While mechanics liens and bond claims are the most generally recognized means by which construction companies can secure payment, there is another construction document that can be used to prompt payment in a handful of states. This document, the Stop Notice, is not widely available and only appears in the laws of a few states. Since the stop notice does not encumber the property like a mechanics lien does, and is not filed in the property records, some parties use this document to urge payment with a little less force than would accompany the filing of a mechanics lien.
What Is a Stop Notice?
A stop notice is a document given for the purpose of stopping, intercepting, or freezing funds that have not yet been paid on a construction project in an attempt to ensure payment.
Stop notices, where available, are effective only against the money that has not yet been paid on the project – similarly to an“unpaid balance” lien (click on the link to open an article with a state-by-state breakdown of ‘unpaid balance’ vs. ‘full price’ states).
This means that a stop notice cannot necessitate “double payment” from the owner in the event the owner has already made payment to the GC – it only “stops” funds from being paid but does not require additional payment.
If the owner has already paid, a stop notice is ineffective. Because of this, stop notices are most effective when sent as soon as possible, when they are most likely to be able to trap funds that have not yet been paid.
Additionally, unlike mechanics liens, stop notices do not encumber the property being improved and it is not recorded in the property records. The property remains free and clear after a stop notice has been sent, and the property owner can do anything with the property that could have been done if the stop notice had not been sent. The obligation created by the stop notice is independent of the property itself, and is only tied to the money/payment itself.
What States Have Stop Notices?
As mentioned above, only a few states specifically contemplate stop notices by statute. The following states have authorized stop notices as a means to secure payment on construction projects:
Mississippi used to be included on this list, but its stop notice provision was declared unconstitutional paving the way for a sweeping amendment to Mississippi’s mechanics lien laws.
There are some states in which portions of the “stop notice” idea seem to have made their way into the mechanics lien law, without the stop notice document as a separate entity. For example, some states’ mechanics liens are effective agains the unpaid balance remaining in the hands of the owner at the time some preliminary notice is given, and Texas has unique monthly notice requirements that function as “fund trapping notices” that, if formed and delivered correctly, authorize the owner to withhold the funds immediately on receipt (the claimant may later file a lien against the property to recover the unpaid funds).
The stop notice is a rare and unheralded document, but in certain situations, it can be an avenue worth exploring to prompt payment either as a supplement to, or instead of, a mechanics lien filing.
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