QUICK NOTE: PERFECT PRIVATE PROJECT PAYMENT BOND RIGHTS IF NOT IN PRIVITY WITH GENERAL CONTRACTOR

Posted on April 13, 2016April 13, 2016 by Edward Garber

Remember, if you are not in privity of contract with the general contractor on a private project where the general contractor furnished the owner with a payment bond (e.g., sub-subcontractor or supplier), you NEED to perfect your payment bond rights by initially serving a notice of intent to look to the bond on the general contractor. (Or, serve a notice to owner but make sure you serve a copy on the general contractor). Not serving the general contractor with this initial notice can deprive you of payment bond rights. How do you know if there is a payment bond in place? Pull up the notice of commencement recorded in the official records where the property is located which should identify if there is a payment bond and will attach a copy of the payment bond.

For more information on payment bond rights, check out this chart.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

WHAT TO DO IF THE PAYMENT BOND IS NOT RECORDED WITH THE NOTICE OF COMMENCEMENT

Posted on November 20, 2015November 20, 2015 by Edward Garber

There is an unconditional payment bond for the project but it was not recorded with the Notice of Commencement. Now there are subcontractor construction liens recorded against the property. What do I do? I thought the point of the payment bond was to exempt the real property from subcontractor and supplier liens.

No need to worry! Liens can be transferred to the payment bond even though the payment bond was not recorded with the Notice of Commencement.

The payment bond operates to “secure every lien under the direct contract accruing subsequent to its execution and delivery.” Fla.Stat. s. 713.23(2). Even though the payment bond was not recorded with the Notice of Commencement as required, the owner or contractor can record a Notice of Bond with a copy of the payment bond that will operate to transfer the lien to the security of the payment bond.

To this point, Florida Statute s. 713.13(1)(e) states in relevant part:

[I]f a payment bond under s. 713.23 exists but was not attached at the time of recordation of the notice of commencement, the bond may be used to transfer any recorded lien of a lienor except that of the contractor by the recordation and service of a notice of bond pursuant to s. 713.23(2). The notice requirements of s. 713.23 apply to any claim against the bond; however, the time limits for serving any required notices shall, at the option of the lienor, be calculated from the dates specified in s. 713.23 or the date the notice of bond is served on the lienor.

Stated differently, just because the payment bond was not recorded with the Notice of Commencement does not mean the payment bond is worthless. Rather, it can still be used to transfer construction liens to the security of the bond.

Further, if discovered early enough, and within the effective period of the Notice of Commencement, an Amended Notice of Commencement can be recorded which attaches a copy of the payment bond. The Amended Notice of Commencement needs to be served by the owner “upon the contractor and each lienor who serves notice before or within 30 days after the date the amended notice is recorded.” Fla.Stat. s. 713.13(5)(b). But, the Amended Notice of Commencement can be used to clarify the omission of the payment bond in the original Notice of Commencement.

RECORDING THE NOTICE OF BOND TO TRANSFER THE CONSTRUCTION LIEN TO THE PAYMENT BOND

Posted on November 29, 2014November 29, 2014 by Edward Garber

If a contractor furnishes a payment bond for a private project (per Florida Statute s. 713.23), a copy of that bond should be recorded with the Notice of Commencement recorded in the official records of the county where the project is located. A contractor furnishes a payment bond on a private project in order to exempt the owner’s real property from construction liens.

There are times, though, where a subcontractor or a supplier will still go ahead and record a lien against the owner’s real property even though there is a payment bond that was recorded with the Notice of Commencement. This is a frustrating scenario because the point of paying for the payment bond and furnishing the bond is to prevent this very scenario from occurring. No worries, however, because Florida’s Lien Law efficiently addresses this scenario by allowing the contractor or owner to record in the official records and serve on the lienor a verified Notice of Bond (attaching a copy of the payment bond) that will operate to transfer the lien to the payment bond. Fla. Stat. s. 713.23(2). A copy of the Notice of Bond form is provided below.

