How to Get the Most Out of Preliminary Notices

Whenever starting a new construction project, subcontractors and material suppliers should always verify state requirements for securing mechanic's lien rights.

In most states, the process starts with sending a preliminary notice to the owner and general contractor. Start by determining whether the state in which you are working requires them. Requirements vary by state so it's always important to verify the requirements using a tool such as the Lien Navigator, said Chris Ring, of NACM Secured Transaction Services (STS).

According to NACM STS's Lien Navigator, 14 states are direct to lien states and do not require a preliminary notice. However, that doesn't mean you shouldn't send one in those states, Ring advised. Preliminary notices promote transparency and elevate subs and materials suppliers in the minds of the parties that receive them. These notices can serve as preemptive measures. With multiple tiers sometimes between an owner and a supplier, the visibility that a preliminary notice provides can strengthen the chances of getting paid before having to file a lien.

"They let the property owner know you are on the job," Ring said.

On the other hand, Ring doesn't recommend serving these notifications for every scenario and every customer. "That wouldn't be a good strategy. You're going to upset some customers; you might even drive some customers away because you're doing things that's not required by statute."

Consider each project on a case-by-case basis, Ring underscored. "There are advantages to sending preliminary notices even when they are not statutorily required."

In a recent webinar, Preliminary Notices – Having to Serve Them vs. Should be Serving Them," Ring highlighted different scenarios where they can benefit your business.

Among the reasons for using a non-statutory notice, Ring outlined several situations:

• A new customer with questionable credit
• Existing customers with high DSO
• Returning customers with poor payment history
• Customers that recently filed Chapter 11 bankruptcy

Ring also explained how subs and suppliers can turn some unpaid lien states such as Colorado and New Hampshire into full paid lien states by serving a preliminary notice. In these states, if the preliminary notice is not filed, subs and suppliers still have lien rights but if the owner can prove it has made payments to the general contractor it has a defense to fight the lien. In a full lien state, regardless of how much money has flowed between the owner and general contractor, subs and suppliers maintain full lien rights, Ring explained. In both situations, however, subs and suppliers must follow the laws of the state for filing in order to maintain their rights.

Even in less than favorable situations, Ring explained how preliminary notices provide benefits. For example, in Alabama, a property owner has the right to object to a sub or supplier stipulating the full price of a lien. For that reason, Ring suggests serving a notice at least 15 days prior to furnishing so that a creditor knows the situation upfront before the project receives its goods or services, and can make better credit decisions.

-Bryan Mason, editorial associate