Recap: How to Preserve Mechanic’s Lien Rights in Arizona
The focus of the first part in this series is how to preserve mechanic’s lien rights and bond rights in Arizona.
a. Timely serve a proper 20-Day Preliminary Notice
First and foremost, in preserving mechanic’s lien rights in Arizona is to timely serve a proper 20-Day Notice in Arizona, except for laborers for wages. Every mechanics lien claimant must serve a Preliminary 20-Day Notice. If you fail to serve this notice at all, you will forfeit all of your lien rights.
If you fail to serve a timely 20-Day Notice, you will forfeit a portion of your lien rights. And how much of your lien rights are forfeited depends on how late in the day you serve your Preliminary 20-Day Notice. Remember that 20-Day notices catch back 20 days, so the best standard practice is to serve a Preliminary 20-Day Notice right when you begin work on a project or you deliver materials to a project.
That way it will catch back to the beginning, and you will be covered for the entire project. If you serve the 20-Day Notice late, like say for instance you start work on a project on July 1, but you do not issue a notice until July 30. Well, it would catch back 30 days and it would give you lien rights for the work done from July 10 going forward on the project.
That is provided that the amount in the 20-Day Notice is correct and everything else about the 20-Day Notice is correct. But for that period of time from July 1 to July 10, you would not have lien rights for the labor or materials furnished within that window.
Extending this further, as a project goes along, that time frame can get bigger and the time with which you are not afforded lien rights can grow if you wait to serve a 20-Day Notice. So in short, get your 20-Day Notices served at the outset of a project and that is Step 1 in preserving your mechanic’s lien rights.
b. Do not forfeit lien rights by signing improper and/or incorrect lien waiver
Lien waivers will be discussed in a future webinar, but we will briefly discuss them here.
Do not forfeit your lien rights by signing an improper or incorrect lien waiver. Arizona has statutory lien waiver forms that those in the construction industry are required to follow. So, you want to make sure that the lien waiver forms that you sign comply with the statute. In addition to that, you want to make sure that the lien waiver forms you sign are the right type.
Arizona statutes provide for four types of lien waivers. You have conditional progress waivers, unconditional progress waivers, conditional final waivers, and unconditional final waivers. So, you want to make sure that you are signing the right type of lien waiver for the given situation.
Finally, when you are filling out your lien waiver, you want to make sure that you are inserting the right date. So, the period within which you may be giving up lien rights is correct, and you are not extending that period beyond where it is supposed to be and short-circuiting your lien claim by signing a waiver with an incorrect date.
c. Timely record a statutorily compliant Notice and Claim of Lien with the county recorder in the county where the project is located
The third general rule or step in preserving your lien rights is to timely record a statutorily compliant Notice and Claim of Lien. That needs to be recorded with the county recorder in the county where the project is located. Notices and Claims of Lien need to be recorded within 120 days ‘completion of the project.’ Completion of the project means completion of the entire project.
So, if you are laborer or materialman who furnishes labor or materials at the outset of a project, you may have a much longer time to record your lien than the individuals who are doing work at the end of the project.
You need to record your lien within 120 days of completion or within 60 days of a recorded Notice of Completion. Recorded Notices of Completion can be sent out by an owner or someone upstream on a construction project. They can short-circuit the time within which you have to foreclose on a lien. If a Notice of Completion is not recorded, you will have 120 days from completion to record your lien.
Although you have 120 days, that deadline can vary depending on the situation if a certificate of occupancy is issued on the project. Completion is defined as 30 days after the CFO is issued. If no CFO is issued on a project, completion is the last date materials are furnished. So, you would have 120 days in that instance from the last date that labor or materials were furnished to record your lien.
If work is stopped short of completion for a number of reasons, then you have 60 days after the cessation of labor. That 60 days after the cessation of labor is defined as the completion date and then you 120 days after that to record your lien. So, those are the steps that you need to take just from a general level to preserve your lien rights in Arizona.
I Have Recorded My Lien – What Happens Next?
