Prompt Payment, Mechanic/Materialman’s Liens, and other ...

Prompt Payment, Mechanic/Materialman’s

Liens, and other Collection Issues

LAUREN M. REYNOLDSF E B R UA R Y 2 8 , 2 0 1 9

Arizona Prompt Pay ActA.R.S. § 32-1129 through § 32-

1129.07• A licensed contractor, licensed subcontractor, or material supplier, on a private project, who has performed according to its contract is entitled to prompt payment from the party with which it contracted◦ Applies to private projects lasting longer than 60 days. A.R.S. § 32-

1129.01.◦ Can be applied to projects lasting a lesser amount of time, if mutually

agreed to by the owner and contractor. Id.◦ Applies to owner-occupied residences, only if specific, statutory

language is included in clean and conspicuous type on the front of each billing or estimate from the contractor to the owner-occupant. A.R.S. §32-1129.07.

Arizona Prompt Pay ActCreates a Standard 30-day Billing Cycle

◦ Progress payments/retention releases/final payments are to be made on the basis of that cycle◦ If the parties have agreed to a different billing cycle, then the construction contract and each page of

the plans, including bid plans and construction plans, must specifically identify such other billing cycle

◦ Contractors are required to timely submit billings/estimates covering work in the applicable cycle

◦ Those billings are deemed approved and certified 14 days after the owner receives the billing, UNLESS◦ Before that time the owner issues a written statement stating in reasonable detail the owner’s

reasons for not approving all or a portion of the billing

◦ Once approved and certified, the owner must make payment to the contractor within 7 days

Arizona Prompt Pay ActAn owner may decline to certify and approve a billing or estimate for any of the following reasons:

◦ Unsatisfactory job progress.◦ Defective construction work or materials not remedied.◦ Disputed work or materials.◦ Failure to comply with other material provisions of the construction contract.◦ Third party claims filed or reasonable evidence that a claim will be filed.◦ Failure of the contractor or a subcontractor to make timely payments for labor,

equipment and materials.◦ Damage to the owner.◦ Reasonable evidence that the construction contract cannot be completed for the

unpaid balance of the construction contract sum.

The owner may only withhold the amount of costs and expenses the owner reasonable expects to incur.

Arizona Prompt Pay ActA contractor must also make prompt payment to its subcontractors and material suppliers who provide:

◦ A billing/invoice for the work performed or material supplied and◦ A waiver of any mechanic’s or materialman’s lien conditioned on payment for

the work completed or material supplied.

Specifically, payment is to be made within seven days of receipt by the contractor or subcontractor of each progress payment, the full amount received for the subcontractor’s work and materials supplied.

Failure to make such payments could result in disciplinary action by the ROC.

Arizona Prompt Pay ActA contractor may withhold certification of a subcontractor or material supplier’s bill, so long as the contractor notifies the subcontractor or material supplier in writing within 14 days, for the following reasons:

◦ Unsatisfactory job progress.◦ Defective construction work or materials not remedied.◦ Disputed work or materials.◦ Failure to comply with other material provisions of the construction contract.◦ Third party claims filed or reasonable evidence that a claim will be filed.◦ Failure of the subcontractor to make timely payments for labor, equipment and materials.◦ Damage to a contractor or another subcontractor or material supplier.◦ Reasonable evidence that the subcontract cannot be completed for the unpaid balance of

the subcontract sum.◦ The owner has withheld retention from the contractor, in which case the amount of the

retention withholding by the contractor shall not exceed the actual amount of the retention retained by the owner pertaining to the subcontractor’s work.

Arizona Prompt Pay ActFailing to make prompt payment will result in◦ Interest accruing at a rate of 1½ percent per month◦ If taken to court or arbitration, attorneys’ fees and costs shall be

awarded to the prevailing party

Additionally, a contractor can suspend performance or terminate a construction contract for failure to make prompt payment◦ Contractor must provide written notice to the owner at least seven

calendar days before the intended suspension or termination◦ Such suspension or termination would not constitute a breach

Arizona Prompt Pay ActA subcontractor can also suspend performance or terminate its contract for failure to make prompt payment◦ Subcontractor must provide written notice to the contractor and owner

at least three calendar days before the intended suspension or termination if the failure to make prompt payment is by the owner

◦ Subcontractor must provide written notice to the contractor and owner at seven three calendar days before the intended suspension or termination if the failure to make prompt payment is by the contractor

What If We Don’t Get Paid?

