WHAT EVERY LAWYER NEEDS TO KNOW
ABOUT CONTRACTOR LIENS:

Basics of Arizona Mechanic's and Materialmen's Liens

By Corey B. Larson
November 20, 2008

Contents

1. WHAT IS A LIEN?
1. WHO HAS LIEN RIGHTS; AND WHO DOES NOT?
2. WHAT TYPES OF PROJECTS MAY A CONTRACTOR LIEN?
3. THE COMPETING OBJECTIVES OF LIEN LAW
2. HOW TO LIEN A PROJECT IN ARIZONA
   1. BRIEF SUMMARY
   2. PRELIMINARY NOTICE REQUIREMENTS
   3. REQUIREMENTS FOR FILING A NOTICE AND CLAIM OF LIEN
   4. THE REPUTED OWNER EXCEPTION
   5. WHAT CAN BE INCLUDED IN A LIEN CLAIM?
   6. REQUIREMENTS FOR FILING SUIT TO ENFORCE A CLAIM OF LIEN
   7. PRIORITY AND THE EQUAL FOOTINGS RULE
   8. OWNER AND GENERAL CONTRACTOR ISSUES AFTER A LIEN IS FILED BY A SUBCONTRACTOR OR SUPPLIER
   9. ASSIGNMENT OF LIEN RIGHTS
3. LIEN WAIVERS AND OTHER ISSUES
   1. THE PURPOSE OF LIEN WAIVERS
   2. THE FOUR LIEN WAIVER FORMS
   3. WRONGFUL LIEN
   4. LEGAL FEES
4. BOND ISSUES
   1. BONDS IN LIEU OF LIEN ON PRIVATE PROJECTS
   2. DISCHARGE BONDS ON PRIVATE PROJECTS

About The Author

I. WHAT IS A LIEN?

There is no common law right to a lien for work performed on a construction project. ¹ Rather, any right to payment by a contractor or materials supplier that is not in contractual privity with a project owner of statute. Although lien "rights" are commonly referred to in reported decisions, liens are not so much a right as a statutorily created remedy. Specifically, the lien holder is allowed the remedy of imposing a nonconsensual security interest and permitted to sell the owner's property to pay for a lien holder's labor and materials.

 A. WHO HAS LIEN RIGHTS; AND WHO DOES NOT?

The statute from which most contractor lien claims arise is A.R.S. § 33-981(A), which reads as follows:

Except as provided in Sections 33-10022² and 33-10033³, every person who labors or furnishes professional services, materials, machinery, fixtures or tools in the construction, alteration or repair of any building, or other structure or improvement whatever, shall have a lien on such building, structure or improvement for the work or labor done or professional services, materials, machinery. fixtures or tools furnished, whether the work was done or articles furnished at the instance of the owner of the building, structure or improvement, or his agent. (emphasis added)

Thus, the following classifications of entities have lien rights under A.R.S. § 33-981(A):

1. general contractors;
2. subcontractors;
3. material suppliers;
4. equipment lessors; and
5. licensed professionals including architects, engineers, and surveyors.

A partial list of entities that do not have lien rights helps illustrate the limits of A.R.S. § 33-981(A):

1. Parties not licensed by the Arizona Registrar of Contractors. A.R.S. § 33-981(E) provides that an unlicensed contractor has no lien rights.⁴ Further, A.R.S. § 32-1153 requires a lien claimant to have a valid license (a) when the contract was entered into; and (b) when the alleged cause of action arose.⁵ Otherwise, the contractor has no right to payment for services provided and, thus, no secured right for payment by virtue of a lien.
2. Licensed contractors who work beyond the scope of their license. In a notable case, an Arizona court held that a licensed general contractor could not foreclose a lien because it lacked the required specialty license to perform masonry work. The general contractor obtained the needed C-31 specialty license after the work was performed and before the lien foreclosure action was filed. In ruling against the contractor who performed excellent work, the court noted it was irrelevant that the result was "unjust" or harsh.⁶
3. Material suppliers who furnish materials to another supplier who in turn sells those materials to the general contractor or a subcontractor. Lien rights only run "upstream" in a supply chain so far. A.R.S. § 33-981(A) limits lien rights to those who contract with the owner or "his agent." Since material suppliers have no responsibility for the construction process, they may not be agents of the owner.⁷ As it is often a close call who is acting as "agent" for the owner for lien purposes, courts have developed a four part test for determining when a material supplier has lien rights.⁸ As a general rule, a material supplier to a subcontractor will have lien rights, but not a material supplier to a sub-subcontractor or an upstream supplier to the material supplier of a subcontractor. Such parties are considered simply too distant from an owner's ability to oversee and control payment.
4. Subcontractors and suppliers who provide labor and materials in the improvement of a personal property that is not so attached to the real property as to make it permanent. A lien attaches to the real property upon which work is performed only when the work is performed on the land or to an improvement that is so attached to the real property so as to make it permanent. As a general rule, unless there is a substantial physical attachment to the real property, improvements to personal property do not create a lien in the realty.⁹ As a result, mobile homes present interesting questions and distinct factual inquiries determine whether a lien may attach.
5. The seller of machinery used to improve real property. The rental value of machinery can be the subject of a lien.¹⁰ The entire cost of a given piece of machinery may not be made the subject of a lien unless it is entirely consumed in the construction project in its ordinary use.¹¹ Thus, the costs of tires on a tractor or a chain on a chainsaw may be included in a lien if the equipment is leased. But, no lien exists if the equipment is sold and utilized on a project.

