The Misunderstood Preliminary Notice

05-Mar-2012

The preliminary notice, a.k.a. the pre-lien, is a source of confusion for those who wish to manage their construction lien rights. A majority of the confusion is due to the complexity of the construction lien law. Even seasoned attorneys at times look at the preliminary notice as only a legalistic step, overlooking the true intent and power of this document. We begin to understand the benefits of the preliminary notice, as a communication tool to property owners and hiring parties, once we sift through the legal mumbo-jumbo. 

Following are some reasons why to pre-lien often and early:

  • Makes the homeowner aware that you are on the job site
  • Makes the homeowner aware of their own rights, which could lead to them paying you directly
  • Creates open lines for communication
  • Eliminates the gray area, ensuring the homeowner doesn’t pay twice, and ensuring you maintain your lien rights if the homeowner pays the general contractor early
  • The earlier you pre-lien, the earlier you get paid and less likely you need to cloud a title 

There is gray area when it comes to the preliminary notice of the lien law. For example, in Minnesota a preliminary notice is sometimes required for commercial projects, but not always. In some cases, placing the preliminary verbiage in the contract fulfills the statutory requirements, but its message gets buried in the contract. On top of all of this, if the notice is served after the funds have been distributed to the general contractor, the subcontractor or supplier may have lost their lien rights. We have found that the best practice and most effective use of the preliminary notice is to serve the notice at the beginning of every project. This practice improves communication and takes the guesswork out of many of the gray areas. 

Let's look at a situation that occurred while Perfekt built-out new office space in 2010. The property was a single story residential rambler zoned commercial. We had purchased the property to renovate the rambler into office space for Perfekt. We hired a few subcontractors, including: an electrician, plumber, counter top supplier, carpenter, paving contractor, curb contractor, and concrete contractor. The carpenter helped coordinate the construction activities, hired a sub or two, and purchased materials through a lumber yard, which positioned the carpenter as a primary contractor. 

Although Perfekt’s project was the conversion of a residential rambler to commercial office space, the project was under 5000 ft2, and therefore required a preliminary notice to ensure lien rights. Since the carpenter was in a primary contractor position, according to Minnesota statutes, he would need to serve a preliminary notice within ten days of the verbal agreement, unless the verbiage was written in his contract; we never received a notice, and if the verbiage was in the contract, we never saw it. As it turned out, the lumberyard that the carpenter hired was the only party to send us a preliminary notice, which they served within days of delivery.

The lumberyard only delivered a few materials, and yet they best understood the value of the preliminary notice. They used the lien law as it was intended – a tool for contractors and suppliers to communicate their rights. Interestingly enough, all of the tradesmen who contributed their time and labor to the property did not send a preliminary notice, ultimately losing their lien rights; while the lumberyard, who merely delivered a load of materials to the property, was smart and communicated their lien rights.

Even though everyone was paid, the preliminary notice did more than merely protect lien rights for the lumberyard.

Now, we can see the preliminary notice is much more than an inconvenient step in securing construction lien rights when utilized with consistency and purpose. Most of the people you’re working with have the best intentions to pay you, but sometimes they can’t come up with the money to pay their employees, other subs, other projects, other bills, and you. It’s crummy, but it is a part of the construction world as we know it today. So get smart and visit www.GetPerfekt.com to see how easy and cost effective it is to build construction lien management services into your business process. Discover Perfekt - The Truth About Construction Lien Management.