Mechanics liens (on private projects), and bond claims (on public projects) are far and away the most commonly used and widespread avenues for securing extensions of credit in the construction industry and facilitating payment. There is, however, a third approach; which is only available in a handful of states – the Stop Notice.
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What is a stop notice?
A stop notice is a notice 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. This remedy is only available in a few states.
Does it work? It may, and it is certainly better than nothing since it creates a legal obligation if the required steps are complied with. But note, however, that it does not encumber the property itself, and is only effective as to the unpaid funds – and will not require a double payment.
Video: What is a stop notice?
Stop notices have limited availability
Unlike mechanics liens and bond claims, which are available in every state – and regarding which every state has enacted specific law – stop notices are not widely available. In fact, a potential claimant should be very cautious of sending stop notices since the overwhelming majority of states have no stop notice law. If a stop notice is sent in a state without specific law regarding the sending and effectiveness of stop notices, it has no effect.
Not only can it be a waste of time (and money) to send documents that have no effect, mistaken reliance on these documents could jeopardize the potential lien claimant’s mechanics lien rights. Sending an ineffective stop notice does nothing to extend mechanics lien or notice deadlines, and the mistaken belief that the stop notice is providing protection may cause a potential claimant to disregard these deadlines – and lose lien rights as a result.
Stop notices are generally effective in California, Alaska, Arizona, and Washington. 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 against 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).
Stop notices are effective to the same extent as an “unpaid balance” lien
Stop notices, where available, are generally effective only against the money that has not yet been paid on the project. We’ve spent some time previously noting the difference between “full price” lien states and “unpaid balance” lien states. Stop notices work in a similar manner to the unpaid balance lien. That is, a stop notice cannot necessitate “double payment” from the owner, it only “Stops” funds from being paid, it does not require additional payment.
If the owner has already paid, a stop notice will have no effect. 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.
Apply to funds only – They do not encumber the property
Stop notices are similar to bond claims in that they do not encumber the property being improved. Because stop notices are only effective to funds as yet unpaid, it does not provide security in the property like a mechanics lien, 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.
Stop notices are not recorded
As mentioned above, stop notices are not filed in the property records, or anywhere else, for that matter. Stop notices are sent to the parties on the project, by the manner outlined by the state-specific law. The method of sending varies between states, but each state’s rules must be strictly complied with. If they are not, the stop notice may be invalid.
Since there is no actual filing, it is important for the party that’s providing the stop notice to maintain proper records of sending the stop notice, and of receipt by the parties to whom it was sent, if possible. If the claim goes to court, it will be up to the party giving the notice to prove that the notice was properly provided to the required parties. Unfortunately, since it is usually delivered by some sort of mail, it may be easy for the party receiving the stop notice to unintentionally (or intentionally) overlook it.
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 or payment bond claim.