So say that you do all those steps, you comply with the steps, you get your 20-Day Notice served, you do not forfeit lien rights inadvertently through signing an incorrect or improper waiver, and you timely record your Notice and Claim of lien. What happens next? Well after that, you still have several hoops you have to jump through first.
a. Must timely serve the Notice and Claim of Lien
You must timely serve the Notice and Claim of Lien and we will talk about what that means.
b. Need to be on the lookout for lien discharge bonds
Second, you need to be on the lookout for lien discharge bonds. These can change and they are statutorily available to owners and others on projects if they want to remove a lien from certain property. As a lien claimant, they change the actions you have to take to collect the money that you are owed.
c. Must sue to foreclose the lien within 6 months of recording
Third, you must sue to foreclose the lien within 6 months of recording. We discussed above about the deadlines for filing your Notice and Claim of Lien and we used days to calculate those deadlines 120 days after completion and then you can add 30 days of CFO issues. And you can add 60 days if work stops on the project.
But one thing to remember here is that the deadline to foreclose the lien is not measured n days, it is measured in months. Sometimes that can be a material difference after you sue to foreclose on your lien.
d. Must record a Lis Pendens within 5 days of filing suit
Finally, you must record a Lis Pendens within 5 days of filing suit.
So these are the steps to follow. Once a lien is recorded you are not out of the woods yet. You have to comply with these steps in order to preserve your lien rights. And we will talk about each of these in more detail going forward.
Serving a Notice and Claim of Lien in Arizona
First, we will talk a little bit about serving a Notice and Claim of Lien in Arizona.
a. Lien claimants are obligated to serve a copy of their Notices and Claim of Lien on property owners
Once a lien claimant records their Notice and Claim of Lien in the county recorder where the project is located, they are obligated to serve a copy of their Notice and Claim of Lien on the property owner within a reasonable time of recording.
b. Old Adobe Office Props. V. Gin 727 P.2d 26, 29 (Ariz. App. 1986)
The statute does not define what ‘serve’ means. But thankfully there is an Arizona case that addresses that issue. That case is Old Adobe Office Properties v. Gin. What that case says is the term ‘serve’ for purposes of Arizona's lien statute requires that service be made by first class mail, registered, or certified mail with the sender obtaining a certificate of mailing, receipt registration or receipt of certification. What this is analogous to is the service of a Preliminary 20-Day Notice under Arizona’s lien statute.
So, if you serve your lien that way, you have complied with the statute, and it is deemed a good service. You can also, however, serve your lien the same way that process is served in Arizona by serving the correct person that is provided for in either the corporate structure or the statutory agent of the owner of the property. If you serve them personally through a process server, that is also good service.
c. The phrase “a reasonable time after recording” is not defined in Arizona law
As mentioned above, the statute provides that the lien must be served within a reasonable time of recording. The statute does not define what is a reasonable time after recording. In short, the Notice and Claim of Lien should be served promptly after recording. Because the Arizona Court of Appeals held that absent unusual circumstances, the notice requirement of 33 993(A) which is the statute that provides for service will not be met merely by appending a copy of the Notice and Claim of Lien to the complaint filed in the action to foreclose.
So it as a general practice, for the lawsuit that will be filed to foreclose on the lien, you need to attach a copy of the lien to the lawsuit and that lawsuit will then be served on the owner and the other necessary parties to the lawsuit. But Arizona Court of Appeals said that absent unusual circumstances is not going to be good enough in terms of complying with the service requirements in the statute. So, long story short, get your lien served promptly after recording and do not wait on that.
The title of this blog is ‘what happens after I record my lien’ and so we have covered the first step in what happens after a lien is recorded. The second part is ‘how do I get paid?’
Throughout the process, there are various points that allow for the parties to get together, negotiate, resolve their differences, and allow for the contractor or supplier to get paid. And the service of a Notice and Claim of Lien often is one of those times that will naturally facilitate negotiation.
Typically, if you have not had luck speaking with the owner or the people upstream about getting paid. Once they get served with a Notice and Claim of Lien, they tend to take you a little bit more seriously, given the impending nature of a lawsuit. So hopefully, that opens the door to communications between the parties and allow resolution of the lien claim without having to go further in the legal process.
You need to be mindful of lien discharge bonds.
a. After Notice and Claim of Lien is recorded, property owner can post statutory lien discharge bond
After a Notice and Claim of Lien is recorded, a property owner has the option of posting a statutory lien discharge bond pursuant to A.R.S § 33 1004. These discharge bonds must be recorded in the county where the project is located and served on the lien holders. What these do is they effectively discharge the property from the lien.