Moreover, this Notice of Bond procedure would apply even if the contractor furnished a payment bond, but for whatever reason, that payment bond was not recorded with the Notice of Commencement. When this happens, and it does happen, the subcontractor or supplier may honestly not know that the contractor actually furnished a payment bond and will move forward and record a lien. Again, no worries, because the contractor or owner should implement the same procedure by recording and serving the lienor with a Notice of Bond. Every lien recorded AFTER the execution and delivery of the payment bond will be transferred to the payment bond through the recording of the Notice of Bond (attaching a copy of the payment bond).

Now, if the contractor did NOT furnish a payment bond BEFORE the lien was recorded, the contractor could move to transfer the lien to a lien transfer bond pursuant to Florida Statute s. 713.24. This is different than a payment bond. The lien transfer bond is simply a mechanism where a contractor through a statutory procedure procures and records a lien transfer bond that is designed to transfer a specific lien to the security of the bond. (When a contractor procures a lien transfer bond, the bond must be for the principal amount of the lien, plus the greater of $1,000 or 25% of the principal amount to cover potential attorney’s fees and court costs, plus three years worth of interest on the principal amount at the prevailing statutory rate.)

NOTICE OF BOND

To (Name and Address of Lienor)
You are notified that the claim of lien filed by you on ___, ___, and recorded in Official Records Book ___ at page ___ of the public records of ___ County, Florida, is secured by a bond, a copy being attached.
Signed: (Name of person recording notice)

THE IMPORTANCE OF AN EFFECTIVE NOTICE OF COMMENCEMENT ON YOUR LIEN RIGHTS

Posted on August 6, 2014August 6, 2014 by Edward Garber

Contractors, subcontractors, and suppliers need to appreciate the importance of an EFFECTIVE Notice of Commencement. This recorded document, among other things, governs the priority of YOUR lien rights on a private construction project because a construction lien RELATES BACK in time to an effective Notice of Commencement.

The Notice of Commencement is recorded in the public records where the project is located. It is a statutory form (per Florida Statute s. 713.13) and gives the lienor the required information about the project so that the lienor can preserve its lien / bond rights. A copy of the Notice of Commencement form is included at the bottom of this posting. The Notice of Commencement must be recorded within 90 days of construction otherwise the Notice is invalid.

The Notice of Commencement is effective for 1 year unless a different expiration date is specified. If a project is going to last longer than a year, a more realistic expiration date should be specified. However, the Notice of Commencement can be amended at any time within its effective period to extend the expiration date. The amended Notice of Commencement should reflect that it is amending the original Notice of Commencement that is recorded (and specify the book and page of the recording) and a copy must be served by the owner on the contractor and any other lienor that served a Notice to Owner to preserve its lien rights “before or within 30 days after the date the amended notice is recorded.” Fla. Stat. s. 713.13(5)(b).

In demonstrating the importance of an effective Notice of Commencement, Section 713.13(6) provides:

“Unless otherwise provided in the notice of commencement or a new or amended notice of commencement, a notice of commencement is not effectual in law or equity against a conveyance, transfer, or mortgage of or lien on the real property described in the notice, or against creditors or subsequent purchasers for a valuable consideration, after 1 year after the date of recording the notice of commencement.”

What does this mean? The best way to explain is to apply this statutory language to the following facts of a condominium project:

Construction loan recorded on 1/1/09.

Notice of Commencement recorded on 5/1/09. It is only effective for 1 year and an amended Notice was never recorded.

On 6/15/10 a mortgage is recorded on a condominium unit. When this is recorded, the unit owner’s mortgagee secures a release from the construction lender relating to the lender’s mortgage relating to the unit.

On 7/1/10 a construction lien is recorded.

Under this factual pattern, the lienor that recorded a lien would absolutely want its lien to take priority over the unit owner’s mortgage. The lienor will argue it takes priority since the lien should relate back to the Notice of Commencement that was recorded prior to the mortgage on the unit. But, wait. The Notice of Commencement expired before the lien was recorded and an amended Notice of Commencement was never recorded. This means the lien takes priority as of the date it is recorded and, thus, the mortgage on the condominium unit takes priority.

