Mechanics Liens: Part 3

Stop payment notice

  1. This form freezes undisbursed funds held by the construction lender or owner so that the claimant can be paid-also from escrow or fund control this remedy is in additionto the mechanic’s lien and the payment bond remedy.
  2. Assume that O paid a builder $200,000 down for a lot and obtained a $500,000 construction loan secured by a first deed of trust and the seller took back a second purchase money deed of trust. The building was partly completed and owner took some of the funds and purchased another property. O abandoned the project and moved to Costa Rica. At the time this occurred the lender had already disbursed $250,000 leaving only $250,000 from the construction loan account. The present construction is worth $400,000. Contractors and suppliers recorded liens totaling $200,000.

The encumbrances are as follows:

1           Construction loan $250,000

2           Second deed of trust $150,000

3           Mechanic’s liens $200,000.

Since the market value of the property is only $400,000 and the first and second are worth $400,000 the mechanic’s liens are worthless.

However, the mechanic’s lien claimants may still get paid if they exercise their stop notice rights by filing a bonded stop notice requiring the lender to pay the balance of the undisbursed construction loan to the stop notice claimants

The lender had disbursed $250,000 and another $250,000 remained in the account construction loan fund. By successfully following the stop notice requirements the $200,000 that is due and owing could be recovered.

  1. The stop notice is an additional document like a mechanic’s lien and requires seven(7) items.
  2. The name of the claimant
  3. A notice that the claimant has furnished or agreed to furnish

Work or materials to the project

  1. A description of the kind of work or materials furnished
  2. The name of the person who ordered the work or materials
  3. The total value of all work of materials agreed to be furnished
  4. The value of the work and materials already furnished g verification

4. Service of the notice-by personal service or registered or certified mail-always use certified mail. It is served on the lending company

5. If the stop notice is served on the lending company, joint control or an escrow in order for these entities to withhold the money that is due to the claimant the stop notice must be accompanied by a bond in the amount of 11/4th or 125% of the amount claimed.

6 . If the stop notice is served on the owner to withhold funds and either there is no lender or it is served on the owner then no bond is required.

7 . Just like a mechanic’s lien you must properly serve your preliminary notice in order to take advantage of a stop notice.

8 . You must file a lawsuit within in the same time frame as is required that is 90 days from the date of recording a mechanic’s lien rather than 90 days from the expiration of the time within which a mechanic# lien could be recorded.

Jobs against the owner maybe filed at any time after the claimant has agreed to furnish work or materials-even before any work or materials have actually been furnished.

If served against a construction lender or building fund holderthe materials have to be furnis

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© 2013 Robert L. Bachman