Mechanic’s LiensStop Notices

Mechanic's LiensThe Origin of Mechanic's Liens

• Created by constitutional provisions and statutes.• Arizona’s Statutory Scheme: Chapter 7, Article 6, Title 33 of the Arizona Revised Statutes (A.R.S. §§ 33-981 to 33-1008).

Mechanic's LiensWhat is a Mechanic’s Lien?

• A Mechanic’s Lien allows certain parties to a construction project assert a claim against an owner’s property.◦ Applies to general contractors, subcontractors, suppliers and design

professionals.

• Another avenue to obtain payment.◦ Other avenues include stop notices, payment bonds and lawsuits

alleging breach of contract, unjust enrichment, and violation of the Prompt Pay Act.

• Allowed even where there is no privity of contract.

Mechanic's LiensPurpose of Mechanic's Liens

• Primary Purpose: Protect laborers and materialmen for the value they add to another’s property.• Secondary Purpose: Protect the owner by providing notice and the opportunity to investigate potential claims against the property.

Mechanic's LiensNature of Mechanic's Liens

• It is a remedy, not a right.

• A method to secure payment of an obligation.

• It does not create a cause of action. The cause of action arises from the performance of the work.

Mechanic’s LiensPersons entitled to enforce

Mechanic's liens“[E]very person who labors or furnishes professional services, materials, machinery, fixtures or tools in the construction, alteration, or repair of any building, or other structure or improvement.” A.R.S. § 33-981(A).

◦ Includes corporations or individuals, as well as contractors, subcontractors, and professional service providers (ie. architects and engineers).

◦ Subject to statutory exceptions and prerequisites.

Mechanic's LiensPersons not entitled to enforce Mechanic's liens (No Lien Remedies)

• A person who performs work that was not performed for the Owner or Agent.◦ “Agent” includes general contractor, subcontractors and/or architect

having charge or control of the construction. ◦ Important distinction between subcontractor and

materialman.◦ Subcontractor is agent of owner, so subcontractor’s supplier has

lien rights.◦ Materialman is not agent of owner, so materialman supplier does

not have lien rights.


• A person who fails to provide a preliminary twenty-day notice pursuant to A.R.S. § 33-992.01.

• A person who is not properly licensed (ie. contractors and sub-contractors) A.R.S. § 33-981(c).◦ Only need to be licensed at the time the work was

performed.◦ Must be licensed for the work performed.

◦ Residential (4 units or less) versus commercial (more than 4 units).


• A person who does not have a written contract with the owner of an owner-occupied residential property.• A professional service provider who does not have a written contract with the owner or with contractor who has an agreement with the owner.◦ “Professional service providers” are licensed architects, engineers,

and land surveyors.◦ Additionally, work performed by professional service providers

must add value to the property, therefore a mechanic’s lien will not attach until labor by others has commenced to improve the property.

Mechanic's LiensPersons entitled to enforce

Mechanic's liens• Specialty Statutes

◦ There are various specialty statues that provide a separate basis for lien rights that govern unique projects like:◦ Mill, factory or hoisting works (ARS 33-984)◦ Repair of domestic vessels (ARS 33-985)◦ Labor in cutting wood (ARS 33-986)◦ Canal, water ditch aqueduct, bridge, etc. (ARS 33-987)◦ Railroad (ARS 33-988)◦ Mines and Mining Claims (ARS 33-989)

◦ The specialty statute’s requirements control over the general lien statute requirements.

