Construction Contract & Lien Basics that Will Get You Paid Faster: Part 3 - Lien and Bond Rules and Exceptions - Webinar

This 6-part blog comes from a webinar presented by SunRay Construction Solutions and Alex Barthet. Alex is a board-certified construction lawyer who serves clients in the state of Florida.  

The following points will be discussed in this series:  

Part 1: Construction contract basics

Part 2: Notice to Owner do’s and don’ts

Part 3: Lien and bond rules and exceptions

Part 4: Waiver and release best practices

Part 5: Lien law traps to avoid

Part 6: How to get paid faster

How and When Do I Make a Payment Bond Claim?

A payment bond secures a lienor’s right to payment in situations on private jobs when the job is bonded.  

a. Instead of a claim on the property, the lienor has a claim against the surety bond

Not every private job is bonded, but some are. Most public jobs are bonded, but not every public job is. So, when the bond exists, you have the right to make a claim on that payment bond. The reason for this is because it keeps the property free and clear of liens so your lien does not attach to the property, it attaches to the bond.

b. Reference to the payment bond should be made in the Notice of Commencement

How do you know if a job is bonded? Reference to that bond on private jobs should be referenced in the Notice of Commencement. On public jobs in Florida where there may not be a Notice of Commencement, a copy of the bond is still supposed to be recorded in the public record.  

Now, for all of you who use SunRay, if you want to know whether a job is bonded or not, we will do the research for you. But if you ask us, we would also be happy to send you a copy of the notice or the bond for you to verify yourself. Our team is researchers can help you find all the recorded documents applicable to your project.

Now we will discuss the steps to make a claim on a payment bond:

Step 1: Serve the Notice to Contractor within 45 days of your first work

Step one is to serve a Notice to Contractor within 45 days of your first work. Now, the Notice to Contractor is a lot like the Notice to Owner. In fact, if you use SunRay, we use what is called a combined form. It combines the Notice to Owner form and Notice to Contractor form. If you ever look at the form when we send you a copy, you will notice that it is actually titled Notice to Owner/Notice to Contractor.  

It covers both projects that you can lien as well as projects where you have a claim against the surety bond. The Notice to Contractor needs to be received by the 45th day from your first work on the project.  

Exception 1: Not needing to send a Notice to Contractor

Now there is one exception. If you have a contract with the bonded contractor, you technically do not have to send this notice.

Let us say you are doing work on either a private project that has a bond, which means that the general contractor has a surety bond, or a public project in which the general contractor has a bond. You are a plumber who has a contract with this bonded contractor. You technically do not need to serve this 45-day notice or Notice to Contractor.

But you should absolutely send one. The most successful people set up a threshold in their office, whether it is $500 or $2,000, whatever number you want internally. And you decide that for every job over that amount, you are going to send a notice, no questions asked.

The most successful people in their ability to collect past due balances, follow this strict rule. They do not try to figure out whether they need it on one job or another, they do not do that analysis. They just set a threshold and go with it.

However, if something falls through the cracks and you realize that you did not send a notice on a specific job, just know that one of the exceptions in the lien law is that when you have a direct contract with the bonded contractor, you do not need to send this first notice.

Exception 2: No evidence of a bond exists

In some situations, a bond may exist but you may not be aware of it. Consider:

• a Notice of Commencement is supposed to be recorded but it is not, or
• reference to the bond is not given in the Notice of Commencement, or
• on public projects, the bond is not recorded, or
• if the lienor is not otherwise notified in writing of the existence of the bond,

then a lienor not in privity with the contractor shall 45 days from the date the lienor is notified of the existence of the bond within which to serve the notice. Simply put, this means that the 45 days does not even start to run.

For example, you are a sub-subcontractor on a bonded public job. You need to send this 45-day notice but you do not. Something happens in your office, you switch from one administrative assistant to another, and you miss it. Fast-forward to the end of the job, you are now demobilized from a job that you started a year ago. You are owed $100,000. The subcontractor that owes you that amount has now filed for bankruptcy.