If for lien claimants, they shift the focus of your target in pursuing the funds that you are owed, instead of filing a foreclosure lawsuit to foreclose on the property. they have the property sold at the end through judicial sale and the proceeds split among the various lien claimants. Your focus is now on the bond that has been posted and recorded to discharge the lien.
b. If lawsuit is pending, lien claimant must amend suit to add claim on the bond
So, if a lien discharge bond is posted by an owner, a general contractor or someone upstream, and a lawsuit is already pending, the lien claimant the lien claimant must amend his or her lawsuit to add a claim on the bond. By statute you have 90 days to do that. If a lawsuit is not pending, the lien claimant must file suit against the bond within six months of recording its Notice and Claim of Lien.
It is worth noting here that although the focus of your claims and your lawsuit change with the recording of the lien to discharge bond, the time frame within which you have to pursue that lawsuit does not change.
c. If lawsuit is not pending, lien claimant must file suit on the bond
If the general contractor posts a lien discharge bond, then as a lien claimant you still have six months from the time you recorded your Notice and Claim of Lien to file suit against the bond in this case.
The Mechanics of a Lien Foreclosure Lawsuit in Arizona
Now we will jump into the mechanics of a Lien Foreclosure Lawsuit in Arizona.
a. What is a foreclosure lawsuit?
A foreclosure lawsuit asks the court to order the sale of the property to satisfy liens. Mechanic’s lien claimants are required to prove the validity of their lien and the value of the materials or services provided.
b. Lawsuit must be filed within 6 months
As mentioned earlier, the lawsuit must be filed within 6 months. If no foreclosure lawsuit is filed within six months of when the Notice and Claim of Lien is recorded, the lien expires by operation of law.
c. Necessary parties
Necessary parties are for when people get tripped up. You need to sue to foreclose against all others holding an equal or inferior interest in the property than you do as a lien claimant. So what does that mean?
i. Include other lien claimants on the same project
This means that other lien claimants or other people that have recorded liens on the property are of equal priority to you. All the mechanic’s liens resulting from certain work on a project have the same priority regardless of when the work was performed. They go back to the first day that the work was performed on the project and that is where the priority for the mechanic’s liens is set.
Any claimant on the project is going to be of an equal interest to you. So it is incumbent upon you when you sue to foreclose on your lien to name all of the other lien claimants. The easiest way to make sure this is done properly of course, is to search the county recorder website and look for other lien claimants on the project.
Typically, there is a situation where either you as a material supplier or a contractor is not being paid. It means that other folks are not being paid as well. So you can go to the county recorder’s website, look there, and see if there are other lien claimants. But the most efficient way to do it and the way that usually provides the most security as a lien claimant is to obtain a litigation guarantee from a title company.
That is a report from the title company and it is essentially a title report on the property whether they identify additional potential lien claimants. So, this is a very good step at this stage in the process before you file your lien foreclosure lawsuit to make sure that you are getting all the necessary parties.
ii. Be careful with lenders
Often but not always, lenders have a superior interest to lien claimants and that is because usually in most instances, lenders are savvy enough where they know to have their lien and interest in the property recorded before any construction work begins. And so long as they do that, they will have a superior interest to lien claimants.
That is not always the case. If a lender records their interest after construction work begins, usually that means there is a broken priority and there is some super technical legal argument that even in those circumstances could mean that if it happens there is not broken priority. But usually that means there is broken priority. And all the lien claimants would then have a superior interest to the lender on the property.
But this is a very complex situation that really needs to be analyzed in each circumstance. This is something that has to be examined carefully in circumstance when you are about to file your lien foreclosure lawsuit.
d. Claimants with valid mechanic’s liens share the proceeds of sale pro rata
If a lien foreclosure lawsuit it pursued all the way to the end, and the lien claimant prevails, then the property is sold and the proceeds are split pro rata between the different link limits. So, in circumstances where properties are upside down, like what happened in the 2007 to 2009 window, liens may not be a fruitful method of recovering sums owed.
