Monthly Archives: September 2013

Notice of Non-Responsibility-A possible defense against a Mechanics Lien

While a Notice of Non-responsibility is an important step for property owners to take in order to protect themselves from a mechanics lien brought forward by improvements made by tenants, it is only a possible means of defense against a mechanics lien. It is very beneficial to understand the parameters of the notice of non responsibility and under which circumstances you may be protected from becoming liable for a mechanics lien filed against your property.

Let’s take a look at an illustration:

A Tenant receives approval from his Landlord (Property Owner) to make tenant improvements to the unit he is leasing in order to improve his business. He is the owner of a Hair Salon located in the leased property and has contracted to install new sinks, chairs, and stylist work stations. He understands that he will be liable for all payments to any of the trades or materials suppliers who participate in this project. The Property Owner, with the understanding that the tenant is accepting all liability for this tenant improvement, agrees to allow the tenant to make these changes.

 In order to protect himself from any payment defaults on the part of the tenant, which may be cause for mechanics liens being filed against the property,  the Property Owner files a Notice of Non-Responsibility. This notice of Non-Responsibility is posted at the leased property to communicate to all contractors that he bears no legal liability for the project, and that should they have any issues collecting money owed for improvements made or materials supplied,  they should direct their collections efforts exclusively with the tenant and refrain from filing any mechanics lien against the Property Owners interest in the leased property.

Ensuring the effectiveness of your Notice of Non-Responsibility

In order to be effective, a Notice of Non-Responsibility must be prepared, recorded and posted properly, which requires strict adherence to the statutes set forth by the state in which the lease property is located. For example in California if you prepare, record and post the notice correctly – but fail to complete the process within 10 days from the day you first became aware of the pending tenant improvements, the notice may be unenforceable to protect you from a mechanics lien.

Strengths and Weaknesses

It is possible that the tenant may elect to forgo his lease and abandon the property before the project is completed. Leaving all of the contractors and materials suppliers with unpaid invoices for this project. This could result in the Property Owner being named in a mechanics lien for unpaid balances due to tenant improvements made to his property. Many are surprised when this happens because they believed the Notice of Non-Responsibility would serve to prevent anyone from filing a mechanics lien. Unfortunately, this is not always the case.

In order for the Property Owner to not be found liable for the improvements, they will have to prove that the property did not benefit from any of the changes made, and that the work done was solely for the benefit of the tenant.

For example, if the Property Owner has re-leased the same property to a lessee who will benefit from the improvments made to the property, the property owner may be found to be benefitting from the improvements and can be held liable in court to pay what is owed. Alternatively, if they wish to re-lease the unit to be used for a different kind of business, and therefore must undo all of the work that was done, they may be able to have any mechanics liens discharged for lack of cause. Keep in mind, that if any part of the project is found beneficial to the Property Owner long term, such as new electrical wiring or improved plumbing, they may still be asked to make good on monies owed, or a portion thereof.  If the Property Owner has received upon the initial leasing of the unit certain licensing fees, special payments, or an additional month’s rent – they may be asked by the court to use these funds to pay the mechanics lien holders.

From a standpoint of “Best Practices”, a Notice of Non-Responsibility is a smart solution to position the property owner from becoming liable to a mechanics lien. However, it is important that you understand that the notice of non-responsibility is only a possible means of defense and due diligence should be exercised when granting a tenant permission to make tenant improvements which may impact the property owners exposure.

If you would like to speak have someone who understands the process of the notice and/or would like to discuss your specific situation in further detail with an expert at CRM Lien Services, please contact us today for a free consultation.

When do you need “Proof of Receipt” for your served Preliminary Notice?

The Preliminary Notice requirements vary from state to state, which is why it’s beneficial to have a Preliminary Notice Service Provider who keeps track of each state’s requirements. Depending on the state or states where you conduct business, you may or may not need “Proof of Receipt” for your served Preliminary Notices. As we’ve discussed in past articles, some states require contractors and subcontractors to serve a Preliminary Notice to establish their lien rights while some states do not. Understanding your state’s mechanics lien statutes is crucial to knowing whether or not you will need “Proof of Receipt” of your served Preliminary Notices.

If the Preliminary Notice is “Non Statutory” it will never be needed to support a Mechanics Lien. Therefore, you may never need “Proof of Receipt”. (see our blog on “Non Statutory Notices” for a more detailed explanation. )

However, if the Preliminary Notice is required to support a Mechanics Lien, you will surely need “Proof of Receipt” before the Mechanics Lien can be filed or recorded. The “Proof of Receipt” serves to verify that the Preliminary Notice was received by the correct owner. And that the owner was aware that he may become liable to you if you are not paid according to your contract for the improvements you helped to make to the owner’s real property. If the required proof is not available, a court may find that you only complied with serving requirements for the Preliminary Notice and failed to comply with the “Proof of Receipt of a Preliminary Notice” requirements for perfecting a mechanics lien. The “Proof of Receipt” is designed to comply with the statutes governing the proper filing of a mechanics lien

So why not serve the Preliminary Notice with Proof of Receipt requested every time? The simple answer is that very few of the Preliminary Notices served will ever be needed to support a mechanics lien. The preliminary notice served with proof of receipt usually cost upwards of 20 – 25% more per notice. It is true that by serving all preliminary notices by Certified Mail Return Receipt Requested you will never be confronted with needing to request proof prior to filing your mechanics lien. However, the overall cost tends to be somewhat frivolous and unnecessary.

Consider this: You have your preliminary notice served within 20 days from the first day you begin to work on the job. You continue on the job for 6 months before your part is completed. The job last another 7 month before the General Contractor completely finishes and turns the property over to the owner. Think about it. 7 months have elapsed since you finished the job. Are you still owed money after being done for 7 months? If so, you now have 11 more months to request your “Proof of Receipt” from the US Postal Service while you may only have 3 months before you must file your mechanics lien. The Good News is that there is plenty of time to get the Proof of Receipt you need to file your mechanics lien. In fact, there is a better chance that the 3 months time to file a mechanics lien slips by you then there is that you forget to get Proof of Receipt of your preliminary notice.

Obtaining “Proof of Receipt” is not difficult. By serving the Preliminary Notice by Certified Mail through the U.S. Postal Service, you always have the option to obtain a “Proof of Receipt”. In fact, the USPS maintains “Proof of Receipt” for all Certified Mail for up to 2 years after delivery. This should be more than enough time to request proof of receipt for any preliminary notice and have your mechanic lien served with confidence.

Keep in mind that if you file a Mechanics Lien without first securing “Proof of Receipt” for your Preliminary Notice your Preliminary Notice may be dismissed, rendering your mechanics lien invalid. Don’t make this mistake. If a Preliminary Notice is required in order for you to file and record a lien, make sure you are protected by obtaining a “Proof of Receipt”. In these economic times, you cannot risk losing income because you failed to file the necessary forms or obtain the required proof.

We have been helping contractors and subcontractors prepare and serve Preliminary Notices for over 25 years on construction projects in all 50 states. If you have any questions about lien requirements in your state or would like to start protecting your lien rights, give us a call today at 1-800-PRELIMS.