June 13, 2008

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An Arizona Lender's Guide to Mechanics' Liens and Stop Notices

Michael P. Ripp ©
Ryley Carlock & Applewhite


In the current turbulent Arizona real estate environment, construction lenders often encounter, and must grapple with how to address, potentially disruptive mechanics' liens and stop notices.  This Guide describes mechanics' liens (which constitute liens against a construction project) and stop notices (which request "holds" against unexpended construction funds) from the construction lender's perspective, beginning with who is permitted to claim a mechanic's lien or serve a stop notice, through and including a construction lender's strategies for addressing a mechanic's lien or stop notice that might otherwise disrupt a project or the flow of construction funds into the project.  The reader should bear in mind that this Guide addresses only Arizona law, and that every state's laws differ.  This Guide does not address public projects, which are covered by the so-called "Miller Act" and "Littler Miller Act" bonding requirements.

A.     Mechanics' Liens

Who can claim a mechanic's lien?  Any person who provides labor, professional services, materials, machinery, fixtures or tools in the construction, alteration or repair of a building, structure or improvement is entitled to claim a mechanic's lien if those items were provided at the instance of the owner or the owner's agent.[1]  A person whose work requires him to be licensed as a contractor, but who does not hold a valid contractor's license, cannot claim a mechanic's lien.[2]  Lower-tier labor and material suppliers may file liens only if the person requesting labor or materials from them was the owner's "agent" for mechanics' lien purposes.  In addition, subcontractors and properly licensed architects, engineers and land surveyors are entitled to file liens for professional services.[3]  An assignee of a construction contract or account for material furnished or labor performed may also enforce its assignor's mechanic's lien.

Amount and priority of mechanics' liens.  A party in privity (a direct contractual relationship) with the owner (such as the prime or general contractor) is entitled to claim a lien for the contract amount, while a party not in privity with the owner (such as a subcontractor or materialman) is entitled to claim a lien for only the reasonable value of the work or materials provided.  Mechanics' liens have priority over all other liens, mortgages or encumbrances attaching after work commences on the property or materials are first furnished to the property, except for a mortgage or deed of trust that is given as security for a construction loan and that is recorded before, or within ten days after, work commences or materials are first furnished to the property.  All mechanics' lien claimants performing work under a construction contract are generally on an equal footing, regardless of when they perform their work or record their liens, and subcontractors' liens relate back to the time when the general contractor began work.[4]  However, if the subcontractor contracts directly with the owner (rather than with the general contractor), then the subcontractor's lien dates from the time the subcontractor (rather than the general contractor) first furnished labor or materials to the project.

Scope of mechanics' liens.  Only the interest of the party who caused the work to be done or materials to be furnished can be sold to satisfy a mechanic's lien.  Arizona case law suggests that the provisions of the lease are important in determining whether one is entitled to enforce a mechanic's lien against a landlord's interest in property for construction work done by a tenant.  For example, where a lease allowed the tenant to improve realty, but only to the extent such work did not create a lien against the interest of the landlord, a materialman's lien was not permitted to reach the landlord's interest in the property.  However, where the lease required the tenant to construct a building on leased property within a certain time period and provided that a failure to construct the building was a breach of the lease, the court permitted mechanics' liens to reach the landlord's interest.  Blanket liens filed against numerous lots may, in appropriate circumstances, be treated as a series of liens against the individual benefited lots.

Owner-occupied dwellings.  A special rule applies in the case of properties that are or will become owner-occupied dwellings.  Only a person contracting in writing directly with the owner-occupant may claim a mechanic's lien against the dwelling of a person who became an owner-occupant prior to the construction in question.  For the purpose of that limitation: (a) "dwelling" means real property upon which there has been or is to be constructed a building or improvement designed for either single one-family or single two-family residential purposes or related activities, including a condominium; and (b) "owner-occupant" means a natural person who (i) prior to commencement of construction, holds legal or equitable title to the dwelling by a deed or recorded contract for conveyance, and (ii) resides or intends to reside in the dwelling at least 30 days during the 12-month period immediately following completion of the construction and does not intend to sell or lease the dwelling to others.  Residence or intent to reside may be established by occupancy by the person or members of his or her family.  The owner-occupant cannot waive the benefit of this statute.  The contractor must hold as a trust fund for the benefit of its labor and material suppliers and professional service providers any monies paid by or for an owner-occupant to the contractor.