Now, let’s add another realistic wrinkle to this fact pattern. Let’s say the Declaration of Condominium (the instrument creating the condominium) is recorded on 6/1/10, before the lien is recorded.

The Declaration of Condominium would need to be recorded before mortgages are recorded on individual units. For the construction of a new condominium, the lien would apply to the ENTIRE condominium property provided the lien relates back to the Notice of Commencement. This is because the lien would take priority before the Declaration of Condominium was even recorded. But, if the Notice of Commencement expired, then the Declaration of Condominium would take priority over the lien since the Declaration of Condominium would have been recorded first (since the lien would not relate back to the Notice of Commencement). This means that the lien would not apply to the entire condominium property, but would more equitably apply to each unit based on the unit’s pro rata share of the common expenses. See Fla. Stat. 718.121. In other words, if the lien is $100,000 and there are 100 units each responsible for 1% of the condominium association’s budget, each unit would be responsible for the principal amount of $1,000 in order to discharge the lien relating to the unit. And, mortgages on the individual units may take priority over the lien potentially nullifying the value of the lien based on the equity in the units.

Notably, even if a lien relates back to the Notice of Commencement and takes priority over the Declaration of Condominium, a court may still find the equitable result is that each unit is only liable for its pro rata share of common expenses. See Southern Colonial Mortgage Co., Inc. v. Medeiros, 347 So.2d 736 (Fla. 4^th DCA 1977). However, this equitable approach should arguably not apply because the lien would attach to the entire condominium property and the lienor should be entitled to foreclose that property including all units since the lien would have priority over any mortgage and deed associated with those units. At this point, the unit owner should look to its title insurance policy.

Take-aways:

Make sure the Notice of Commencement is recorded within 90 days from the start of construction. If not, there will be a strong argument that the Notice is not valid. This means that a lien would not be able to relate back to the Notice.

Make sure the lien is recorded within an effective Notice of Commencement. If not, the lien will not relate back to the Notice, but will take priority as of the date it is recorded. This is a big difference.

If the Notice of Commencement is on the verge of expiring, prepare and send a letter to the owner advising the owner that it needs to record an amended Notice of Commencement to ensure the parties are performing construction within an effective Notice of Commencement.

Understand the potential priority of your lien based on the recording of the Notice of Commencement, any amended Notice of Commencement, the Declaration of Condominium, and other recordings that may impact the priority of your lien if the Notice of Commencement expired.

NOTICE OF COMMENCEMENT

State of _____

County of _____

The undersigned hereby gives notice that improvement will be made to certain real property, and in accordance with Chapter 713, Florida Statutes, the following information is provided in this Notice of Commencement.

1. Description of property: (legal description of the property, and street address if available).

2. General description of improvement: __________.

3. Owner information or Lessee information if the Lessee contracted for the improvement:

a. Name and address: __________.

b. Interest in property: __________.

c. Name and address of fee simple titleholder (if different from Owner listed above): __________.

4. a. Contractor: (name and address) .

b. Contractor’s phone number: _____.

5. Surety (if applicable, a copy of the payment bond is attached):

a. Name and address: __________.

b. Phone number: _____.

c. Amount of bond: $_____.

6. a. Lender: (name and address) .

b. Lender’s phone number: _____.

7. Persons within the State of Florida designated by Owner upon whom notices or other documents may be served as provided by Section 713.13(1)(a) 7., Florida Statutes:

a. Name and address: __________.

b. Phone numbers of designated persons: __________.

8. a. In addition to himself or herself, Owner designates __________ of __________ to receive a copy of the Lienor’s Notice as provided in Section 713.13(1)(b), Florida Statutes.

b. Phone number of person or entity designated by owner: _____.

9. Expiration date of notice of commencement (the expiration date will be 1 year from the date of recording unless a different date is specified) _____.

