In Arizona, any party providing services or supplies for a construction project may place a lien on the property where the work is performed and/or materials supplied in most circumstances. The Arizona statutes are very strict and must be followed precisely in order for the contractor or supplier to obtain lien rights against real property. Mechanic’s liens also apply to situations where repair work is performed on a vehicle or other movable, personal property. In such instances, the mechanic may have an interest in the vehicle or movable object itself. The procedures for enforcing and perfecting such a lien are different than the procedures discussed below. This information page only discusses the situation of an unpaid contractor or supplier on a construction project.
Materialmen’s liens provide contractors and suppliers an alternative remedy for collection of their accounts. Clearly, a subcontractor has a contract with the general contractor and could sue that general contractor for breach of contract if the subcontractor is not paid. Additionally, a supplier has contract rights against the purchaser of supplies if the supplier is not paid. However, in the absence of a properly recorded materialmen’s lien the supplier and the subcontractor do not have contractual rights directly with the owner of the property where the work is performed and materials supplied. Materialmen’s liens allow the subcontractor and a supplier to foreclose on the owner’s property for payment in some circumstances. In addition, general contractors may file a lien against the property owner, but the general contractor also, typically, has contractual rights with the property owner directly.
Restrictions on Materialmen’s Liens
Subcontractors and suppliers may not file liens against owner-occupant property (if they do not have a written contract directly with the owner) or projects owned by governmental entities. For example, if a subcontractor works on a remodeling project at a residential property that is owned by the party living at the residence, the subcontractor may not place on a lien on the property. In addition, if a subcontractor is working on a building owned by any government entity, the subcontractor may not place a lien on that property. However, this does not mean that the subcontractor or supplier does not have a way to ensure that the subcontractor or supplier is paid. In situations such as these, the subcontractor or supplier may proceed against the general contractor’s or owner’s bond. In governmental projects, the general contractor is required to have a bond to ensure payment for work performed on the project. Subcontractor’s and supplier’s need to ask the general contractor about the bond so that they may be sure to give appropriate notice of the amount of their claims. In residential projects, there may not be a bond on the project. Again, suppliers and subcontractors need to ask the general contractor. If there is no bond on a residential project and the supplier/subcontractor is not paid by the general contractor, the supplier or subcontractor has the right to sue the general contractor for breach of contract and may also have a claim against the property owner for unjust enrichment.
Preliminary Twenty-Day Notice
To start the process of obtaining a lien against a project or even to obtain a claim to a bond, the subcontractor or supplier must issue a Preliminary Twenty-Day Notice (sometimes referred to as a “pre-lien”). The Preliminary Twenty-Day Notice must be sent to the owner, the lender (if any), the general contractor, and if the issuer is a supplier, to the subcontractor. The Preliminary Twenty-Day Notice lists the amount that the subcontractor or supplier anticipates the work or supplies will cost for a particular job. Suppliers and subcontractors should overestimate the amount of the contract (but not more than 20%) so that they do not have to issue additional Preliminary Twenty-Day Notices throughout the duration of the project when there are change orders affecting the total cost. Whatever amount is listed in the Preliminary Twenty-Day Notice will be the maximum amount that the supplier or subcontractor may claim in a lien. The Preliminary Twenty-Day Notice is effective to protect payment of any labor or materials that were used within twenty day prior to the date of the Preliminary Twenty-Day Notice. For example, if a project is started 30 days before the Preliminary Twenty-Day Notice is issued, the only payment for labor and materials that will be covered by the Preliminary Twenty-Day Notice are those used in the twenty days prior to the date of the issuance of the Preliminary Twenty-Day Notice and not payment for the labor or materials provided during the time before the job began or during the first ten days of a job.
A Preliminary Twenty-Day Notice is not a lien. It is not recorded with the recorder’s office where the project is located and is not subject to any liability for its issuance. For this reason, some subcontractors and suppliers issue a Preliminary Twenty-Day Notices on all projects, even those that are on residential property and owned by governmental entities where there will be no lien rights. On these projects where there is potentially a bond, but no lien rights, the Preliminary Twenty-Day Notice will act as appropriate notice to the owner so that the subcontractor or supplier may perfect the bond claim at the end of the job.
Perfection of Lien Rights
Once work on a project has been completed by a subcontractor and that subcontractor has not been paid, the subcontractor or that subcontractor’s supplier may want to take steps to perfect their lien rights. If the subcontractor and supplier have been paid on a job, there is no reason to perfect a lien as the lien amount has already been paid. If the subcontractor and supplier have not been paid, they must file a “Notice and Claim of Lien” with the appropriate county recorder’s office within 120 days after completion of the project or if a Notice of Completion of the project has been recorded, the supplier or subcontractor only has 60 days after recordation of the Notice of Completion to record a Notice and Claim of Lien. Once a Notice and Claim of Lien has been properly recorded and served, the lienholder has only six months in which to enforce his, her or its lien rights through foreclosure. There are many definitions of “completion” for a project so at the time an account becomes past due and there are potentially lien or bond rights, it is prudent to contact an attorney to determine when a lien or bond claim must be asserted so that those rights are not lost.
There are many lien services operating in Arizona. They provide flat rate services for the filing of liens and issuing Preliminary Twenty-Day Notices on construction jobs. If you choose to use a lien service, you need to know whether or not the service provides legal advice as to whether or not you are able to lien a particular project. In most instances, the lien services do not provide legal advice for the services they provide. For example, they do not check or monitor the timing of the perfection of a lien. The lien service will merely file the lien itself at your instruction. It is advisable to contact an attorney to determine the timing of filing a lien and when it must be enforced so that no deadlines are missed. If a lien is wrongfully placed on a property the owner could bring a claim of “slander of title” against you. If the owner prevailed on a claim of “slander of title”, the owner would be awarded the owner’s actual damages or $5,000, whichever is greater.