Sending preliminary notice on every project is good practice for many reasons. But, in order for the preliminary notice to be its most effective and protect your ability to file a valid mechanics lien if needed, the notice must comply with specific statutory requirements.
In some states, one of these specific statutory requirements mandates that preliminary notices must contain a dollar figure of the contract amount or estimated value of the services to be provided. This requirement allows the property owner and GC to get a better view of the potential exposure to each noticing party.
Some participants, however, do not want to include any dollar figures on preliminary notices due to a worry that it will expose their margins to parties up-the-chain. However, modifying the actual amount is not a good idea, and we’ll discuss why below.
States that Require Dollar Figures on Preliminary Notices
Specifically requiring a dollar amount on preliminary notices is not case in a majority of states, but it is relatively common. A significant number of states require some dollar amount to be included on required or best-practice preliminary notices. These states include: Alabama, Arizona, California, Colorado, Georgia, Illinois, Louisiana [public projects only], Massachusetts, Minnesota, Nebraska, New Hampshire, New Jersey, Rhode Island, South Carolina, South Dakota, Texas, and Virginia.
While it’s understandable that some parties may be wary of providing amounts on preliminary notices, when it’s a ‘requirement,’ it’s a requirement and not a suggestion, and failing to provide the proper amount is a mistake.
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Common Reasons to Hide an Amount (or to Fudge the Amount)
There are many reasons construction participants may not want to provide an amount on their preliminary notices: they don’t want to appear adversarial since the amount may not yet be due; they may not want to expose their contract amount to parties other than those who they contracted with; subs may be getting pressure from other parties (the GC) to not expose the GC’s margins by providing the property owner with the actual value of the sub’s contract or labor furnished.
These reservations, coupled with the pressure of relevant parties to not expose financial information, can lead parties to send notices without the required dollar figures. Or, attempting to game the system by sending preliminary notices with different amounts to different parties (i.e. by sending different notices to the property owner and GC). Instead of merely attempting to smooth the waters, though, the actual result is that the noticing party is sending an incomplete and insufficient preliminary notice. And this is bad.
Why Is This Bad?
To put it simply and not mince words, it’s bad because it can result in an insufficient preliminary notice and destroy the ability to file a valid mechanics lien.
As noted above, the requirements for preliminary notices are actual requirements, not suggestions that parties can take or leave at their whim. Mechanics liens are creatures of statute, and as such (being in contradiction to the common law) their requirements are strictly interpreted. This means that when requirements are not met (even if the requirements seems small or insignificant) – the notice or lien may, and likely will, be determined invalid.
This is obviously the case when an amount is not included at all – omitting the amount entirely clearly fails to meet the requirement. It can also be the case when the amount is improper. When the notice requires the contract amount – it requires the contract amount. And the failure to provide it (or the failure to provide it the same on each notice) is a violation of the requirement.
Notice requirements generally require a notice to be provided to certain parties, not different notices to different parties. By modifying the amounts on the notices, you run the risk of 1) limiting any subsequent lien to the lower value; or 2) eliminating the right to file a valid lien at all since the amount on the notice was not provided in good faith and was known to be incorrect.
While states that require an estimated contract amount, or estimated value of the labor or materials to be furnished, do not require an exact (or necessarily even close) estimate, they do require that the estimate be more than a guess, and be made in good faith and based on some factual information. Knowingly providing an incorrect amount, even if the difference is small, can easily be argued as an estimate not made in good faith.
One of the most important benefits of sending preliminary notices is that they protect the right to file a lien in the event that a company working on construction project runs into difficulty getting paid the money that they’ve rightfully earned. Actions that destroy that right weaken the notice, fail to promote visibility, and are, at the end of the day, bad business practices that should be avoided at all costs.