WARNING TO OWNER: ANY PAYMENTS MADE BY THE OWNER AFTER THE EXPIRATION OF THE NOTICE OF COMMENCEMENT ARE CONSIDERED IMPROPER PAYMENTS UNDER CHAPTER 713, PART I, SECTION 713.13, FLORIDA STATUTES, AND CAN RESULT IN YOUR PAYING TWICE FOR IMPROVEMENTS TO YOUR PROPERTY. A NOTICE OF COMMENCEMENT MUST BE RECORDED AND POSTED ON THE JOB SITE BEFORE THE FIRST INSPECTION. IF YOU INTEND TO OBTAIN FINANCING, CONSULT WITH YOUR LENDER OR AN ATTORNEY BEFORE COMMENCING WORK OR RECORDING YOUR NOTICE OF COMMENCEMENT.

CONTRACTORS AND SUPPLIERS-DO NOT NEGLECT THE NOTICE REQUIREMENTS IN FLORIDA’S LIEN LAW

Posted on October 9, 2011October 9, 2011 by Edward Garber

Oftentimes, subcontractors, suppliers, and sub-subcontractors rely on companies to serve the statutory notices that are prerequisites to preserving a lien or bond claim under Florida’s Lien Law in the event of nonpayment. However, if these notices are not served in accordance with Florida’s Lien Law, the outcome could be injurious to the subcontractor, supplier, or sub-subcontractor. Stated differently, the outcome could mean a loss of lien or bond rights which may be the only true leverage the party has to secure payment.

The case of Stock Building Supply, Inc. v. Soares Da Costa Construction Services, LLC, 36 Fla. L. Weekly D2200a (Fla. 3d DCA 2011), illustrates the absolute importance of complying with the notice requirements in Florida’s Lien Law.

In this case, an owner hired a contractor to build a condominium. The contractor subcontracted with a structural shell subcontractor which, interestingly, held a 40% ownership interest in the contractor. The subcontractor engaged a supplier to provide rebar to the project. The contractor also engaged the same supplier to provide certain materials to the project. To graphically illustrate:

Contractor –> Shell Subcontractor –> Supplier

and

Contractor –> Supplier

Originally, there was no payment bond on the project. Therefore, once the supplier was engaged to provide materials, it served a statutory notice to owner on the contractor and the owner stating that it was supplying materials under an order given by the subcontractor. It served a second notice to owner on the contractor and owner stating it was supplying materials under an order given by contractor. (Notably, Florida Statute §713.06 requires lienors not in privity of contract with the owner to serve a notice to owner on the owner no later than 45 days after commencing services. The notice should also be served on anyone up the chain to the owner the lienor is not in privity of contract with, i.e., the sub-subcontractor or supplier to the subcontractor should serve the notice on the contractor too. This is a mandatory statutory notice if there is not a payment bond in place.)

Shortly after construction commenced, there was a funding problem that led to a halt in construction. The supplier recorded 2 claims of lien for nonpayment: one for nonpayment by the subcontractor and the other for nonpayment by the contractor.

The owner then paid the supplier and had the liens satisfied and recorded a notice of termination of the initial notice of commencement which is a procedure under Florida’s Lien Law that allows an owner to terminate a notice of commencement that accurately states that all lienors were paid in full. After the notice of commencement was terminated by law, the owner recorded a new notice of commencement that attached a payment bond, meaning the owner’s property was now exempt from all liens except that of the general contractor it hired. (One of the main reasons an owner would terminate a notice of commencement and record a new notice of commencement is so a construction lender financing construction can record a mortgage and maintain a first priority encumbrance on the property in the event the owner did not repay the loan.)

Once construction restarted, the supplier continued supplying rebar to the structural shell subcontractor. The supplier also continued to supply building materials to the contractor. However, for whatever reason, the company the supplier hired to serve the statutory notices served only one statutory notice to contractor stating that the supplier was supplying building materials under an order given by the contractor. Unlike the notice to owner mentioned above, when there is a payment bond in place, lienors not in privity of contract with the contractor must serve a notice on the contractor stating that they intend to look to the contractor’s payment bond for payment. In other words, the supplier was required to serve a notice on the contractor that it was supplying materials under an order given by the subcontractor, but it really wasn’t required to serve the same notice for the supplies it was providing under an order given by the contractor.

