Reprinted with permission from the Daily Journal of Commerce. Click here to read online.
As most subcontractors probably know, a construction lien is an important tool to ensure payment, but the lien process is full of pitfalls for the unwary. For the uninitiated, knowing beforehand all the steps needed to perfect a lien can help prevent contractors from learning those lessons the hard way.
One requirement that can trip contractors up, and result in forfeiture of lien rights, is failure to provide the statutory notice of right to lien. Many contractors do not involve their lien recording service or attorney until they fail to receive payment and it is time to record the lien, which can often be too late. Providing adequate pre-lien notice, as a matter of course, can protect a contractor’s right to seek payment from the owner if a project goes sideways.
The statutes regarding notice of right to lien in Oregon and Washington are similar, but with some fine, but important, distinctions. Given that many contractors perform work in both jurisdictions, it is important to have familiarity with those distinctions. One of them was established just this year in the Washington Supreme Court case of Velazquez Framing, LLC v. Cascadia Homes, Inc. That case involved an unfortunately all-to-common situation, in which a second-tier subcontractor, Velazquez Framing, was not paid for labor and materials it supplied to a project, even though the first-tier subcontractor had been paid for that work.
Velazquez Framing recorded a lien on the project for labor and materials but had failed to provide a pre-lien notice. When Velazquez Framing sought to foreclose its lien, the trial court dismissed the lien altogether for Velazquez Framing’s failure to provide the notice of right to lien. Velazquez Framing appealed and the Washington Court of Appeals confirmed, but the Supreme Court reversed, holding that the Washington pre-lien notice statute, RCW 60.04.031(1), required pre-lien notice only for the furnishing of “professional services, materials, or equipment” and labor was thereby exempted from the notice requirement.
This result raises two important, related points. First, if a contractor fails to provide pre-lien notice on a project in Washington, it can still record an enforceable lien for the labor. While, of course, it would have been better for Velazquez Framing to have supplied the pre-lien notice and have been entitled to enforce the lien as to its material costs as well, at least it was allowed a portion of the lien.
Second, the court relied on the “practice of lien segregation,” which provides that “a claimant may enforce that portion relating to labor so long as the court has an evidentiary basis to segregate the value of the labor from materials.” This means that to recover the labor portion of the lien, the lien cannot be in a lump sum amount, but must be broken down between labor and materials such that a court can segregate the two categories of costs from one another.
It is good practice to both break down the lien total into labor, materials, and/or equipment categories on the lien itself and attach a more detailed breakdown of each category in an exhibit to the lien. By doing this, if any part of the lien is invalid — whether due to lack of notice or, for example, including non-lienable items — the court will have an evidentiary basis for segregating the costs and leaving the rest of the lien intact.
In contrast to the Washington pre-lien notice statute, Oregon’s statute does not contain a blanket exemption of labor from the notice of right to lien requirement. Instead, the Oregon statute, ORS 87.021, differentiates the notice requirement based on the type of project. That is, a subcontractor providing labor to a commercial project is not required to provide pre-lien notice to the project owner, while a subcontractor on a residential project is required to provide the notice of right to lien.
On the other hand, a subcontractor that supplies only materials (i.e., does not also supply labor) is required to provide a pre-lien notice regardless of whether the project is residential or commercial. A materials supplier should also consider providing a notice of right to lien to any mortgagee on the project to maintain the supplier’s lien priority over any mortgage or trust deep on the property. See ORS 87.025(3).
Normally, this would require a materials supplier to obtain a title report to identify any mortgagees, which is an additional expense. However, if the materials costs will be significant and the supplier has any worries about project financing and/or the solvency of parties up the contracting chain, it might be worth spending a couple hundred dollars for the report to make sure you have priority.
As the above suggests, instead of trying to track every instance of when a notice of right to lien is or is not required, it is a much easier and safer practice to just send pre-lien notices out as a matter of course. Many lien services have online forms that contractors can fill out to make sending the pre-lien notice relatively simple. For example, check out the RoHillCo Notice of Right to Lien at www.rohillco.com/forms/right-to-lien.php (last visited Feb. 11, 2024).
Given the potential forfeiture of lien rights should a contractor fail to provide the required notice, erring on the side of over-notification is advisable. Indeed, no one has ever had a lien invalidated because of providing too much notice. Sending a notice of right to lien is a relatively low-cost, low-effort way to increase the chances of getting paid the money you are owed. Put simply, just send the notice.
Tags: Construction and Development, Homebuilding