Preliminary 20-day notices.  Arizona law generally requires the giving of a preliminary 20-day notice as a prerequisite to filing a mechanic's lien.[5]

Deadlines for filing and foreclosing mechanics' liens.  A notice and claim of lien[6] must be recorded with the County Recorder of the county in which the property is located within 120 days after the completion of the improvement, alteration or repair.[7]  The owner or its agent may elect to shorten the 120-day period to 60 days by recording a statutory notice of completion and sending it (by certified or registered mail) within 15 days thereafter to the original contractor and all persons from whom the owner has received preliminary 20-day notices.  A mechanic's lien continues for only six months after the notice and claim of lien is recorded, unless the claimant sues to foreclose its lien within that six-month period and records within five days after filing suit a notice of lis pendens with the County Recorder in the county where the property is located.[8]

Contractor obligations.  The owner may withhold from payments to its contractor the amount of any mechanics' liens filed against the owner.[9]  The contractor must defend any actions brought by others on liens filed against the owner and must reimburse the owner for any amounts lien claimants collect from the owner on the liens, if the owner has already paid the contractor the amounts claimed to be due. 

Lien releases and waivers.  A mechanic's lien claimant must release its lien by recordable document within 20 days after satisfaction.[10]  The Arizona statutes set forth statutory lien waiver forms (conditional, unconditional, progress payment and final payment).  A lien waiver is effective only if it "follows substantially" one of the statutory lien waiver forms and is signed by the claimant or its authorized agent (and, in the case of a conditional lien waiver, there is evidence of payment to the claimant, such as the claimant's endorsement on a single or joint payee check that has been paid by the drawee bank or the claimant's written acknowledgment of payment).[11]

Payment bonds.   An owner may avoid mechanics' liens against the project by persons with whom it does not contract by requiring the contractor to furnish a labor and material payment bond.  After the payment bond (in an amount equal to the full contract amount) and a copy of the construction contract containing a legal description of the land upon which the work is being or will be performed are recorded, third party mechanics' liens will attach to the bond instead of the project.[12]

Discharge bonds.  If the owner has not obtained a payment bond prior to the recording of a mechanic's lien against the project, the owner or other interested party may record a discharge bond in favor of the lien claimant (in an amount equal to 150% of the amount of the lien), whereupon the lien will be discharged from the project.[13]

Construction lender strategies for dealing with mechanics' lien risks.  A construction lender should consider the following strategies for dealing with mechanics' liens:

1.   If the project will bear the cost, consider requiring a payment bond to protect the project from mechanics' liens from subcontractors and labor and material suppliers.

2.   Consider requiring the borrower to record and mail a notice of completion to interested parties upon the completion of the project to shorten the mechanics' lien filing period from 120 days to 60 days.  The owner may attempt to persuade you to "let sleeping dogs lie", but this measure would enable you to get past the lien filing period as quickly as possible.

3.   Determine whether all major improvements or other components of the project are covered by the same construction contract, so that you know whether only one or several lien filing periods are running with respect to the project.

4.   Bear in mind that your receipt of actual notice of the recordation of a notice and claim of a lien will break your lien priority with respect to any future loan advances that you are not obligated to make (the discovery of a mechanic's lien is typically characterized as an event of default that will relieve the lender of any obligation to make further advances).  Therefore, even if you have elected for competitive reasons not to obtain bring‑down endorsements with respect to all post‑closing construction advances, you would be well advised to do so after mechanics' liens start hitting the project.

5.   Title companies issuing ALTA lenders' title insurance policies often insure over mechanics' liens on the strength of an indemnity from the borrower if the borrower started construction more than ten days before the loan closing.  If this is the case with your loan, bear in mind that you will be relying purely on your title insurance coverage (and the strength of your underwriter) to resolve mechanics' lien priority issues, as you will not have legal priority, and you must bring your title insurer into the picture as soon as possible and allow it to direct and control the resolution of disputes with lien claimants.