The point or objective of the notices is so the owner, in a situation without a payment bond, and a contractor, in a situation with a payment bond, know specifically who is performing work on the project to ensure these entities get paid. The reason why a contractor doesn’t need to serve a notice to owner (when there is no bond) or a subcontractor doesn’t need to serve a notice on the contractor (when there is a payment bond) is because the owner or contractor in these situations know the entities it hired to ensure these entities get paid.

Although the contractor paid the structural shell subcontractor for the rebar, the subcontractor did not pay the supplier. The supplier then served a notice of nonpayment on the payment bond surety (another prerequisite to suing on a general contractor’s payment bond) and filed suit.

The main issue in this case was whether the supplier had properly preserved a payment bond claim for the rebar it supplied to the subcontractor that it was not paid for by virtue of its neglect in serving the proper notice on the contractor that it was supplying rebar under an order given by the subcontractor. The trial court concluded that the supplier could NOT pursue a payment bond claim because it failed to serve this notice. The Third District affirmed the trial court on this issue essentially holding that because lien and bond claims are creatures of statute, the supplier’s failure to comply with the lien law by serving this initial notice was fatal to its bond claim for rebar materials it supplied to subcontractor.

Unfortunately for the supplier, this is a hypertechnical argument that killed its claim against the payment bond for materials it supplied under the order given by the structural shell subcontractor. This ruling, however, does not seem to make sense in light of the specific facts of the case. Again, the whole point of the notice is so the contractor in this situation knows that the supplier is supplying rebar to the subcontractor and that it will look to the payment bond if it is not paid so that the contractor can affirmatively ensure the supplier gets paid. First, the contractor knew the supplier was supplying rebar because before the owner terminated the notice of commencement, the supplier was supplying the same rebar and the contractor was made aware of same. Second, after the owner recorded a new notice of commencement with a payment bond, the supplier served a notice on the contractor (although it was not legally required to do so) that it was serving materials to the contractor per an order given by the contractor. Well, at this point in time, the contractor had continued knowledge the supplier was still involved in the project and still supplying materials, even though there may have been oversight in that another notice was not also provided by supplier for the materials it was providing under an order given by the subcontractor. And, last, the subcontractor owned 40% of the contractor, thus, how could contractor not know that its minority owner was still utilizing and ordering rebar? The Third District did not get into this, but I believe this fact is important because it would seem to impute some knowledge on the contractor under this fact pattern that the subcontractor was still utilizing the supplier, which just so happened to an identical supplier that contractor was utilizing and ordering materials from. Thus, where was the prejudice to the contractor??

Regardless of the equities of the Third District’s decision, the morale remains that it is absolutely critical to comply with Florida’s Lien Law, as in many circumstances, oversight or neglect will not be tolerated!! Do not let this happen to you!

In this case, the supplier used an outside company to serve the required statutory notices and it was uncertain why the outside company did not serve the required notice on the contractor that supplier would look to the bond for protection if it was not paid for materials supplied to the subcontractor, especially when it served the unnecessary notice for materials being supplied directly to contractor. The supplier or outside company’s oversight, whatever the case may be, resulted in a loss of its payment bond claim.

To prevent this from happening, it is always a good idea to utilize an attorney on the front end to ensure the proper notices are being served. An attorney understanding construction will ask: 1) is it a private project or publicly funded project; 2) do you have a copy of the notice of commencement (to see whether there is or is not a payment bond in place); 3) who hired you; and 4) when did you first start commencing services. In the event of nonpayment, the attorney will ask the follow-up questions: 5) when was your last day on the job and 6) how much are you owed and how did you arrive at this specific amount (e.g., retainage owed, contractual work owed, change order work owed, does this include delay-related damages or lost profit, etc.) in order to ensure the lien or payment bond claim comports with Florida’s Lien Law.