Mechanic's LiensTenant Improvements

• Providing labor/materials for a lessee will only give lien rights as to the leasehold estate, unless one of the following is true:◦ Lessee is agent of the owner◦ Owner is estopped from denying the agency relationship

as a matter of law

Mechanic’s LiensProperty Subject to Mechanic’s Liens• Mechanic’s lien cannot extend beyond the property provided for in the applicable lien statute.• Primarily against buildings/improvements; secondarily against land.

Mechanic’s LiensStages of the Lien Process

Stage 1: 20-day Preliminary Notice◦ Preliminary notices cover work performed 20 days

prior to the notice date.Stage 2: Lien◦ Must be recorded no more than 120 days after work is

complete; or◦ Recorded no more than 60 days after Notice of

Completion.Stage 3: Lien Foreclosure◦ 6 months to file lawsuit to foreclose a lien.

20-Day Preliminary Notices• What they are, what they do, and why they are so

important:◦ “Preliminary 20-day notice… means one or more written notices

from a claimant that are given prior to the recording of a mechanic’slien….” A.R.S. § 33-992.01(A)

◦ To have a valid lien, all potential lien claimants must properly send a20-day prelim. A.R.S. § 33-981(D)

◦ “Prelims” or “Pre-liens” preserve lien, stop notice, and payment bondrights

◦ Only covers materials or services provided within previous 20 days◦ Why? So that those receiving notice can protect themselves◦ Notice must substantially comply with the form prescribed by statute

20-Day Preliminary Notice -Contents

Required Contents:General description of labor, professional services, materials, machinery,fixtures or tools furnished, or to be furnished, and estimate of totalprice. A.R.S. § 33-992.01(C)(1)

• Lien is limited to 120% of estimate. A.R.S. § 33-992.01(G) & (H).◦ Name and address of person furnishing labor/materials/services.

A.R.S. § 33-992.01(C)(2)◦ Name of person who contracted for materials/services. A.R.S. § 33-

992.01(C)(3)◦ Legal, street address, or other jobsite description “sufficient for

identification.” A.R.S. § 33-992.01(C)(4)◦ “Notice to Property Owner” in boldface type and “Within ten days…”

statements “in type at least as large as the largest type otherwise onthe document.” A.R.S. § 33-992.01(C)(5) & (D)

20-Day Preliminary Notice - ServiceWho must receive:◦ Owner, original contractor, construction lender, and person with whom

contracted. A.R.S. § 33-992.01(B).◦ Reputed vs. Actual- public records usually sufficient to establish “reputed”

owner.How to serve:◦ First class mail w/ cert of mailing, registered, or certified. A.R.S. § 33-

992.01(F) .◦ Service is complete at time of deposit in mail. A.R.S. § 33-992.01(F).◦ Serving by certified or registered mail is always preferred.

Proof of Mailing:◦ An acknowledgement of receipt is to be included with the 20-Day

Preliminary Notice. A.R.S. §§ 33-922.01 and -922.02.◦ If the person to whom the notice is sent does not complete and return the

acknowledgment within 30 days, proof of mailing may be made by affidavit of the sender. A.R.S. § 33-922.02.

20-Day Preliminary Notice –Owner Duties

◦ Owner has 10 days to notify claimant of deficiencies or errors in the notice or defenses to deficiency are waived.◦ Claimant has 30 days to correct deficiencies or

errors identified.◦ Owner must provide a copy of payment bond to all

claimants.

20-Day Preliminary Notice Amended/Supplemental

Prelims• 20-Day Preliminary Notices are allowed to exceed

original value estimate by 20% .• A.R.S. § 33-992.01(G)- Potential lien claimant only

needs to serve one prelim, unless;◦ “Actual estimated total price” exceeds by 20% or more the

estimated value in the prelim, or◦ Labor/materials/services are “furnished under contracts

with more than one subcontractor, in which case notice requirements shall be met for all additional [labor/materials/services]”.

◦ There needs to be compliance for every “deal”.• Supplemental 20-Day Preliminary Notices are

permitted.

Preliminary 20-Day Notice –Hypothetical 1

• Mom-N-Pop Contractor sign $100K contract on 9/25 and start work on 10/1◦ $50K between 10/1 to 10/10 ◦ $60K between 10/11 and 10/31

• What is the lien amount if a 20-Day Preliminary Notice for $100k is served on 10/30?• What is the lien amount if a 20-Day Preliminary Notice for $100k is served on 10/20?