 B. WHAT TYPES OF PROJECTS MAY A CONTRACTOR LIEN?

Article X, § 3 of the Arizona Constitution prohibits liens or any other encumbrances against the land of the State of Arizona or any of its political subdivisions. As a result, liens are not available against any project contracted by a governmental agency or against any land held by the government at the time the claim arises.¹²

Some lien rights are not available on "owner-occupied" projects pursuant to A.R.S. § 33-1002. This statute permits liens against single or double occupancy (e.g. duplex) residential projects where the owner intends to reside therein only where the party claiming a lien has a direct contract relationship with the owner. Accordingly, a general contractor will always have lien rights on such projects, assuming the contract is in writing, but subcontractors and materials suppliers will not have lien rights unless they have a signed contract with the owner.¹³

Accordingly, except for projects on government land, a contractor that is in direct contractual privity with the owner nearly always has the right to lien a project.¹⁴ First tier subcontractors and suppliers also have such right except where A.R.S. § 33-1002 applies to certain residential projects or A.R.S. § 33-1003 applies.

 C. THE COMPETING OBJECTIVES OF LIEN LAW

Much in the same way that use of property is promoted by recognition of prescriptive rights and adverse possession; Arizona's lien law promotes development and use of property. But the relationship between lien law and promotion of development is not necessarily linear.

Arizona's lien law was created by the Arizona Legislature to give some security of payment to those not in direct privity of contract with the owner.¹⁵ Specifically, Arizona's lien law was created to protect those who supply labor and materials in the development of real property.¹⁶ This promotes development by giving a subcontractor or supplier an interest in the value of improvements that become 'fixed' or 'permanently attached' to a given parcel of real property. As a result, there is less of a need, or at least perceived need, for parties to contract directly with owners. And there is no perceived need to increase bids or prices to contractors based upon a "risk assessment" of their financial stability.

If the first purpose of lien law is to protect those who provide labor and materials so as to promote the development of real property, the second purpose is to protect property owners against the risk of paying twice for the same labor and materials. This is achieved by requiring strict compliance with the notice requirements for affixing a lien.¹⁷ In theory, strict compliance with the lien statutes requires adequate notice to an owner such that, in the absence of fraud, an owner will not be required to pay twice.

Whenever there are competing interests there are, of course, conflicts between such competing interests. In the classic example, an owner of real property hires a general contractor to construct a building. The owner pays the general contractor, who does not pay the subcontractors and suppliers. The general contractor seeks protection in bankruptcy. The subcontractors and suppliers do not have a breach of contract claim against the owner because they lack privity. Nor do they have an unjust enrichment claim because the owner has paid for the labor and materials received.¹⁸

From this and similar fact patterns arise countless lawsuits wherein the courts are asked to decide the hardest question in lien law: Does the law require the owner to pay twice for the same labor and materials? When the subcontractors and suppliers win, the resulting court opinions invariably contain a reference to the public policy of protecting those who supply labor and materials in the development of real property. These same decisions almost always hold that the lien statutes should be construed liberally to carry out the statutes' purpose.¹⁹ By contrast, when the owners win, the resulting court opinions invariably recite the doctrine of strict compliance with notice requirements.²⁰ But how an these two seemingly divergent lines of cases be reconciled?

