In Utah, Preconstruction Lien Notice Deficiencies Affect Payment Bond Claims Too

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Snell & WilmerYou’re a landowner in Utah, and fail to get a payment bond for commercial work a contractor is doing on your property, and the value of the work exceeds $50,000. To protect lien rights, contractors working on your property have to file a preliminary notice with the State Construction Registry giving you and the world at large notice that they are performing work on or providing materials to your property.

Under Section 14-2-1 of the Utah Code, before commencing any commercial contract exceeding $50,000, you are required to obtain from the general contractor a payment bond equal to the contract price. This bond, of course, is to protect the subcontractors (and owner) in the event the general contractor fails to pay the subcontractors for the materials or services provided. A subcontractor files a preliminary notice, but only late in the project near its completion. You pay the general, but the general doesn’t pay the sub, and you learn the general is now judgment proof. The subcontractor records a lien and sues you to foreclose on the lien, but it also sues under Utah’s bond statute. Both claims are for the full amount of its work, before and after the pre-lien filing.

At first blush, the lien statute will limit the lien rights to the value only of the work performed more than five days after the pre-lien filing. Section 38-1a-501(c)(ii) & 805. So, the issue is whether the owner’s exposure is only for the value of that late work. Does the owner have exposure pursuant to the bond claim? The answer is not obvious, and Utah has no case law on the issue. Section 14-2-2 presumptively makes the owner liable to the subcontractor for owner’s failure to get a bond. But owners and contractors alike need to evaluate the relationship between the payment bond and the lien notice requirement. Section 14-2-5 of the Utah Code imposes the same preliminary notice requirement for bond purposes as it does for liens. A subcontractor’s bond claim is dependent on it filing a preliminary notice pursuant to Section 38-1a-501 with the Registry.

Effectively, this probably means that a subcontractor’s bond claim is going to have the same deficiencies as the its lien claims. In both cases, the law is arguably designed to ensure the owner knows, in advance of incurring potential liability, who is working on the project. With that knowledge, the owner can also protect itself against an unscrupulous or financially weak general contractor by other means, including issuing joint checks. The best protection for the owner, of course, is to comply with the law and obtain from the general contractor a payment bond when required.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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