California's 20-Day Preliminary Notice: A Necessary, If Awkward, First Step

Several states require contractors to provide a preliminary notice to certain parties prior to filing suit. In California, this preliminary notice is a statutory requirement for a valid mechanic's lien or stop payment notice cause of action. You cannot sue on those claims in California if you do not satisfy the preliminary notice requirement. But what is it? How does it work? And why does California require it?

What is a Preliminary Notice?

The 20-day preliminary notice is a fairly simple document. It's rarely longer than one page, and it informs certain parties that a contractor might have a right to record a lien against the property (note: although this is true for stop payment claims as well, this article focuses specifically on lien claims). That's basically it. it isn't a lien; it isn't recorded; and many attorneys don't even include it in their complaints. But there is serious value to it to contractors, owners, and lenders, so lien claimants should take the notice seriously.

Why does California require it?

The goal is to protect property owners and lenders. While California contractors have a constitutional right to a mechanic's lien (even if California doesn't always treat it that way), property owners have a strong interest in keeping invalid liens off their property. This might be the only information a property owner or lender receives during the project about the subcontractors. And many property owners might not know that their property could be subject to a lien if the contractor goes unpaid. In short, its purpose is transparency.

Who must be served with the Preliminary Notice?

If there is a construction lender, the construction (or the reputed lender; see below) must be served with the preliminary notice. (Civ. Code section 8200). This is true whether the claimant is a direct or indirect contractor ("direct" meaning the contractor has a contract with the property owner; on a typical project, the direct contractor will be the general contractor, and the indirect contractors will be its subcontractors). Direct contractors are not required to provide the preliminary notice to the owner. (Civ. Code section 8200(b)).

For indirect contractors, the notice must also be served on the property owner (or reputed owner) and the direct contractor (or reputed direct contractor). (Civ. Code section 8200(a)).

What does "reputed" mean?

"Reputed" refers to a person or entity that the claimant, in good faith, believed to be the proper party. This means that the correct party might not receive actual notice!

California case law provides little guidance on how to determine who the true lender or owner is (in most cases, it will be clear who the true direct contractor is, but this isn't always the case; see the discussion of Texas's HB 2237 here).

A reputed construction lender “is a person or entity reasonably and in good faith believed by the claimant to be the actual construction lender.” (Kodiak Industries, Inc. v. Ellis (1986) 185 Cal. App. 3d 75, 87). "[T]he information on which a reasonable claimant should rely must be cloaked with sufficient indicia of reliability—such as statements from the owner, general contractor, or lender itself or their agents—so as to distinguish this information from a mere guess or some ill-founded conjecture." (Ibid.).

The cases diverge when discussing how a claimant may prove that he held a good faith belief that the reputed lender was the actual lender. In one case, the appellate court held that a good faith belief that the reputed lender was the actual lender should be proven by evidence that the claimant examined county records to ascertain the identity of the construction lender, e.g., the building permit or construction deed of trust. (Romak Iron Works v. Prudential Ins. Co. of America (1980) 104 Cal. App. 3d 767).

You read that correctly. There may be cases in which courts will require claimants to search county title records to determine who the owner and construction lender are! If there are multiple deeds of trust, the lender might well argue that you had constructive notice of their interest.

Other cases have held otherwise. For example, one case held that a claimant (a supplier) did not necessarily need to check county records in order to demonstrate that he held a good faith belief that the reputed lender was the actual lender. (Brown Co. v. Superior Court (1986) 148 Cal. App. 3d 891). And another case held that a laborer or materialman in the stop payment context did not need to search county records to prove a good faith belief. (Force Framing, Inc. v. Chinatrust Bank (U.S.A.) (2010) 187 Cal. App. 4th 1368).

That said, the best practice is to do everything you need to do to make sure that you have identified the correct contractor, owner, or lender.

What information is required?

The preliminary notice must be in writing, and must include the following:

(1) The name and address of the owner or reputed owner.

(2) The name and address of the direct contractor.