6.   If you do have legal priority over a mechanic's lien claimant (i.e., your deed of trust was recorded before or, within ten days after, work started), you should request that the claimant dismiss you as a defendant in any foreclosure action it brings based on the mechanic's lien, as the claimant's successful foreclosure against the project should not affect your prior lien.  If you are served with a foreclosure complaint (which typically alleges that the mechanic's lien has priority over all competing liens) and simply choose not to respond, you will have judgment taken against you by default and your interest in the property will be foreclosed out.

7.   Be mindful that you may have insufficient information on the subcontractors and labor and material suppliers to the project to know whether a notice and claim of lien is legitimate.  Therefore, provide to the owner and general contractor a copy of any notice and claim of lien you may receive so that they can obtain a discharge bond or negotiate with the claimant, if appropriate.

8.   Remember that obtaining a statutory lien waiver will not, in and of itself, release a related recorded notice and claim of lien or a lis pendens; one or more separate recordable releases must also be obtained.

9.   Although the owner will ideally take the lead in determining whether claims asserted by the contractor or labor and material suppliers are valid and accurate, bear in mind that, if the owner is not responding (perhaps the project is seriously upside down), you may need to take the lead or assist your title insurer in examining mechanics' lien claims by, for example, confirming whether the claimant was properly licensed, provided the proper preliminary 20‑day notices (and supplemented them if the total claim exceeds 120% of the previously noticed price), recorded its notice and claim of lien within the lien filing period, commenced its foreclosure within the six‑month period following recordation, recorded a lis pendens, etc.

B.     Stop Notices

General.  Since 1998, the Arizona statutes have included a stop notice remedy similar to the one adopted in California a number of years ago.  A construction lender should have at least a general understanding of the stop notice provisions.  A stop notice is essentially a "hold" imposed against unexpended construction funds, and is based on the premise that the right to file and foreclose a mechanic's lien (especially a lien that is junior to the construction lender's lien) is a fairly hollow remedy.

What is a stop notice?  A stop notice is a signed and verified notice by the lien claimant or its agent stating in general terms all of the information described in the stop notice statutes.  A stop notice may be either bonded (i.e., accompanied by a surety bond in an amount equal to 125% of the amount of the claim,[14] which is available to pay damages sustained by the owner, original contractor or construction lender if one of them disputes and recovers judgment against the claimant in an action based upon the stop notice claim)[15] or unbonded.  A construction lender should consider a stop notice to be valid, regardless of a possible defect in form, if it is sufficient to substantially inform the owner of the information required in the stop notice statutes.

Who can serve a stop notice?  Any person entitled to record a mechanic's lien may give the construction lender a stop notice at any time the person is owed money.[16]  The stop notice remedy may be pursued concurrently with, or separately from, the filing and foreclosure of a mechanic's lien.  Service is effective only if the stop notice claimant has timely given a preliminary 20-day notice and has served the stop notice before the expiration of the mechanics' lien filing period.[17]  However, a stop notice claimant need not actually record a notice and claim of lien to assert stop notice rights, and a construction lender's lien priority over a claimant's lien does not defeat a stop notice.  The stop notice may be served by either personal service or certified mail.  If a construction lender maintains branch offices, the stop notice must be given to or served on the manager or other responsible officer or person at the office or branch that administers or holds the construction funds.  Any person entitled to give a stop notice who fails to serve a stop notice within 30 days after a written demand from the owner or construction lender forfeits the right to give any stop notice on the work described in the demand. 

Do I need to honor the stop notice?  A construction lender[18] that receives a stop notice must first determine whether a payment bond has been recorded with respect to the construction contract that includes the relevant improvements.  If no payment bond has been recorded, the construction lender may honor an unbonded stop notice, but must honor a bonded stop notice, by withholding from the owner or other person to whom it or the owner may be obligated to make payments or advances out of the "construction fund" sufficient funds to pay the stop notice claim and any related recorded mechanic's lien.  If a payment bond has previously been recorded, the construction lender must withhold funds pursuant to a bonded stop notice from the original contractor, and may, at its option, withhold funds pursuant to a stop notice (either bonded or unbonded) given by a person other than the original contractor.  Therefore, the construction lender may elect not to withhold pursuant to a bonded stop notice from a party other than the original contractor if a payment bond has been duly recorded.[19]