Preliminary 20-Day Notice –Hypothetical 2

• Mom-N-Pop Contractor sign $100K contract on 9/25 and start work on 10/1◦ $50K between 10/1 to 10/10 ◦ $60K between 10/11 and 10/31◦ $20K between 11/1 and 11/10

• What is the lien amount if a 20-Day Preliminary Notice for $100k is only served on 10/30?

• What is the lien amount if a 20-Day Preliminary Notice for $20k is only served on 10/20?

• How would the contractor obtain a lien for the entire amount?

Preliminary 20-Day Notice - Example

Notice and Claim of Lien Contents

• Pursuant to A.R.S. § 33-993 a notice and claim of lien shall include:◦ The legal description of the subject lands and improvements◦ The name of the owner/reputed owner of the subject property and the

name of the person by whom the claimant was employed or to whom claimant furnished materials

◦ A statement of the terms, time given and conditions of the contract, if it is oral, or a copy of the contract, if it is written◦ Separate contracts cannot be tacked together (unless clearly intended to be a single contract)◦ Each contract with owner treated separately

◦ A statement of the claimant’s demand, after deducting credits/offsets◦ A statement of the date of completion◦ A statement of the date the preliminary twenty day notice was given

◦ A copy of the prelim and the proof of mailing shall be attached

Notice and Claim of Lien Time and Place of Filing

• Record with County Recorder where property is located.• Mechanic’s lien may always be recorded prior to completion of the work (so long as the other requirements are met).• Record : (a) within 120 days after “completion”, or (b) 60 days after the recording of a Notice of Completion. A.R.S. §33-993(A).◦ “Completion” is either:

◦ 30 days after the Certificate of Occupancy or◦ Cessation of labor for 60 consecutive days

• Date of “completion” is same for original contractors and all of its downstream partners.

Notice and Claim of Lien Time and Place of Filing

• Alternatively, if an owner records a Notice of Completion, a claimant only has 60 days after the Notice of Completion was recorded to record its lien. A.R.S. § 33-993(A).

• A Notice of Completion is a Notice recorded by the Owner with the County Recorder where the property is located. A.R.S. § 33-993(E) – (H).

◦ In order to be effective, it must include the following information:

◦ The name and address of the owner.◦ The nature of the interest or estate of the owner.◦ The legal description of the jobsite and the street address.◦ The name of the original contractor, if any.◦ The names and addresses of any predecessors in interest if the property was transferred after

the beginning of the work or improvement.◦ The nature of the improvements to the real property.

• Additionally, within 15 days of recording, the owner must mail by certified or registered mail a copy of the Notice of Completion and a written statement of the date of recording and the County Recorder’s record location information to (1) the original contractor and (2) all persons from whom the owner received a Preliminary 20-Day Notice. A.R.S. § 33-993(I).

Notice and Claim of LienService

Who must receive:◦ Owner or reputed owner

How to serve:◦ First class mail w/ cert of mailing, registered, or certified◦ Serving by certified or registered mail is always preferred◦ Must be served in a timely manner, or else it will be invalid◦ The best practice is to use a professional lien service

Procedures to Foreclose on Mechanic's Lien

• Claimant has 6 months from the date of recording the lien to file a lawsuit to foreclose a lien, or the lien rights will be extinguished. A.R.S. § 33-998.

◦ Within 5 days of the lawsuit being filed, a lis pendens must be recorded ◦ The superior court is likely to consolidate cases if there is more than one claim

(and so long as those claimants do not contest the claims of each other)◦ Claimants not joined have a right to intervene◦ To the extent other lien claimants contest the claims of each other, they will be made defendants

◦ If judgment is granted in favor of the claimants, it will be a judgment of foreclosure and order of sale of the property to satisfy the lien (A.R.S. § 33-997)

• The prevailing parties may recover attorneys’ fees and expenses of the litigation. A.R.S. § 33-998(B).