You did not send your first notice. But you do some research and realize that the job is bonded. It is a public job but it turns out that the third point in the list above did not happen. It was a public job but the contractor failed to record a copy of the bond. As such, 45 days did not even start to run on the first notice. And remember that you are done with the job. So what do you do?

You need to immediately serve a Notice to Contractor. The next day you serve the Notice of Nonpayment, and the day after that, you file a lawsuit. Fast-forwarding to the end which is about four months later, you successfully settle the case and you get your $100,000, legal fees, and interest. This happens because the contractor made a mistake and did not record a copy of the bond which exposed them or their surety to having to be liable to this claim.

So these are some exceptions that you need to be aware of. Just because you may not have lien rights or bond claim rights, know that there are a lot of exceptions in the lien law that are worth investigating, because maybe in fact you do.

Step 2: Serve the Notice of Nonpayment within 90 days of your last work

You need to serve your Notice of Nonpayment within 90 days of your last work.

a. Remember that 90 days is not 3 months

Remember that 90 days is not three months. Some months have more than 30 days and one month has fewer than 30 days. As a result, you should not be counting out your deadline as June 7, July 7, August 7 and so on. You need to count out every day starting from the day after your last day of work. You need to count every day including weekends and legal holidays.

On the 90th day, if the 90th day lands on a weekend or legal holiday, it gets rolled to the next business day. That is how you count the 90 days.

b. ‘Last work’ does not include punch list or warranty work

If you finish work and you go back let us say, as a painter and touch up, your last day of work is not the day you did the touch up, it is when you actually finished work. This is also when the 90 days start.

c. The Notice of Nonpayment must be served on the contractor and surety

Effective October 1, 2019, the Notice of Nonpayment form changed. At SunRay, we have the latest forms. But even today, there are people who file or send documents on their own and use old forms.

d. The notice must be made under oath

The notice must be made under oath.

e. The notice must include (as of the date of the Notice):

• the nature of the labor or services performed or to be performed;
• the materials furnished or to be furnished;
• the amount paid on the account;
• the amount owed;
• if known, the amount to become due;  
• sums for retainage must specify the portion of the amount claimed for retainage;
• substantially the following form:

This form is substantially different from the old form mainly because it has a lot more information and it is notarized. If you use SunRay for your Notice of Nonpayment, we use this statutory form so you will be up-to-date.

f. A claimant who serves a ‘fraudulent’ notice loses their rights under the payment bond

The reason this change was made was because in the lien law if you included information improperly in your lien, your lien was fraudulent. That did not exist for bond claims. This change now makes it such that improper or incorrect information in your Notice of Nonpayment makes it fraudulent.

g. Service of a ‘fraudulent’ notice is a complete defense to claimant's bond claim

It is a complete defense to a bond if it is determined that your Notice of Nonpayment is fraudulent. But how is it determined fraudulent? They use the same rule as the fraudulent lien rule which is if it is willfully exaggerated in the amount due, willfully includes a claim for work not performed or materials not furnished or prepared in a manner of such that the notice was done with willful or gross negligence, which results in willful exaggeration.

If these things are found by the court, then your Notice of Nonpayment is no good.

h. A minor mistake in the notice is not considered ‘fraudulent’

However, minor mistakes do not by themselves make a Notice of Nonpayment fraudulent. This is called a ‘good faith dispute.’

i. This section now matches the fraudulent lien statute

All the cases dealing with what a fraudulent is, can be used to determine what a fraudulent Notice of Nonpayment is.

j. Notices that do not have required information, are not notarized and do not track the statutory form are likely ineffective

Aside from being fraudulent, notices that do not contain the required information, are not notarized or do not track the statutory form ‘substantially’ are likely ineffective. Even today, years after the statutory change, people are using the wrong form.

Step 3: File suit on the bond within one year of your last work

The last step is to file a suit on the bond within one year of your last work.

How and When Do I Record a Lien?

Now we will talk about how to lien. Those who can lien include:

• Laborers – John Smith the Carpenter
• Architects, engineers, and land surveyors
• Contractors – anyone who has a direct contract with the owner
• Subcontractors
• Sub-subcontractors
• Material suppliers/rental companies to owners, contractors, subcontractors, and sub-subcontractors.
  