Release bond.  If an owner, construction lender, original contractor or subcontractor disputes a stop notice, it may file with the person on whom the notice was served a release bond (in an amount equal to 125% of the amount[20] claimed in the notice), and serve a copy of the release bond on the stop notice claimant, whereupon the funds withheld in response to the stop notice must be promptly released.[21]

How much do I need to withhold?  If funds withheld or required to be withheld in response to a stop notice are insufficient to pay in full the valid claims of all stop notice claimants and related recorded mechanics' liens, the funds withheld are to be distributed among all claimants in the same ratio that their claims bear to the aggregate of all valid claims, regardless of the order in which their stop notices were given or their actions (if any) were filed.[22]  A bonded stop notice cannot require the construction lender to withhold more than the net amount due for labor, services, materials, machinery, fixtures or tools.[23]  Any person who willfully gives a false stop notice (whether bonded or unbonded) forfeits all right to participate in the pro rata distribution of monies, forfeits its right to a mechanic's lien and is subject to penalties under Arizona's groundless document statute.

Enforcement of payment.  The claimant may commence an action in court against the owner or construction lender to enforce payment of a stop notice claim at any time after ten days from the date of service of the stop notice on either the owner or construction lender, and must commence any such action not later than three months after expiration of the mechanics' lien filing period, unless all required parties to the claim stipulate to extend the time for bringing such an action by up to an additional three months (for a total of six months).[24]  The construction lender or other party withholding construction funds pursuant to the stop notice is not required to withhold the funds for longer than the three-month period, unless the claimant commences an action within that time period.  If the claimant does not commence an action within that time period, the stop notice ceases to be effective and the funds are to be released to the contractor or other person to whom they are due.  The prevailing party in an action under a bonded stop notice is to be awarded its reasonable attorneys' fees from "the party held liable by the court for the payment of the claim" and, if the claimant is the prevailing party, any amount awarded on the claim is to include interest at the 10% legal rate computed from the date the bonded stop notice was served on the owner or construction lender.

Assignments and allocations of loan funds.  The owner or contractor cannot defeat a stop notice by assigning or allocating construction funds, even if the assignment or allocation is made before the stop notice is given to the construction lender.  However, the construction lender may allocate or disburse from construction funds loan fees, interest or "other charges to the construction lender" without running afoul of the anti-assignment provision and without subjecting those amounts to any stop notice that may be given to the construction lender.  The anti-assignment provision is one of many potentially key provisions of Arizona's stop notice statute that have not yet been tested in litigation (given that the local economy has done fairly well since the adoption of the stop notice statute ten years ago).  It is unclear, for example, whether a stop notice claimant would be able to compel the withholding and ultimate payment of costs such as (a) line item costs in excess of budgeted line item amounts, (b) line item costs (such as tenant improvements, leasing commissions, architect's fees, taxes, etc.) that were never intended for the benefit of the claimant, (c) construction costs that were to have been paid from borrower equity instead of loan advances, or (d) amounts to which the lender terminated availability due to an existing loan default.

Construction lender strategies for dealing with stop notices.  A stop notice essentially shifts from the owner to the construction lender the burden of making sure that subcontractors and labor and material suppliers are paid for work they perform, and offers an attractive remedy for such parties when the owner has little or no equity in the project or when foreclosure of a mechanic's lien against a project would otherwise offer little expected benefit (a subcontractor or tradesman rarely wishes to own a shopping center).  A stop notice is potentially more disruptive than a mechanic's lien in that it may have a direct impact on the construction lender's ability to continue funding construction of a project.  A construction lender should consider the following strategies for dealing with stop notices:

1.   As a payment bond will protect the construction lender from having to withhold, except in the case of a bonded stop notice from the original contractor, always consider requesting that a payment bond be recorded at the outset of the project if the project will bear the cost.

2.   Your loan documents should characterize the receipt of a stop notice that is not bonded off or otherwise resolved to your satisfaction within a relatively short time period as an event of default to give you maximum flexibility in dealing with stop notices.

3.   Determine whether all major improvements or other components of the project are covered by the same construction contract, so that you know whether only one or several lien filing periods are running with respect to the project.