Thankfully, we are no longer in that real estate environment and properties are increasing in value. So, in those circumstances, lien claims can be very valuable.
e. Courts may award successful party its reasonable attorney’s fees
Courts may award the successful party its reasonable attorney’s fees in lien foreclosure lawsuits which can be important. And the topic of attorneys’ fees in Arizona is an interesting one. Arizona has a statute that is similar to the one we are referencing here that relates to lien foreclosure lawsuits. It generally relates to contract disputes in general.
The statute says that the prevailing party may be awarded their reasonable attorney’s fees in breach of contract lawsuits. So if you file a lien foreclosure lawsuit, and you do not have a direct contract with the owner, you are probably going to have a contract claim against the folks upstream on the construction project who have not paid you, as well as the lien foreclosure lawsuit.
If you have a contract directly with the owner then you are probably going to have a breach of contract claim against them as well as your lien foreclosure claim. So you will have a basis for fees under the lien statute and you will have a basis for fees under the general litigation statute. You may also have a basis for attorney’s fees under the contracts between the parties.
But the thing to note in both the statutory provision for fees and a lien foreclosure lawsuit, and the statutory provision for fees in general contract litigation is the word ‘may’ as in the heading above. It gives the court discretion whether or not to award fees. Typically in Arizona, courts do. But that is not always the case. You will need to be mindful of that.
Must Also Record a Lis Pendens
Say you record your lien, you then serve your lien timely and properly to preserve your lien rights and then serve your lien timely and properly to preserve your lien rights, and then you sue to foreclose within six months, you are still not out of the woods. There is still an additional step you have to take pursuant to the statutes to preserve your lien rights and that is to record a Lis Pendens.
a. Lien claimants must record a Lis Pendens in a county where the project is located
That lis pendens is a notice of pendency of action designed to provide general notice to everyone that a lawsuit is pending. That affects title to the subject property and pursuant to A.R.S § 33 998, the lis pendens needs to be recorded in the county where the project is located within five days of filing suit.
That is a fairly quick deadline that you need to be on top of when you file a lawsuit to foreclose on your lien. So, once that lis pendens is filed, that is really the last step in preserving your lien rights. And provided everything is done properly all the way from issuing a 20-Day Notice to filing suit and recording your lis pendens, then you are in the court system and your action can and should progress.
b. A lis pendens must contain certain information
The lis pendens pursuant to the statute in A.R.S. § 12-1191(A) shall contain:
- The names of the parties to the lawsuit;
- The object of the action;
- The relief demanded; and
- A description of the affected property.
So that is an overview of the litigation process and an overview of the steps you have to take to preserve a mechanics lien claim in Arizona, all the way until you get to the point of litigation. As you can see, it is very technical and there are plenty of Arizona cases that hold that Arizona lien laws are to be liberally construed in favor of the lien claimants.
However that said, the courts still strictly adhere to the time frames that are prescribed by the statute. So, these time frames are something that you have to be mindful of. Make sure you are monitoring as projects progress and as payment disputes arise.
Recording a Release of Lien
If you make it all the way through – you record a lien, you get to a lawsuit and you resolve that lawsuit through settlement or you get a judgment and you collect that way, it is incumbent upon you as a lien claimant than to record a release of lien.
a. Issue a release of lien
This is a document that you will record that says the lien has been satisfied. You want to make sure you record that only when you receive payment in full and not before. Once you receive payment you have 20 days to issue that release of lien and have it recorded. That lets everyone know that the lien is no longer in effect.
b. Failure to provide a release subjects lien claimant to liabilities
Failure to provide such a release subjects lien claimants or individuals, (and that refers to those who may be named or signed the Notice and Claim of Lien) to liability in the amount of $1,000 and also liability for actual damages of the owner at that point. So that is something that you want to be mindful of if you do get paid, and hopefully you will. You should promptly record a release of lien.
Generally, 99 percent of all civil cases in Arizona are resolved short of trial. So chances are, if you do file a lien foreclosure lawsuit, it will be resolved short of going all the way through the litigation process through settlement. If the service of the Notice and Claim of Lien right after it is recorded does not prompt and get the folks upstream to take your payment claim seriously, then chances are the filing of lawsuit will.
Or as the lawsuit progresses and things become more expensive, hopefully at some point during that time, settlement discussion will be facilitated and chances are, given the stats in Arizona, that is how you will get paid through settlement and resolve your claims in that way.