Friday, February 26, 2016

Navigating Complex Preliminary Notice Requirements

Scott Wolfe UpdatedFor this week’s Guest Post Friday here at Musings, we welcome back a good friend, Scott Wolfe. Scott is the founder of zlien, a cloud-based platform that gives construction industry participants control over their financial risk and payment processes. The zlien platform manages the mechanics lien compliance process for all parties in the contracting chain, automating and optimizing the exchange of preliminary notices, monitoring lien rights and exposure, and exchanging lien waivers. zlien empowers over 10,000 companies to optimize their credit and financial risk management, and works to promote a fair and transparent construction payment process, improve B2B relationships, facilitate faster payments, and reduce legal and financial risk.

Sending preliminary notice is the most important step in mechanics lien compliance. A majority of states require preliminary notice (sometimes called a pre-lien notice or notice to owner) from contractors, material suppliers, and other construction parties. Even if preliminary notice is not required, however, it is best practice to send this document on all projects for a variety of reasons.

Preliminary notice requirements and deadlines can creep up quickly. In some states, such as Georgia and South Dakota, preliminary notice is only required if the property owner or general contractor files and posts a Notice of Commencement. In most cases, the person filing notice of commencement must notify all sub-tier parties. Preliminary notice deadlines are measured from the filing of the notice of commencement rather than from the date the lien claimant began work on a project. To recap, notice of commencement can be a good thing as well as a challenge for lien claimants. It may pile on additional preliminary notice requirements, but it also clearly identifies the project start date and simplifies the process of determining deadlines.

The rules governing preliminary notice requirements vary so widely from one state to the next that keeping them straight is tough, especially for companies that work in more than one state. Most of the time, required preliminary notices are due within three months from the start of a project. The first two weeks of work can fly by, so it’s a good idea to prepare preliminary notice as soon as a contract is signed. Another benefit of starting this process early? Preliminary notices often require information about the project and other involved parties (such as the owner, lender, or GC) that can be tough to find, especially on large projects with multiple tiers of hiring. If you get a head start on submitting the document, you have some buffer time to locate the information you need.

And what happens if a deadline slips by? Is it still worth sending preliminary notice even if it’s late? The answer is, it depends. In states where sending preliminary notice is optional, there is, as you might expect, no late penalty, because there is no deadline. Other states offer limited protection to lien claimants that send preliminary notice late. For example, if California’s 20-Day Preliminary Notice is sent within 20 days of first furnishing labor or materials on a project, lien rights are fully protected. If the notice is sent late, it protects only the work done in the preceding 20 days. For example, if notice is sent on day 30, the claimant has no protection for work provided on days one through 10.

Other states’ lien statutes are less forgiving when it comes to missed deadlines. In a majority of states, sending preliminary notice late is fatal to lien rights. (Note: North Carolina and Virginia fall into this category.) It is essential to stay on top of notice requirements in these states in order to avoid unnecessary financial risk.

It’s clear that preliminary notice requirements are complex. Numerous considerations come into play when determining when to send preliminary notice. One must know when these documents are required, what information they should contain, when deadlines fall, and if those deadlines are strict or flexible. The best way to stay on top of these rules and requirements is to implement a strong credit policy with a preliminary notice program at its core. Several tools exist to assist with preliminary notice management, including software platforms that automate and simplify the process.

Navigating these provisions and requirements may seem intimidating or confusing, but keep in mind the powerful benefits of sending preliminary notice. In addition to securing your right to file a mechanics lien in the event of nonpayment, sending preliminary notice – whether required or optional – prioritizes your invoice and often drastically speeds up the payment process. zlien‘s data shows that mechanics liens only need to be filed in fewer than 2% of cases where preliminary notices are sent properly. And resolving payment issues before a mechanics lien becomes necessary means avoiding stress and saving time and money.

Scott and I welcome your comments below.  Also, please subscribe to keep up with this and other Guest Post Friday Musings.

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