4.   Don't be hasty in deciding whether to honor a stop notice.  A construction lender needs to honor only a bonded stop notice, and if a payment bond has been recorded with respect to a project, then it needs to honor only a bonded stop notice from the original (general) contractor.  In the author's experience, subcontractors and labor and material suppliers most often take the cheapest possible route (an unbonded, albeit strongly worded, stop notice inaccurately stating that the construction lender is obligated to honor it) and hope that the lender will in fact honor it (which rarely happens).  However, resist the temptation to automatically dismiss an unbonded stop notice, as any stop notice (whether bonded or unbonded) may be a sign of deeper problems with the project, and additional stop notices or recorded mechanics' liens often follow.

5.   Be mindful that you may have insufficient information on the subcontractors and labor and material suppliers to the project to know whether a stop notice received from a party other than the original contractor is legitimate.  Therefore, provide to the owner and general contractor a copy of any stop notice you may receive so that they can obtain a release or discharge bond or negotiate with the claimant, if appropriate.

6.   Although the owner will ideally take the lead in determining whether claims asserted by the contractor, subcontractors or labor and material suppliers are valid and accurate, bear in mind that, if the owner is not responding (perhaps the project is seriously upside down), you may need to take the lead in examining stop notices by, for example, confirming whether the claimant was properly licensed, provided the proper preliminary 20‑day notices (and supplemented them if the total claim exceeds 120% of the previously noticed price), served its stop notice within the lien filing period, etc.

7.   Consider making demands on potential claimants for service of stop notices.  If a contractor, subcontractor, or labor or material supplier fails to respond to a demand for service within 30 days, it forfeits its right to later serve stop notices for those amounts.  Some practitioners have suggested that such a "sweep" could be employed as a routine strategy prior to the last construction draw so that the lender knows exactly what demands remain against unexpended loan funds.

June 2008

The goal of the RC&A Arizona Lending Guides is to provide helpful substantive discussion and insights, based on the author's 25 years of experience in Arizona commercial real estate lending, loan workouts and enforcement, regarding a number of general legal issues of concern to commercial real estate lenders.  Opinions expressed in the RC&A Arizona Lending Guides are the author's and do not constitute legal advice regarding any specific matter or situation.  Legal advice can be given, and an attorney-client relationship can be formed, only on the basis of specific facts discussed between client and attorney pursuant to an engagement to perform legal services.

Michael P. Ripp
Ryley Carlock & Applewhite
602-440-4823
mripp@rcalaw.com


[1] For mechanics' lien purposes, the owner's "agents" include every contractor, subcontractor, architect, builder or other person having charge or control of the construction, alteration or repair, in whole or in part.  Absent this "statutory agency" fiction, subcontractors and materialmen would generally not be able to pursue a privity-based claim against the owner.  Whether a particular person constitutes the owner's "agent" is a frequently litigated issue.

[2] The Arizona Supreme Court has barred a contractor with only a commercial license from asserting a lien for residential remodeling work, and the Arizona Court of Appeals has barred a party with a general residential contractor's license from enforcing a mechanic's lien for masonry work done without a specialty masonry license.

[3] A person who furnishes professional services is entitled to enforce a professional services lien only if the person has an agreement (although not necessarily a written one) with the owner of the property or with an architect, engineer or contractor who has an agreement with the property owner, and only if the person holds a valid certificate of registration from the Arizona Board of Technical Registration.

[4] A notice and claim of lien for professional services attaches to the property for priority purposes when labor has commenced on the property or when materials have commenced to be furnished to the property so that it is apparent to any person inspecting the property that construction, alteration or repair of an improvement has commenced.  Liens for professional services attach at the same time, and have the same priority, as other mechanics' liens.  However, if work is never done or materials are never furnished to the property, the registered professional may record and foreclose upon a professional services lien at any time after his work has commenced if his work has added value to the property.

[5] The preliminary 20-day notice must be served on the owner or reputed owner, original contractor or reputed contractor, construction lender (if any) or reputed construction lender (if any), and the person with whom the claimant contracted for the purchase price of labor or materials, and alerts those parties to the existence of a potential lien claimant.  For the purpose of the statute, "reputed owner" means one who has, for all appearances, the title and possession of property; the claimant must make some reasonable effort to ascertain the name of the owner or reputed owner.

