In this blog, presented by SunRay Construction Solutions and Kevin M Estevez, Member, Holden Willits PLC, learn what construction professionals in Arizona should do once they file their lien and various steps that they should take to ensure successful payment.
How to Preserve Mechanics Lien Rights in Arizona?
Before we get on to the primary topic of this blog, let us take a quick recap of how to preserve your mechanics lien rights in Arizona.
a. You must serve proper preliminary 20-day notice in time. In Arizona, except for laborers for wages, every mechanics lien claimant must serve a preliminary 20-day notice. This is extremely important because if you do not serve the 20-day notice, then you forfeit your lien rights and if you don’t serve it timely, you will forfeit a portion of your lien rights.
For example, if you started work on May 1st and you submit the notice on May 30th, you will have lien rights only from May 10th. You would not have any lien rights on labor or materials furnished from May 1st to May 10th. So, make sure that you serve the preliminary 20-day notice in a timely manner.
b. Don’t forfeit lien rights by signing an improper and/or incorrect lien waivers. In Arizona, four statutory forms are used – conditional progress, unconditional progress, conditional final, and unconditional final. It is important to know when to sign which of these waiver forms. Do not sign and encourage any waivers unless you have received payment and the payment has been cleared.
c. Timely record a statutory compliant Notice and Claim of Lien with the country recorded in the county where the project is located. Typically, the time to record a Notice and Claim of lien is calculated from 120 days of project completion or if a Notice of Completion has been recorded and served, then within 60 days of recording the Notice of Completion.
For recording the Notice and Claim of Lien, the word ‘completion’ can vary based on the project type. For example, if a Certificate of Occupancy (CO) is recorded, then completion is considered as 30 days after the CO, which means you have 150 days for recording your Notice and Claim of Lien. If no CO is issued, then completion is considered as the last day when the labor/materials were furnished for the project. And finally, if the work stops, then completion is considered as 60 days after cessation of labor.
I Have Recorded my Lien – What Happens Next?
Once you have ensured that your lien rights are preserved and you have taken all the necessary steps to ensure that you do not waive your lien rights, what happens next? Well, you will have to:
a. Ensure that you timely serve the Notice and Claim of Lien
b. Be on the lookout for lien discharge bonds
c. Sue to foreclose the lien within six months of recording
d. Record a Lis Pendens within five days of filing suit
Let us look at each of these steps in detail.
Serving a Notice and Claim of Lien in Arizona
a. The first step that you need to take is serve a Notice and Claim of Lien. Pursuant to A.R.S. § 33.-993(A), the lien claimants are obligated to serve the copies of their Notice and Claim of Lien to property owners within a reasonable time of recording.
b. The copies of the Notice should typically be ‘served’ by first class, registered or certified mail. The sender also needs to obtain a certificate of mailing, receipt of registration, or receipt of certification. You can also serve them in the same manner that process is served.
c. Although the phrase ‘a reasonable time after recording’ is not clearly defined in Arizona law, it is recommended that the Notice and Claim of Lien is served promptly.
A key point to note is that the notice requirements will not be considered as met just by appending a copy of the Notice and Claim of Lien to the complaint filed in the action to foreclose. Although it is proper to attach the lien to the complaint, it must be served before you attach the complaint and file for lawsuit.
So, what happens once you record and serve your Notice and Claim of Lien? How do you get paid after that? In most instances, when you serve the Notice, it gets the property owner’s attention and typically the issue is resolved through negotiation at this stage. However, if the negotiations are not successful, or the other party is not willing to engage in negotiations, then you will have to sue to foreclose.
One thing that you should be mindful of is that in Arizona, once you serve the Notice and Claim of Lien, there is a potential for the property owner to record a statutory lien discharge bond. These bonds are governed by A.R.S. § 33-1004.
a. This statutory lien discharge bond must be recorded in the county where the project is located, and it must be served on the lienholder.
b. Once they record it, what happens is that the bond discharges the lien on the property and the bond takes its place. This means that the lien claimant will have to pursue the bond.
c. The principal will be the surety to enter the bond and the lien claimant will be under the bond. The bond will be 1.5 per statutory requirements, meaning 1.5 times the lien amount.
d. If a lawsuit is already pending, then the lien claimant must amend his lawsuit and add a claim on the bond.
e. If there is no lawsuit pending, then the lien claimant must file suit against the bond within 6 months of recording the Notice and Claim of Lien.
So, one key takeaway here is that there is no change in the timeframe: be it lien or bond. So, whether you are suing to foreclose or filing against the bond, you must do it within six months of recording the Notice and Claim of Liens.
The Mechanics of a Lien Foreclosure Lawsuit in Arizona
Now, let us look at the mechanics of a lien foreclosure lawsuit in Arizona.
a. A lien foreclosure lawsuit typically asks the Court to order the sale of the property to satisfy the lien. The lien claimants are obligated to prove the validity of their lien and the value of the materials/labor they furnished for the construction project.
b. As mentioned earlier, the lawsuit must be filed within six months of recording the Notice and Claim of Lien. If you fail to meet this deadline, then the lien expires by operation of law.
c. The lawsuit to foreclose must be brought against all the parties who have an equal or inferior interest in the property. This includes:
i. All the other lien claimants on the same project. To ensure that you are naming all the right parties, the lien claimant can obtain a litigation guaranty from the title company.
ii. You need to keep an eye out for lenders who in some instance may have superior interest in the property. Typically, construction projects will have a lender involved and you need to check whether you have superior or inferior rights to that lender as this will dictate how they are addressed in the foreclosure lawsuit.
d. Claimants who have a valid mechanics lien will share the proceeds of the same on a pro-rata basis.
e. In some cases, the Court may award the successful party its reasonable attorney’s fees.
Must Also Record a Lis Pendens
Another key step that you cannot miss is recording a Lis pendens.
a. Along with filing a foreclosure lawsuit, the lien claimant must also record a Lis pendens in the county where the project is located. The Lis pendens must be recorded within five days of filing the suit.
b. What is a Lis pendens? It is a notice of pendency of action that is designed to provide general notice that a lawsuit is pending which affects the title of the property.
c. Typically, a Lis pendens shall include the name of the parties, object of the action, relief demanded, and a description of the affected property.
Recording a Release of Lien
The final point that we are going to discuss is recording a release of lien. Let us assume that you have recorded your lien and after recording it, you either negotiate with the upstream parties, property owner, or general contractor/subcontractor, and you get paid. If the negotiation fails, then let’s assume that you have filed suit to foreclose which leads to a judgment of property sale and you receive your payment from the sale proceeds. So, what do you need to do next?
a. Once the lien claimant is satisfied, which means that they have received the payment in full, the claimant will have to issue a release of lien within 20 days after satisfaction.
b. If the lien is not released within 20 days after satisfaction, the lien claimant is subject “to liability in the amount of one thousand dollars and also to liability for actual damages.”
So, make sure that once you have recorded your lien and you get paid successfully either through negotiations or foreclosure proceedings, you must release the lien which will clear the title to the property.