Many general contractors believe that they never have to file a 20-Day Preliminary Notice, but this isn’t necessarily true. If a general contractor understands that the purpose of the 20-Day Preliminary Notice , then many unfortunate situations can be avoided. The purpose of the 20- Day Preliminary Notice is to alert owners and lenders to the fact that the property or funds involved might be subject to claims arising from contracts to which they were not parties and would otherwise have no knowledge.
The Two Instances When A General Contractor Must File Preliminary Notices
Under California Civil Code section 8200(e)(2), “[a] claimant with a direct contractual relationship with an owner or reputed owner is required to give preliminary notice only to the construction lender or reputed construction lender, if any.” The negative in this statement explains the two scenarios when a general contractor needs to file a 20-Day Preliminary Notice.
The first instance is when the general contractor is not directly working for the owner. For instance, if the general contractor is doing work for a tenant, then they would need to provide the owner of the property with a 20-Day Preliminary Notice. The second instance when a general contractor must file a 20-Day Preliminary Notice is when there is a construction lender for the Project. A “construction lender” is defined in Civil Code section 8006 as a third party that (1) has either (1) agreed to loan money to the owner to pay for all or part of the construction or (2) is holding funds in escrow to be used to pay for all or part of the construction.
What If The Construction Loan Is Obtained After The General Contractor Started Work?
Generally, a general contractor is not required to serve a 20-Day Preliminary Notice on the construction lender if the general contractor started work before the construction lender recorded a Deed of Trust on the Property. Kodiak Industries, Inc. v. Ellis (1986) 185 Cal.App.3d 75, 83-85; see also See Brewer Corp. v. Point Center Financial, Inc. (2014) 223 Cal.App.4th 831, 851-854.
Yet, if “construction loans” are obtained after a general contractor begins work, then the owner must give notice of the name and address of the construction lender to each person that had given the owner a preliminary notice. California Civil Code § 8210. Although there is no case or statute requiring it (yet), it is smart to send a 20-Day Preliminary Notice to the construction lender after receiving the Section 8210 notice from the Owner.
Making The Case That A General Contractor Should Always File A 20-Day Preliminary Notice
First, it is a good habit to get into for every project. During the preparation of the 20-Day Preliminary Notice, the general contractor may determine that the party they are contracting with is not the owner of the property or may learn that a construction loan had been obtained for the project. Second, considering the consequences of failing to file a 20-Day Preliminary Notice with the owner or lender (i.e. loss of mechanics lien rights), the short amount of time it takes to prepare the 20-Day Preliminary Notice is well worth the effort.