LEGAL ISSUES


General Contractors Must Serve a Preliminary Notice


By: Trevor B. Potter, Cox, Castle & Nicholson LLP P


reliminary notices are a hot button issue for general contractors today, because if they


fail to serve a preliminary notice on a construction lender, contractors lose their statutory mechanic’s lien and stop notice rights. Te loss of these powerful rights


and remedies robs general contractors of immense leverage in payment disputes with owners (and lenders) and relegates general contractors to pursuing unsecured breach of contract claims to recover unpaid amounts – claims that could languish for years without resolution. Without a mechanic’s lien on the owner’s property and the threat of foreclosing on that lien, the litigation posture of general contractors is substantially and unnec- essarily weakened.


Some GCs Unaware Law Changed


In two recent litigation matters


handled by Cox, Castle & Nicholson, the general contractor failed to serve a preliminary notice on the construction lender, rendering the majority of the contractor’s litigation claims dead on arrival. Indeed, it appears that some general contractors are simply unaware that California law changed and that they now have to serve a preliminary notice on the construction lender in order to perfect their mechanic’s lien and stop notice rights. Civil Code section 8200(e)


expressly states, “[a] claimant with a direct contractual relationship with an owner or reputed owner [e.g. a general contractor] is required to give prelim- inary notice only to the construction lender or reputed construction lender, if any” as a necessary prerequisite to the


12 March/April 2019


validity of a subsequent mechanic’s lien or stop payment notice claim to recover unpaid amounts for work performed. (Civ. Code 8200(a), (e)(2).)


What It Contains A preliminary notice is typically


a one-page document prepared by contractors that contains: (1) a general description of the work and its estimated price, (2) the name and address of the person furnishing the work, (3) the name of the person who contracted for the work, (4) a description of the jobsite, and (5) the identity of the owner and construction lender (if any). A preliminary notice from a general contractor puts the construction lender on notice that the contractor is performing work on a project and the approximate value of that work. Prior to 2012, it was obvious that


the law required subcontractors to serve preliminary notices on owners, general contractors and construction lenders in order to assert valid mechanic’s lien and stop notice claims, and subcon- tractors became accustomed to doing so as a matter of course. As to general contractors, however, the preliminary notice requirement was unnecessarily ambiguous, because general contractors were expressly exempted from serving preliminary notices under Civil Code section 3097(a) but it was unclear if Civil Code section 3097(b) qualified that exemption. (See Brewer Corpo- ration v. Point Center Financial, Inc. (2014) 223 Cal.App.4th 831.) Notwithstanding this legal


ambiguity, general contractors (and their lawyers) generally concluded that they did not need to serve construction lenders in order to assert valid mechanic’s lien and stop notice claims. As a result, general contractors became


accustomed to not worrying about prelim- inary notices.


2012 Law Changed Things However, the California Legis-


lature passed a law that went into effect in 2012 that amended the preliminary notice statutes, in part, to remove any ambiguity regarding the applicability of the preliminary notice requirement to general contractors. Te Legis- lature noted that section 3097(b) “contain[ed] an ambiguity relating to whether a general contractor must give preliminary notice to a construction lender on a private work.” (Sen. Com. on Judiciary, Analysis of Sen. Bill No. 189 (2009–2010 Reg. Sess.), p. 4, as amended Dec. 15, 2009.) Te bill clarified “that a general


contractor must give preliminary notice to a construction lender on a private work” (Ibid.) and California law now requires any contractor in a direct contractual relationship with an owner to provide a preliminary notice to the construction lender as a prerequisite to the validity of any mechanic’s lien claim.


Preserving Rights and Reme- dies with a Preliminary Notice


General contractors that avoided


the necessity of seeking to enforce mechanic’s lien or stop notice claims since the amended California statutes went into effect in 2012, may be unaware that the law regarding preliminary notices changed. Given the construction boom since the Great Recession and the relative dearth of distressed projects, it appears that many general contractors may fit into this dangerous category. Te prior belief that general


contractors do not need to concern


Continued on page 13 California Constructor


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