What if as a GC we didn’t know about a lender until far into the project & so the subs didn’t send Prelims to the Lender but they did to the us and the owner – what will happen to the subs if they have to lein?? Can the GC be held responsible for their losses?

Answered 2 months ago

1292 Answered Questions

Matt Viator

Legal Associate zlien

That's a great question, and unfortunately, I'm not sure there's a clear answer. Under § 8200(a)(3) of the California Civil Code, subcontractors, suppliers, and any other parties who do not have a direct contractor with the property owner must provide preliminary notice to the construction lender, if one is present. Obviously, when that subcontractor is unaware that a lender is present, it's tough to comply with that requirement. As I think you alluded to above, under § 8208, a direct contractor must make the name and address of the owner available in order for sub-tiers to be able to send notice - and the name and address of the construction lender must be given, too, if a lender is present. In theory, that requirement should help sub-tiers to send effective notice - but where neither the sub nor the GC is aware that there's a lender, the issue of sending valid notice persists. So what happens when the GC (accidentally) fails to provide lender information to the sub and the sub can't send valid notice as a result? It's hard to say. From the GC's perspective - there doesn't appear to be any set-out penalty for failure to provide preliminary notice information. So, it's unclear whether the GC could be held liable for failure to provide lender information where the GC was unaware of the information themselves. On the other hand, mechanics lien statutes are strictly construed. So, it is certainly possible that, even though the subcontractor was entitled to receive lender information, and even though the subcontractor's failure to send notice to the lender was an issue the subcontractor could not have really prevented, a subcontractor's lien rights could be negatively affected. It's worth noting that, if the lender was secured after the commencement of work, the owner is required to give the name and address of the lender or lenders to each party who gave preliminary notice to the owner under § 8210. So, if the lender wasn't present at the start of work, the owner's failure to provide lender info to the relevant parties might save a subcontractor from the effects of not sending notice. Further, it's also worth mentioning that if the lender has actual notice of the parties working on the project, potentially, the failure to send preliminary notice might be overlooked in the event that a lien claim was filed then scrutinized by the court. Finally, it's worth mentioning that in California, notice that is sent late is still effective to preserve some lien rights. When notice is sent beyond 20 days, the notice is effective to preserve lien rights for the 20 days prior to when notice was sent, as well as any work provided after. So, sending late notice is typically better than sending no notice at all. Plus, considering notice was timely sent to both the owner and the GC, notice being sent late to the surety might not even curb the ability to lien where the other notices were timely sent - though that would be up to the discretion of a court. Lastly, it may all be a moot point anyway. Construction payment disputes that result in potential (or actual) lien claims don't often reach the courtroom, so analyzing the potential effects of failure to send notice to an unknown lender might just be a thought exercise when it's all said and done. But again - there is always the chance that failure to send notice could be fatal, and it's hard to predict how a court might treat any given situation.