that is because public property cannot be liened. And because they cannot be liened, in most instances, federal and state law requires payment bonds on projects of a certain type and size.
b. Qualified subcontractors and materialmen may have claims against the bond
Qualified subcontractors and materialmen may have claims against the bond if they satisfy the notice requirements.
Miller Act and Little Miller Act Payment Bonds on Public Projects
a. Federal project payment bonds are governed by the Federal Miller Act (40 U.S.C. § 3101 et seq)
c. Federal and state notice requirements differ and depend on contract ‘tier
Subcontractors and Suppliers Protected by Miller Act and Arizona Little Miller Act Payment Bonds
The image above shows the individuals that have bond claims and the individuals that do not. The payment bond is going to be posted in most instances, by the general contractor on the project. So, those who are in direct contractual privity (whether a supplier or subcontractor), are entitled to make payment bond claims on a project.
Those who are in direct privity with a subcontractor of that general contractor, whether it be a supplier or second-tier subcontractor are also entitled to make payment bond claims under the federal Miller Act and Arizona’s Little Miller Act. But they must furnish certain notices.
If you think about it, the idea behind the Preliminary 20-Day Notice which we discussed briefly before, is to put owners on notice of who is on the project and who is expecting to get paid. With the Miller Act bond claims, the general contractor is going to be the party who furnishes the bond, and so they are going to know, presumably, the individuals they have entered into contracts with.
So, the first-tier subcontractor and the first-tier supplier are not required to provide the notices that are required under both federal and state law. The second-tier subcontractors and suppliers, meaning those who are second-tier to a first-tier subcontractor are required to furnish certain notices.
The third-tier subcontractor and the third-tier supplier or the second-tier supplier to a first-tier supplier are not afforded protection under the Little Miller Act and the federal Miller Act. But they may be afforded protection if a subcontractor is also required to furnish a bond claim and they do so. This is an important consideration to think about in that circumstance.
Payment Bond Claim Notice Requirements
Now we will talk about Bond Claim Notice requirements.
a. Federal Miller Act
Under the federal Miller Act, laborers and materialmen with no direct relationship to the general contractor furnishing the payment bond must give written 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.
Under the federal Miller Act there is no Preliminary 20-Day Notice requirement, but if you are in the tier that has to give notice, those individuals with no direct relationship to the general contractor have to give notice within 90 days of when materials or labor are furnished or provided. You should also let them know in writing that you are out there, you have not been paid, and that you are preserving your payment bond claim.
b. Arizona Little Miller Act
Under Arizona’s Little Miller Act, the notice requirements are slightly different. As alluded to in the outset, if you do not have a direct contractual relationship with the general contractor posting the bond under Arizona’s Little Miller Act, you are required to serve a Preliminary 20-Day Notice at the outset of work on the project.
If you in that situation where you do not have a direct contract with the general contractor furnishing the bond, you are also required to give a 90-day post completion notice which states the amount claimed and the party from whom the material was supplied, or the labor was performed.
Pro-Tip #5: Be Patient with you Payment Bond Claim Deadlines
You have to be patient with your payment bond claims under both federal law and Arizona law. You cannot sue to collect on a payment bond until you let that 90-day period from when you last furnished labor or materials to a project expire. Suits before that time will be thrown out as premature. So, you have to wait 90 days to see if you get paid.
Once that 90-day period is up, you can go ahead and sue if you have provided the requisite notices to recover on your payment bond claims. Now the statute of limitations for filing suit under Arizona law or federal law to recover on a payment bond claim is a year after the date that the claimant last performed labor or supplied material to the project.
Pro-Tip #6: Note the Different Deadlines for Payment Bond Claim and to Foreclose on a Mechanic’s Lien
The deadline to record a payment bond claim and to foreclose on a mechanic's lien are different. The deadline to record a mechanic’s lien can be from 60 to 180 days depending on the circumstances. It is 120 days after completion, and if the Arizona Notice of Completion is served, that will truncate that timeline. But it can be anywhere from 60 days up to 180 days after all work physically stops on a project depending on the circumstances.
With respect to payment bonds, it is different. It is when you last furnished labor or materials to the project. So, if you are supplying to a project where a federal Miller Act bond is in play, or a Little Miller Act bond is, it is important to know and calendar when you last furnished labor or materials to the project.
Statute of limitations for filing suit on a bond expires one year after last work
You have one year from when you last furnish labor or materials to the project, to sue to recover on your bond claim.