Reliance on the traditional mechanic’s lien to recover nonpayment can be a frustrating experience for a contractor lien claimant. Often, recording and enforcing a traditional mechanic’s lien turns into an expensive and time consuming process. This frustration can be especially felt with relatively small claims because the cost of recording and enforcing a lien could be in excess of the claimed amount.
Washington’s Stop Notice presents an aggressive alternative to the traditional mechanic’s lien.
The Stop Notice procedure, set forth in Section 60.04.221 of the Revised Code of Washington, gives a claimant the power to interrupt a project’s construction funding by requiring the construction lender to withhold amounts that are due to the contractor, but have not been promptly paid in accordance with payment terms.
Before filing a Stop Notice, however, the claimant should be certain that it has filed all necessary pre-lien notices. Depending on the role that the contractor plays in a project, the pre-lien notice could be a Notice to Owner, Notice to Customer, or Notice of Furnishing Professional Services.
The next step is to provide a written Stop Notice to the lender. A Stop Notice may not be provided sooner than 5 days after the payment due date, but it must be provided within 35 days of the payment due date. A Stop Notice must contain the name of the lien claimant and general contractor, a description of the property, and a brief statement that the claimant has performed work and is entitled to payment.
The lender, upon receiving a Stop Notice, is required to withhold the claimed amount from future disbursements. In the event that the lender chooses not to withhold the claimed amount, the Stop Notice automatically takes priority over the lender’s prior mortgage interest. This creates significant leverage for the contractor claimant because a traditional mechanic’s lien is routinely subordinate to a lender’s mortgage interest. As an added bonus in this situation, the claimant will also be entitled to recovery of reasonable attorney’s fees upon final judgment.
Despite the obvious benefits of a Stop Notice, a potential claimant should also be mindful of potential negative impacts to the project. For instance, a Stop Notice could actually slow progress of construction. Depending on the size of the claim, the lender’s decision to withhold claimed amounts might burden finite construction funds, thereby preventing payment to other trades and eventually slowing the overall progress of construction. In addition, the presence of one Stop Notice may encourage other Stop Notices, thereby increasing the burden on finite construction funds. Finally, even if a lender withholds the claimed amount, the parties might not agree to its release, and the issue might not be resolved until the conclusion of a foreclosure action.
Despite the potential drawbacks, a contractor, when faced with delinquent progress payments, must take prompt action to protect payment rights. In such cases, Washington’s Stop Notice provides the contractor with an effective hammer to gain leverage when progress payments are due.
Editor’s Note: The original version of this article was published in the January 2009 edition of Associated General Contractors of Washington publication, Cornerstone.