(3) The name and address of the construction lender, if any.

(4) A description of the site sufficient for identification, including the street address of the site, if any (note: if a sufficient legal description of the site is given, the effectiveness of the notice is not affected by the fact that the street address is erroneous or is omitted)

(5) The name, address, and relationship to the parties of the person giving the notice.

(6) If the person giving the notice is a claimant:

(A) A general statement of the work provided.

(B) The name of the person to or for whom the work is provided.

(C) A statement or estimate of the claimant's demand, if any, after deducting all just credits and offsets.

(Civ. Code sections 8100; 8102(a)).

The statute clarifies that the preliminary notice is not invalid by reason of any variance from the requirements of section 8102 if the notice is sufficient to substantially inform the person given notice of the information required by this section and other information required in the notice. (Civ. Code section 8102(b)).

Why is it called a "20-day" Preliminary Notice?

It's referred to as a 20-day preliminary notice because it is retroactive 20 days. This means that your mechanic's lien can only include damages incurred on or after 20 days before you served the notice. Here are some examples:

Edgar's Earthworks, Inc. contracts with the general contractor for grading and earthmoving in a development. Edgar's signs the contract on January 1, serves the preliminary notice the same day, begins work on January 2, and completes work a month later. If Edgar's does not receive payment, it can include all amounts incurred in its mechanic's lien, because the preliminary notice was served before Edgar's started work.

Connie's Concrete, Inc. contracts with the same general contractor to handle the slabs. Connie's signs the contract on January 1, but forgets to serve the preliminary notice that day. Connie's begins work on February 1. On February 10, Connie's realizes its mistake, and serves the preliminary notice. Connie's completes its work a month later. If Connie's does not receive payment, it can include all amounts incurred in its mechanic's lien, because Connie's served it on February 10. This means that all work performed by Connie's on January 21 or after can be included in the lien. Connie's started work after January 21, so Connie's is good.

Marty's Millwork, Inc. contracts with the same general contractor to build and install cabinets and closets. Marty's signs the contract on January 1, but forgets to serve the preliminary notice that day. Marty's begins work on July 1. Marty's completes its work on July 31. On August 1, Marty's realizes its mistake, and serves its preliminary notice. If Marty's goes unpaid, it can only include amounts for work performed on July 12 or after.

Pete's Painting, Inc. contracts with the same general contractor to paint the exterior of the buildings. Pete's signs the contract on January 1, but forgets to serve the preliminary notice that day. Pete's begins work on October 1. Pete's completes its work on October 31. On December 1, Pete's realizes its mistake, but it's too late. Pete's did not serve its preliminary notice in time, and thus will not have a right to a mechanic's lien.

Because the timelines can get a little ridiculous (especially for larger projects), many attorneys will recommend serving the preliminary at the same time the contract or subcontract is signed. This can be awkward for property owners who are unaware that this is a prerequisite. The last thing a property owner wants to think about when starting a project is what might go wrong later. But for contractors, service is critical to preserve their rights.

How do I serve the Preliminary Notice?

California mandates that the preliminary notice be served by personal delivery, registered or certified mail, express mail, overnight delivery by an express service carrier, or in the same manner as a summons and complaint per Code Civ. Proc. section 415.20. (Civ. Code section 8106).

What happens if I serve the wrong party?

If you served the wrong party, your only options are to re-serve the preliminary notice, or hope that you served a reputed required party (see above). If 20 days has passed since you completed your work, you are no longer entitled to a lien (though you may still sue for breach of contract, common counts, etc., as the case may be).

Do other states have similar requirements?

Several states require some kind of preliminary notice (including Texas). California's preliminary notice, often served prior to any work being performed, is unusual, although Arizona has adopted the same rule.

Conclusion

California's preliminary notice requirement is an unusual way to handle the notice to property owners, lenders, and direct contractors. However, it provides transparency to those parties, and it helps protect lien claimants if it comes to that. It may be awkward to present it to a property owner before any issues arise, but you lose your right to a lien without it.