Arizona contractors have a powerful tool to ensure payment: the mechanics’ and materialmen’s lien. This article provides actionable suggestions and tips that contractors and owners may want to consider.

As a refresher, mechanics’ liens are a statutory tool to enforce a contractor’s payment rights. If a contractor complies with the statutory requirements (some of which are highlighted below), the contractor can record a lien with priority from the time labor is commenced on the project, unless a deed of trust or mortgage is recorded within 10 days after the labor was commenced. It means that (in theory) the contractor can foreclose on the lien to collect on unpaid amounts they have earned. This is a very effective way to motivate an owner (or the owner’s lender) to pay a balance due as they could otherwise lose the building, structure, or improvement. Practically it is uncommon to actually foreclose on the lien. Instead, the owner (or its lender) will likely ensure that the disputed amount is paid or will “bond around” the lien so that the project is not at risk of foreclosure.

With that context in mind, there are numerous pitfalls that contractors and owners can encounter. For example, as powerful as the tool is, it is critical that contractors comply with the statutory requirements. To that end, contractors should be sure they are:

1. Sending a timely Preliminary 20 Day Notice;
2. Ensuring accurate information in the Preliminary 20 Day Notice and any lien; and,
3. Maintaining proper controls so that the contractor updates its Preliminary 20 Day Notice if its total price increases by more than 30%.

Failure to comply with the statutory requirements may cost contractors dearly. While every deficiency in complying with the statutory requirements may not necessarily be fatal to a lien, and must be analyzed on an independent basis, proper controls up front can avoid such an issue.

On the other hand, Owners can take steps to minimize the risk of liens on their projects. Owners can:

1. Ensure they are obtaining lien waivers as a matter of routine. Further, when it comes to lien waivers, there is no reason to not use the Arizona statutory forms.
2. Negotiate contractual protections. Owners commonly include in their general contracts a requirement that the general contractor keep the project free of liens. This means that Owners can shift the cost to bond around a lien by a subcontractor or supplier, for example, to their general contractor.

In conclusion, mechanics’ and materialmen’s liens are a frequent issue with which both sides of the relationship need to comply. Even though the statutes describe how the process should work, oftentimes reality does not align with the statute’s requirements. Both owners and contractors are well served by refreshing their processes to ensure they comply with all of the statutory requirements.