Contractors, subcontractors and suppliers in Arizona are often confronted with this situation: When you are preparing your initial preliminary 20-day notice on a new Arizona project, you use the contract or purchase order amount to fill in the “estimated total price” blank. During the project, your scope of work increases and the “actual total price” of labor or materials you furnish exceeds the estimated total price by a substantial amount.
Many potential lien claimants do not realize that if the actual total price for labor and materials furnished exceeds by 20% or more the estimated total price set forth in any prior preliminary 20-day notices, Arizona’s lien law requires that an additional preliminary 20-day notice must be sent in order to protect your lien rights for that excess.
A simple example illustrates this rule: Subcontractor sends a preliminary 20-day notice that includes a $100,000 estimate of the total price of labor and materials to be furnished to the project. With the 20% cushion, the notice covers up to $120,000 of labor and materials to be provided by Subcontractor. In other words, Subcontractor will be entitled to later record a lien for $120,000—the original $100,000 estimate amount plus an additional 20%.
If the actual total price of labor and materials furnished or to be furnished increases to $180,000, Subcontractor must furnish a second preliminary 20-day notice to protect the lien rights for the last $60,000 of labor and materials to be furnished. If Subcontractor does not send a second preliminary notice, Subcontractor will only have lien rights for up to $120,000.
How Is the “Estimated Total Price” for the Initial Notice to be Calculated?
Since the lien statute does not define “estimated total price,” some lawyers have advised their clients to insert a grossly overstated estimate in the preliminary notice, thereby avoiding the need to ever send an amended or additional notice. However, this is likely bad advice.
The word “estimate” is not defined in the lien statute but the dictionary definition is “a reasonable guess.” If a person includes a wildly inflated estimate in its preliminary notice, that notice could later be challenged on the ground that the “estimated total price” did not constitute a reasonable guess of the value of labor and materials furnished or to be furnished. Such a defect could ultimately invalidate an otherwise enforceable Notice and Claim of Lien.
On the other hand, there is a good argument that a person may include a figure higher than the original contract or purchase order amount in its preliminary notice, provided that the person has a reasonable basis for including the increased amount. For example, if a subcontractor historically receives change orders increasing the total value of the labor and materials furnished by 50% over the subcontract amount, the subcontractor would have a reasonable basis for inserting the subcontract amount plus 50% on its initial preliminary notice. Of course, there may be business reasons for not following this advice (you don’t want to get the reputation that you are a “change order happy” subcontractor!)
What Language Should Be Included on the Second Preliminary Notice?
The Arizona lien laws do not discuss specifically how to provide additional preliminary 20-day notices. In the above example, Subcontractor must furnish a second preliminary 20-day notice to protect the lien rights for the last $60,000 of labor and materials to be furnished.
But how should the second notice describe the estimated total price of the additional materials? The recommended method is to label the second notice as an “Additional,” “Amended,” “Supplemental” or “Second” notice and state that Subcontractor has furnished or will furnish “an additional $80,000 of labor and materials for a total estimated price of $180,000.” By utilizing this language, Subcontractor’s intentions are clear.
What Effect Do Payments Have on the Estimated Amount?
A common question is whether a second notice must be given if the total unpaid amount due to a prospective lien claimant does not exceed the estimated total price in the 20-day notice by 20 per cent or more. In the above example, is a second notice required if Subcontractor has been paid in full for the first $100,000 before the additional $80,000 of labor and materials are furnished? The answer is yes—you must provide the second notice.
An easy way to understand this issue is to view the estimated total price stated in the preliminary notice as a “lien account” totaling 120 per cent of the amount stated. Thus, if the estimated total amount is $100,000, then the starting balance of the “lien account” is $120,000. As payments are received on the project, the “lien account” balance is reduced by the amounts of those payments. The person who provided the preliminary notice has the right to later record a lien only up to the amount remaining in the “lien account.” Once payments made up to 120 per cent of the original estimated total amount, the party has no lien rights arising from the initial preliminary 20-day notice. Rather, to have lien rights for the additional amounts furnished above and beyond 120% of the estimate amount, the party must replenish its “lien account” by sending an additional notice.
When Should the Amended Notice Be Sent?
To assure lien rights for the entire project, a person should send the amended preliminary notice within 20 days from the first day labor and materials in excess of 120% of the original estimate are furnished to the project.
The Bottom Line
It is important to compare the actual amount of labor and materials being furnished to an Arizona project with the total estimated amount initially set forth in the preliminary 20-day notice. Otherwise, if the scope of the work increases by more than 20 per cent and you do not send a second notice, you will seriously jeopardize your lien rights under Arizona law.
by Michael J. Holden
Holden Willits PLC