Priority Problems: Who Gets What?

• A priority question exists any time two or more parties hold an interest in a single piece of property.◦ Normally only an issue when total liens exceed value of the

property.◦ But is a concern when lienholder holds a lien junior to

substantial prior liens.


• Construction lenders have until 10 days after construction begins to record deeds of trust without losing priority over mechanic’s liens.• Mechanic’s liens are preferred to all other liens and encumbrances subsequent to the time labor is commenced◦ Mechanic’s lien attaches at the time labor commences

• Architects, engineers and land surveyors have expanded lien rights A.R.S. § 33-992.◦ Can record a lien even if no labor or materials are supplied as long

as professional’s work added value to the property◦ If labor or materials are supplied then liens attach as soon as

labor or materials are supplied in amounts sufficient to indicate the work has commenced


Equal Footing Rule◦ All mechanic’s liens are on an equal footing regardless of when

recorded or when work was performed. A.R.S. § 33-1000(A).◦ As example, lien rights of general contactor, subcontractor and supplier are all

equal priority◦ Where the proceeds of the sale of the property is insufficient to

satisfy the liens, the proceeds must be apportioned over the respective liens. A.R.S. § 33-1000(B).

◦ Equal footing does not apply when there are separate contracts with the owner

Preventing Foreclose on Mechanic's Lien

• After receipt of a notice and claim of lien, and providing the GC with a copy of such notice, an owner may withhold money from GC to satisfy that lien (unless GC provides written notice of intent to dispute the claim within 10 days). A.R.S. § 33-994.

• In fact, the GC has a duty to defend against any action brought based on a notice and claim of lien. A.R.S. § 33-995.

◦ In some circumstances, and where the owner has settled with the GC in full, the owner may recover back from the GC the amount paid to the GC to satisfy that lien. A.R.S. § 33-995(C).

• In order to avoid the lien provisions in their entirety, an owner may require a GC to provide payment bond at outset of project. A.R.S. § 33-1003

◦ Once payment bond is recorded, along with the prime contract it covers, no liens may attach to the real property except from the GC and any other contractors who have a written contract with the owner.

• Owner or GC may secure and record a lien discharge bond to cover 150% of lien amount (prevents foreclosure of real property, but litigation may continue against bond and on other claims). (A.R.S. § 33-1004)

Lien Waivers• Advance contractual waivers of lien rights are not enforceable.• Any waiver and release must substantially comply with statutory forms.• Statute provides four waiver types (A.R.S. § 33-1008):

◦ Conditional – Progress Payment;◦ Unconditional – Progress Payment;◦ Conditional – Final Payment; and◦ Unconditional – Final Payment.

• Unconditional forms waive all lien rights regardless of whether payment was or was not received.• Conditional forms only waive rights after claimant receives payment from the owner/general contractor.

Wrongful Liens• The owner of real property can bring an action in the superior court to immediately clear title to the real property, based on the ground that the lien is forged, groundless, contains a material misstatement or false claim, or is otherwise invalid.

• If a person records a lien against real property, “knowing or having reason to know that the document is forged, groundless, contains a material misstatement or false claim or is otherwise invalid is liable to the owner.” A.R.S. § 33-420(A).

◦ The person is liable “for the sum of not less than five thousand dollars, or for treble the actual damages caused by the recording, whichever is greater, and reasonable attorney fees and costs of the action.” Id.

• Additionally, if a person willfully refuses to release or correct such a lien within twenty days from the date of a written request from the owner, that person is liable “for the sum of not less than one thousand dollars, or for treble actual damages, whichever is greater.” A.R.S. § 33-420(C).

Stop Notices• Stop notices are a payment alternative for Arizona commercial construction projects.• There are two types of stop notices: bonded or unbonded.• A prerequisite to a stop notice is the 20-Day Preliminary Notice

Stop NoticesWhat are Stop Notices?

