Almost all California contractors are aware of the availability of the California mechanic’s lien law, and how they can use these important procedures to obtain payment from a problem project. However, many contractors are not aware of a similarly powerful procedure: the stop notice. This article will give a basic primer on how stop notices are different than mechanic’s liens, and how a contractor can use them to get the money they are entitled to.
The basic difference between a mechanic’s lien and a stop notice is as follows: A mechanic’s lien is a lien on property, whereas a stop notice is a lien on funds. A contractor can use one, or the other, or both. However, be aware that on public works, the only remedy may be a stop notice. The stop notice puts a lender, owner, or anyone else holding construction funds on notice that there is money due and owing to the claimant.
When done properly, the lender or owner has a duty to withhold money from the construction funds sufficient to pay the stop notice claimant. In most cases attorney’s fees can be recovered as well. The end result of a successful stop notice suit is a judgment ordering the construction lender or owner to pay the stop notice claimant out of the undisbursed balance of any construction loan funds.
I cannot tell you the number of times I have seen cases where a subcontractor client knew that the owner or lender had the money, but the general contractor was refusing to pay them. In such a case a stop notice can be the perfect remedy as it allows the claimant to cut out a non-paying general contractor or owner, and obtain the money rightfully owed to them directly from the owner or construction lender. Stop notices are also particularly effective when a dispute arises during an ongoing construction project, or when the owner’s equity in the project property may be insufficient to pay out a mechanic’s lien because of excessive senior encumbrances.
Stop notices, like mechanic’s liens, have certain mandatory steps that must be taken, such as proper service of preliminary notices and proper preparation and filing of the stop notice itself. It is important that the appropriate steps be taken at the beginning of a project in order to ensure the right to later file a stop notice. Moreover, in certain circumstances, such as when forcing a construction lender to pay, a stop notice must be bonded in order to ensure that the claim is valid. There are a multitude of companies that will provide such a bond, often for a relatively low percentage of the bond.
When done properly the stop notice can be an incredibly effective tool to recover money owing to a contractor. However, please be aware that the stop notice laws are very technical, and failure to follow the proper procedures and timelines will often result in forfeiture of a contractor’s right to recover pursuant to a stop notice. This article is by no means intended to cover every step of filing a stop notice. If you have any questions on stop notices, or would like help in filing one, please feel free to contact myself, or any other attorney at our firm.