Those who cannot lien include:

• Material suppliers to material suppliers
• Sub-sub-subcontractors

Step 1: Within 45 days of your first work, you must serve your Notice to Owner

Within 45 days of your first work, you need to serve your Notice to Owner form. Remember of course, that 45 days is the time in which it needs to be received by the owner, not when you send it.

Does not apply to those in privity with the owner

You do not need to send a Notice to Owner if you have a direct contract with the owner. But as we mentioned before, we advise that you decide a threshold internally and you just send notices if your contract exceeds or will exceed that threshold.

Step 2: Within 90 days of your last work, you must record your lien

No later than 90 days from your last work you need to record a Claim of Lien in the public record where the project is located.

a. Remember, 90 days is not three months

Remember that 90 days is not three months. You need to count every day including weekends and legal holidays in between your last day of work and the 90th day. And you only get extra time if the 90th day itself falls on a weekend or legal holiday, at which it rolls to the next business day.

b. ‘Last work’ does not include punch list or warranty work

Last work does not include punch list or warranty work.

Step 3: Within 15 days of recording the lien, you must serve it on all interested parties

Within 15 days of recording the lien, you must serve a copy on all interested parties. Again, when you use SunRay, we do this for you when we prepare the lien, record it, and serve a copy on everyone that is listed in the Notice of Commencement.

Step 4: Those in privity with the owner, must provide a Contractor’s Final Affidavit

If you have a direct contract with the owner, then you need to serve an additional document called a Contractor's Final Affidavit. That has to be done no later than 5 days before you file a lawsuit to foreclosure on your lien, which is the next step we are going to talk about.

What you should do when you prepare a lien, is to prepare the Contractor’s Final Affidavit at the same time as the lien when you know that you happen to have a contract directly with the owner. So you should do them at the same time.

The Contractor’s Final Affidavit does not have to be recorded, it just needs to be served upon the owner.

Step 5: Within 1 year of recording the lien, you must file suit to foreclose on the lien

No later than one year from the recording date of the Claim of Lien you need to file suit to foreclose on the lien. Foreclosure on the lien is a legal process in which you file a civil action in court. In that court action, you ask the court to sell the property so that any equity in the property can be used to pay you, the person who is filing the lien, and it will satisfy the lien. If there is enough equity, you should be paid.

It is still a court process so it is still subject to all the issues and delays that most court proceedings have. It is not that it happens quickly though, it will still take many months.

What Happens After I Lien or Make a Bond Claim? How Do I Get Paid?

So what happens after you record a lien or make a bond claim, and how do you get paid? People perceive incorrectly that after you record a lien, magically things happen and the legal system will get to work for you so that you get paid. But the reality is far from it.

a. Once you secure your rights, continue your collection efforts

A bond claim and lien are just the beginning of the process that you have to undertake yourself. No one is going to do it for you, and it may take a while to get to the end. It is strongly suggested that you secure your lien rights and bond right early. Do not wait until the last minute to do it.

b. Call and email to get paid

At the same time that you are doing that, you should be making phone calls and sending emails to get paid. The most successful people at getting paid and being the best at collections do a lot of leg work on their own, bordering on harassment to get paid.

c. Accept partial payments

You should be willing to accept partial payments. If someone owes you $50,000 and they offer you $20,000, take it. It is always easier to fight over $30,000 than $50,000. You should always be willing to accept partial payments as long as you are not giving a release beyond the amount of money you are getting. So, you do not want to take a $20,000 check on a $50,000 debt and sign a release that gives away all of your rights. You need to approach it very carefully.

d. Once you stop making progress, consider hiring a construction lawyer

Once you stop making progress in your collection efforts, that is when you need to consider hiring a collection attorney to take it to the next step, to take it beyond what you can do, and start using the legal system to exert additional leverage.