◦ A payment alternative for Arizona commercial construction projects

Where did Stop Notices come from?◦ Arizona Statute (A.R.S. §§ 33-1051 through -1067)

Who can issue Stop Notices?◦ Anyone who has lien rights (A.R.S. § 33-1054)

Stop Notices Scope• Apply to all private construction projects except owner-

occupied residential dwellings. A.R.S. § 33-1053.• No stop notice rights on public projects• Preliminary 20 day notice is a prerequisite to stop

notice rights. A.R.S. § 33-1056(B)(1).

Stop Notices ContentsStatutory definition:

• " A written notice that is signed and verified by the Stop Notice claimant orits agent"

Stop Notice must contain:• Description of labor, professional services, materials, machinery, fixtures or

tools furnished or agreed toBe furnished by claimant

• N a m e of person to whom items werefurnished

• Amount in value of the items• Amount of any payments received by claimant on the amounts owed;• N a m e and address of claimant

Substance over Form:• Stop notice must "substantially inform owner/lender of your claim"

Stop Notices Service

• Who to serve:◦ Project owner or reputed owner◦ Original contractor or reputed contractor◦ Construction lender or reputed construction lender

• Manner of service:◦ Personal service upon owner/lender◦ Certified mail is also acceptable

• Timing:◦ First date claimant is entitled to record lien◦ Last date is any time before expiration of deadline to record lien. A.R.S. § 33-

1056(B)(2).

Stop NoticesDemand for Stop Notice

• Owners and lenders have the option to make a written demand for stop notices, but it must include specific statutory language.

◦ Acts as a clean sweep of project

• Anyone who qualifies as a claimant must serve stop notice within 30 days after written demand.

• Warning:◦ Demand for stop notice does not have to be sent by certified

mail and it may arrive general delivery.

Stop Notices Effect

• Claims under the stop notice attach to all undisbursed construction funds.

• The obligation of an owner or lender to withhold the funds pursuant to a stop notice differs, though, depending on (1) who is holding the funds, (2) from whom the funds are being withheld, and (3) whether a payment bond has been recorded in connection with the funds.

Stop NoticesOwner Stop Notices (A.R.S. §33-1057)

Payment Bond Recorded pursuant to § 33-1003 No Payment Bond Recorded

Original Contractor (Contractor Has No Rights) (Contractor Has No Rights)

Other Claimants Owner May Withhold Funds Owner Must Withhold Funds

Stop NoticesLender Stop Notices (A.R.S. §33-1058)

Payment Bond Recorded pursuant

to § 33-1003

No Payment Bond Recorded

Original ContractorBonded Stop Notice Lender Must

Withhold Funds Lender Must

Withhold Funds

Unbonded Stop Notice

Lender MayWithhold Funds


Other ClaimantsBonded Stop Notice Lender May

Withhold FundsLender Must

Withhold Funds

Unbonded Stop Notice



Stop NoticesRelease Bond

• Anyone who disputes the stop notice can file a stop notice release bond. A.R.S. § 33-1062.

◦ Must be equal to 125% of the stop notice amount◦ Must be served on the claimant

• Allows for the funds to be released, but secures potential for full payment to claimant

Stop NoticesEnforcing Stop Notices

• If a claimant wishes to enforce a stop notice, he or she must file a lawsuit◦ Must be filed any time after 10 days from the date the stop notice is served, but

no later than 3 months after the deadline for recording liens for the entire project◦ This time can be extended by written agreement of the parties for no more than an additional 3

months

◦ The lawsuit must include all interested parties◦ Claimant must serve the lawsuit, or at least a Notice of Commencement within

5 days after filing the lawsuit◦ Interest on the stop notice accrues from the date the stop notice is served◦ The prevailing party is entitled to attorney fees

• If no action is commenced, within the prescribed time period, the monies being held should be released

Stop NoticesOther Issues

• Like lien claims, if the amounts withheld for stop notices is insufficient to pay all stop notices, then the amounts withheld will be distributed pro-rata to the dollar value of all valid claims.◦ It doesn’t matter what order the stop notices were

received in.

• The penalty for willfully giving a false stop notices the forfeiture of all right to participate in the pro rata distribution of monies and all rights to any mechanic’s lien.

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