The notice must be given no more than 20 days after the claimant has first furnished labor, professional services, materials, machinery, fixtures or tools to the jobsite, and must contain the information, and substantially follow the form of notice, set forth in the mechanics' lien statutes.  If the 20-day notice is served after the 20-day "window" has closed, the claimant can no longer lien the project for materials or services provided more than 20 days before the 20-day notice is given.  The 20-day notice may be given by registered or certified mail, or by first class mail with a certificate of mailing; service by mail is complete when the notice is deposited in the mail.  Only one 20-day notice must be provided to each interested party, unless either (a) the actual estimated total price for the labor, materials, professional services, etc., furnished or to be furnished by the claimant exceeds by 20% or more the total price in any prior 20-day notices (in which case supplemental 20-day notices must be provided for the new total amount within 20 days of providing the excess work or materials), or (b) the labor, materials or professional services are furnished under contracts with more than one subcontractor.

Within ten days after receipt of a written request from any person or his agent intending to file a preliminary 20-day notice, or within ten days after receipt of a preliminary 20-day notice, the owner or other interested party must furnish the claimant with a written statement containing, among other things, a legal or other description of the jobsite, the names and addresses of the owner or reputed owner, original contractor or reputed contractor, and construction lender or reputed construction lender and, if a payment bond has been recorded, a copy of the bond and name and address of the surety company and bonding agent.  Failure of the interested party to furnish the foregoing information does not excuse any claimant from timely giving the preliminary 20-day notice, but it prevents the owner (and perhaps other interested persons) from raising as a defense any inaccuracy of the information in a preliminary 20-day notice, if the notice otherwise complies with the statute.  If a payment bond has been recorded and the owner or other interested party fails to furnish a copy of the bond and other information required by the statute, the claimant retains lien rights to the extent it is precluded or prejudiced from asserting a right against the bond as a direct result of not timely receiving a copy of the bond and the other information from the owner or other interested party.  If a person on whom a 20-day notice is served fails to complete and return the acknowledgment within 30 days from the date of mailing, the claimant or its agent may prepare an affidavit of mailing in accordance with the statute.

[6] The notice and claim of lien must contain (a) a legal description of the subject land and improvements, (b) the name of the owner or reputed owner of the property, if known, and the name of the person by whom the claimant was employed or to whom it furnished materials, (c) a statement of the terms, time given and conditions of the contract, if oral, or a copy of the contract, if written, (d) a statement of the amount demanded, (e) a statement of the date of completion, and (f) a statement of the date the preliminary 20-day notice was given (with a copy of the 20-day notice and proof of mailing attached).

[7] For this purpose, "completion" occurs on the earlier of (a) 30 days after final inspection and written final acceptance by the governmental body which issued the building permit for the improvement, or (b) cessation of labor for a period of 60 consecutive days, unless the cessation is due to a strike, shortage or materials or act of God.  An improvement at the site ("improvement" includes demolition or removal of improvements, trees or other vegetation, drilling of test holes, grading, filling and constructing sewer, other public utilities or streets and sidewalks) that is not provided for in a contract for the construction of an improvement is a separate work, and the liens arising from the construction of such a separate work will have a separate priority scheme from those related to the improvement described in the contract.  It is therefore important to determine which improvements are covered by the construction contract and which are not.  If a work of improvement consists of the construction for residential occupancy of more than one separate building, regardless of whether the buildings are constructed pursuant to separate contracts or a single contract, then each building is a separate work and the time within which to perfect a lien by recording a notice and claim of lien runs from the completion of each separate building; "separate building" means one structure of a work of improvement and any garages or other appurtenant buildings in a multi-building residential project or residential subdivision.  In a non-residential context, a court would presumably follow the rule that the most important factor in determining whether work on a multi-building project constitutes a single project for the purpose of the mechanics' lien statutes is whether the work was performed pursuant to a single contract between the owner and the general contractor.  The courts have held that the issuance of a certificate of occupancy for each commercial tenant suite within a shell building triggers a separate lien filing period from the shell building and other tenant suites.