These are the steps that typically happen at that point:

Step 1: Usually a demand letter on law firm letterhead

Step one is usually a demand letter. It is usually less about what the letter says and more of the fact that you are conveying to the other side that you have hired and lawyer and that you are going to pursue the claim through the legal system. Many times, the letter by itself gets you paid. So, it is a great way to start the process of collecting your debt if you have been unsuccessful thus far on your own.

Step 2: Lawsuit based on your contract and/or lien/bond

If the demand letter does not work, the next step is a lawsuit. The lawsuit can be based on several legal theories. Maybe you have a contract, credit application, or purchase order. Maybe in addition to that, you have lien rights or a payment bond claim. The lawsuit is going to be brought against all the people that can be named in the case, asserting all of those legal theories.

Sometimes, you may think you have a good relationship with your customer, think of leaving them out of it, and just pursue the bond or lien claim. That is perfectly acceptable. There is no obligation to pursue all of your rights; you can choose to pursue some of them and leave others alone.

a. Once papers are filed in court, they are served upon defendants

Your lawyer will now prepare paperwork, file it with the clerk, pay the filing fee (which is typically several hundred dollars,) hire a process server or sheriff to serve the paperwork to the other side, and then they as defendants, have 20 days to respond to the complaint.

b. Defendants have 20 days to respond, but can delay the process without much penalty

This response can be many different things. It may be to ask for more time, to talk to their lawyer, or that your complaint was not valid, and that they are going to move to dismiss. Or they can answer the complaint and say that they deny it because your product was no good, your work was late or that they had to supplement your forces. None of these may be true but they can allege it and that is when the argument in court continues.

c. If they do not respond, a default will be entered against them

The other thing that could happen is that they may not respond at all. If they fail to respond within the time allotted, which is 20 days, you automatically win, and they automatically lose. This is what is called a ‘default.’ This means that any remedy you want that you are willing to attest to in an affidavit, the court is going to give you.

So if you say you are owed $50,000 and they do not respond, you will get a judgment against the other side for $50,000. The same is true for a foreclosure. If you foreclose on a piece of property and the owner does not respond, you will move through with the foreclosure, actually have a public sale, and sell the property.

d. It is up to you to collect on your judgment

Just know that if you get a judgment, it is up to you to collect. So, if you get a money judgment against the debtor, it is up to you to seize their assets and garnish their accounts. This is not a difficult process but sometimes it is expensive. The sheriff charges a fee, let us say you find that the other side has equipment, inventory or vehicles. To get the sheriff to show up, you have to pay them a fee.  

You have to publish it in a publication of general circulation in advance of executing on your judgment to have the sale, anything you pick up you do not just get to keep, it has to go to a bonded warehouse for public auction, you have to pay for the warehouse and for the towing company. You also have to pay for the auctioneer to sell it. So typically, this only makes sense when there is enough equity in whatever you are taking to make it worth the expense associated with doing all this work.

That being said, many times the threat alone of taking someone’s stuff is enough to get them to pay. There are stories of people attempting to collect debts where they show up with box trucks in front of a company’s office or warehouse with the sheriff standing there, and miraculously the other side is able to come up with some money to avoid having these people in go in and effectively take all their stuff.

So, you do not actually need to go through with it, you just need to make the other side believe that you are about to through with it.

e. If they do respond, their lawyer can assert defenses

If they do respond, either they or their lawyer (if they are a company they have to respond with their lawyer), they can assert whatever defenses they want. They can even file a counterclaim against you.

f. Legal and factual issues will be developed slowly over time until the actual trial

Most cases settle, but usually to go to trial takes anywhere from 6 to 18 months, longer now because of the pandemic, from the time that they were filed. In that time period lots of things happen. Parties exchange documents, they ask each other written questions that have to be answered, they take depositions, and they may hire experts.

g. This can be very expensive

Just remember that this process can be very expensive.

h. Many times it is the legal system that forces issues toward resolution

Many times it is the pressure that is brought to bear by the legal system that forces the other side to deal with it and spend money that causes the case to settle. So while you may be hesitant to incur the cost, just know that many times if you do nothing, the other side will not do anything. You have to force them to come to the table to negotiate with you, if you tried everything and nothing works.