When payment disputes arise, it is best to know all your options for recovering payment from a delinquent client. Other than filing a mechanics lien, serving a stop notice on certain project stakeholders is a method that can get you paid.
Arizona is one of the states in which construction participants have the legal right to serve a stop notice. This guide details the process for serving a valid stop notice in Arizona.
What is a stop notice?
A stop notice is a document that is served on the property owner and/or the construction lender to get them to freeze or withhold the remaining construction funds of a project. This is done, so payment is not released to a hiring party until the claimant of the stop notice gets paid.
Say, for instance, you are a subcontractor, and the general contractor has not been paying you your due compensation. You may serve a stop notice on both the property owner and the construction lender to let them know about your payment claim, and the stop notice will legally require them to withhold any unpaid balance to the general contractor.
However, note that a stop notice is only legally effective in four states, namely Arizona, Alaska, California, and Washington. Outside these states, serving a stop notice is not legally binding and will not necessarily cause the lender or the owner to stop disbursing payments.
Also note that a stop notice only applies to unexpended or unreleased amounts. This means that a construction lender or a property owner may only withhold whatever amount that they have not disbursed yet. If all payment has been made and there is no remaining balance, a stop notice is practically ineffective.
What is a bonded stop notice?
A bonded stop notice is a stop notice that comes with a payment bond. The claimant of the notice secures the payment bond, and it must be for a value that is at least 150% of the amount being claimed in the stop notice.
A construction lender, property owner, or general contractor may look to the bond in case the court sides with them in a mechanics lien or stop notice dispute. A bonded stop notice allows higher-tier parties to recover attorney fees and other damages if they get their payment in an enforcement action.
Note that as per A.R.S § 33-1058, a construction lender may choose not to withhold funding upon receipt of a stop notice unless the notice is accompanied by a payment bond, in which case the lender is mandated to freeze payment.
Who can serve a stop notice in Arizona?
Potential mechanics lien claimants in Arizona are also entitled to serve and enforce a stop notice. These parties include general contractors, subcontractors, and material suppliers. However, parties who work on owner-occupied projects are exempted from having stop notice rights.
Just like with a mechanics lien, a stop notice claimant will only be allowed to exercise their stop notice rights if they have served an Arizona 20-day preliminary notice. This preliminary notice is the same notice that one serves when one seeks to preserve their lien rights.
Also note that general or direct contractors may only serve a stop notice on the construction lender. All other parties may serve a stop notice on both the property owner and the construction lender.
How can an Arizona stop notice get you paid?
A stop notice forces a higher-tier party to withhold payment from the party who hired you for a project. By intercepting the funding flow, you are able to put pressure on your client to pay up.
On top of this, you may also enforce a stop notice in court and potentially recover your payment directly from the withheld amount. If you successfully enforce your stop notice, the funding that was withheld will be granted to you, together with the associated attorney costs for pursuing the court action.
When do you serve an Arizona stop notice?
An Arizona stop notice is valid only when served before the deadline for filing an Arizona mechanics lien expires. The deadline for filing an Arizona mechanics lien is on the 120th day after project completion, or within 60 days from the date the Notice of Completion was filed.
Note that a property owner or a construction lender may also ask a construction participant to serve them with a stop notice. If you receive a written demand from an owner or a lender, you must serve them with a stop notice within 30 days of receiving the request. If you fail to do so, your stop notice rights will be extinguished.
How to serve an Arizona stop notice
1. Prepare your Arizona stop notice form
The Arizona stop notice form should include the following:
- Your name, address, and signature
- The name, address, and contact details of the party who hired you
- A description of the services that you provided or will be providing to the project
- The contract amount
- The amount of the payments made so far
- The valued amount of the services that have been provided so far
Be careful in describing and valuing the worth of the services you have so far furnished to a project. Per A.R.S. § 33-1061, you may not willfully include in your stop notice any labor or services not furnished to the property. Doing so may forfeit your right to payment and your right to lien and may also subject you to penalties.
On the other hand, minor errors on your Arizona stop notice form will not invalidate your claim as long as it has all the sufficient information listed above.
2. Serve your Arizona stop notice on the intended recipient
Serving the Arizona stop notice may be done via personal delivery or certified mail. If serving in person, be sure to hand the stop notice to a manager or responsible officer in the construction lender’s office.
Remember that the deadline for serving a stop notice in Arizona is the same as the deadline for filing a mechanics lien. Be sure that you serve your stop notice before the applicable deadline passes.
After serving your stop notice, the recipient should withhold the necessary amount from your client. Note that that withheld amount may not always be enough to cover all of your claims. There may also be other parties who have served a stop notice and who are equally entitled to the remaining balance. The withheld money is typically distributed among all entitled parties after successfully enforcing the stop notice.
When do you enforce an Arizona stop notice?
Enforcing an Arizona stop notice is done if, after serving your notice, the hiring party or any of the above-chain parties still did not pay up. In this case, you must enforce a stop notice by filing a lawsuit. If the suit is successful, the owner and/or the lender will be required to pay you using the withheld amount.
The deadline for enforcing a stop notice is in 10 days after service. However, note that you may not enforce a stop notice in Arizona 3 months after the mechanics lien deadline expires.
After initiating action to enforce a stop notice, you have 5 days to serve a Notice of Commencement of Action on the property owner or the construction lender. This notice must be served in the same method you chose to serve the stop notice (either personal delivery or certified mail).
Failing to notify the owner or the lender properly will invalidate your stop notice, resulting in the release of the previously withheld funds.
If your enforcement action is successful, you have the right to recover your attorney costs. This ensures that you can potentially re-earn all the money you spent pursuing your payment, assuming there are enough funds.
Best practices for serving an Arizona stop notice
1. Serve a 20-day preliminary notice to protect your stop notice rights
In Arizona, you have no stop notice rights unless you served a valid 20-day preliminary notice as required by the law. You must ensure that you serve an Arizona preliminary notice on time because you are not only preserving your lien rights but also protecting your right to serve a stop notice.
2. Do not inflate your payment claim
When writing down the services that you have so far furnished to a project, be sure to stay as accurate as possible. You may not include in your stop notice any form of service you have not provided, and you must not inflate the amount of your claim. Doing so will be detrimental not only to the validity of your stop notice but also to your lien rights.
3. Remember to serve the Notice of Commencement of Action
After filing a lawsuit to enforce a stop notice, remember to notify the owner and the lender by serving a Notice of Commencement of Action. This lets them know that you have filed a lawsuit. If you missed this step and forgot to serve a Notice of Commencement of Action, your stop notice will not be successfully enforced and the withheld funds will be released.
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