[8] If a claimant fails to comply with the six-month statute of limitations, then the lien is no longer valid.  A person who knowingly files a groundless lis pendens against real property to foreclose a mechanic's lien is subject to statutory damages of $5,000 or treble the actual damages caused, plus attorneys' fees and costs.

[9] The owner must furnish the contractor with a copy of the notice and claim of lien.  The contractor has ten days following receipt to give the owner written notice that the contractor intends to dispute the claim, or the owner may consider the contractor to have assented to the demand.

[10] Failure to release subjects the claimant to liability in the amount of $1,000 plus actual damages.

[11] No oral or written statement purporting to waive, release or otherwise adversely affect a mechanic's lien claim is enforceable or creates any estoppel or impairment of the claim unless pursuant to a statutory lien waiver or the claimant had actually received payment in full for the claim.

[12] A payment bond must be executed solely by one or more surety companies (and not by an individual surety or sureties) holding a certificate of authority to transact surety business in Arizona, issued by the Director of the State Department of Insurance, and must be accompanied by a power of attorney disclosing the authority of the person executing the bond on behalf of the surety.  It is important to distinguish a payment bond, which offers subcontractors and labor and material suppliers who are not being paid by the contractor a quicker and more certain means of recovery than foreclosing against the project, from a performance bond, which protects the owner from financial loss if the contractor fails to perform under its construction contract.  The construction lender normally requires that it be named as an additional obligee under a performance bond.

[13] A discharge bond must be executed by the person seeking to discharge the lien, as principal, and by a surety company or companies authorized to transact surety business in Arizona, and must be recorded together with the power of attorney disclosing the authority of the person executing the discharge bond on behalf of the surety.  The bond must be served upon the lien claimant within a reasonable time after recording and, if a mechanic's lien foreclosure suit is then pending, the claimant must add the surety and principal as parties to the lien foreclosure action.  House Bill 2474 (referenced in footnote 14) will also allow a discharge bond to effectively serve as a stop notice release bond (see footnote 21 and accompanying text).

[14] House Bill 2474 (signed by the Governor on April 28, 2008) will increase this 125% amount to 150% when it becomes effective this fall.

[15] Bonded stop notices are served only on construction lenders.

[16] Any person entitled to claim a mechanic's lien, other than the original contractor, may also give the owner a stop notice.  The requirement that a stop notice claimant also be someone who is entitled to record a mechanic's lien exempts public projects and owner‑occupant dwellings from the stop notice remedy.

[17] Recall that the normal 120-day mechanic's lien filing period can be shortened to 60 days by recording and mailing a notice of completion.  See "Deadlines for filing and foreclosing mechanics' liens" above.

[18] "Construction lender" includes any mortgagee or deed of trust beneficiary lending funds, all or a portion of which defray the cost of construction, alteration, repair or improvement, or any assignee or successor in interest, or any escrow holder or other party holding any funds furnished or to be furnished by the owner or any other person as a source from which to pay construction costs.

[19] If, in such an instance, the stop notice claimant requests in writing that the construction lender notify it of the construction lender's election whether to honor the bonded stop notice, and provides the construction lender with a pre-addressed stamped envelope, the construction lender must furnish to the claimant a copy of the bond within 30 days after making the election.

[20] House Bill 2474 (referenced in footnote 14) will also increase this 125% amount to 150%.

[21] House Bill 2474 (referenced in footnote 14) will also allow a discharge bond (see footnote 13 and accompanying text) to effectively serve as a release bond.

[22] Given the likelihood of a misstep and the potential liability resulting therefrom, a construction lender faced with multiple claims should strongly consider interpleading the withheld funds with the court.

[23] An original contractor or subcontractor is only entitled to recover on its own stop notice (whether bonded or unbonded) the net amount due that party after deducting (a) stop notice claims of all subcontractors or material suppliers who have filed bonded stop notices for work done on behalf of the original contractor or subcontractor, and (b) the amount of any payment already received as described in the stop notice.

[24] Recall that the normal 120-day mechanic's lien filing period can be shortened to 60 days by recording and mailing a notice of completion.  See "Deadlines for filing and foreclosing mechanics' liens" above.

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