Although the case law in this area has not always been the model of clarity, these two lines of opinions are neither contradictory nor mutually exclusive. Rather, read in a certain way, they are consistent and relatively harmonious. On the one hand Arizona courts require strict compliance with statutory notice requirements to protect owners from the risk of paying their subcontractors and materialmen twice. These requirements provide property owners with the opportunity to know that they are at risk of paying twice and identify would-be lien claimants. Once the notice requirements have been strictly met, however, then courts liberally construe the lien statues in favor of protecting the subcontractors and suppliers. That is, courts strictly construe the portion of the statutes requiring notice and, once the owner has notice of a subcontractor and a potential claim against the property, all other requirements are to be liberally construed. Thus, the competing objections of lien law may be understood as balancing the relationship between requiring strict compliance with notice provisions, and liberal construction, or at least "substantial compliance" with the lien statutes, thereafter. Viewed in this manner, Arizona's seeming divergent appellate level decisions begin to make sense.

II. HOW TO LIEN A PROJECT IN ARIZONA

 A. BRIEF SUMMARY

Even though a party may be properly licensed, be of the class of contractors entitled to a lien, and may perform work on a project subject to a lien and remain unpaid, but by the time a contractor is unpaid it is probably already too late to take the action necessary to enforce a lien. Rather, it is a necessary pre-requisite of recording a lien that a contractor or supplier provide the owner, original contract, and, if applicable, construction lender, preliminary notice of a right to lien if not paid. Then, within the appropriate timeframe, the lien must be recorded, along with other required documentation, with the appropriate county recorder. The lien will remain unperfected unless and until an action is commenced in superior court to foreclose upon the lien.

 B. PRELIMINARY NOTICE REQUIREMENTS

Except for laborers performing work for wages²¹, pursuant to A.R.S. § 33-981, a party who intends to record a lien must first send a preliminary notice putting the property owner, lender, and the party with whom he contracted on notice of the possibility that a lien may be filed thereafter.²² The form of a preliminary notice is strictly set by statute, which regulates the content, look, and even relative font size and boldface required. Failure to follow this strict form can invalidate the lien.²³ For all its formality, it serves a very basic purpose. The preliminary notice is designed to help property owners protect themselves against the risk of paying the general contractor only to be surprised by receipt of a lien from an unknown claimant. Although there was some debate as to who was required to give a preliminary notice in the past, the statute now requires every party to send a preliminary notice as a pre-requisite to recording a lien: including the general contractor.

It is good practice to send the "Preliminary 20-day Notice" or "Pre-lien" upon commencement of the project. But the notice may be sent any time up to the end of the project. If the notice is sent after the claimant has begun performance, it is only effective as to labor and materials provided in the twenty days preceding the notice, and all materials later provided up to the dollar value of the preliminary notice.²⁴ The statute does not expressly preclude sending the preliminary notice in advance of the start of work. Consequently, some would be lien claimants send the notice prior to commencement of the project -- sometimes well before or at the time of award of the contract. There has not been a reported appellate level ruling as to this practice.

The statute mandates that certain information be provided in the notice. The informational requirements of A.R.S. § 33-992.01(C) are too extensive to merit inclusion in these materials. It is sufficient to note that Subpart D of the statute actually provides a form that must be "substantially" followed by would-be lien claimants and that liens have been invalidated for failure to strictly follow the statutory form.²⁵

The statute permits a lien to be filed for up to 120% of the face amount of the preliminary notice.²⁶ That is, if the anticipated amount of the work is stated on the prelien as $10,000, and should a greater value of work be provided, a contractor may lien for up to $12,000. If a contractor agrees to a greater scope of work on a project or values change such that the work performed will exceed the original pre-lien amount by greater than 20%, it is advisable to send an Amended Preliminary 20-Day Notice.

Some contractors avoid sending amended pre-liens by overestimating the potential value of their work. The statute does not expressly set forth a penalty for sending a preliminary notice for more than the anticipated amount of the lien claim. There has not been a reported, appellate level decision challenging this practice.

The party providing the preliminary notice must provide proof that the notice was sent by first class mail sent and with a certificate of mailing, registered or certified mail, postage prepaid.²⁷ Personal delivery is not permitted, but the statute does not require actual receipt either. Rather, placement in the mail is definitive proof of service under the statute. However, the preliminary notice form contained in A.R.S. § 33-992.01(O) includes an acknowledgement of receipt form that the owner may fill out and send back to the would-be lien claimant. But there is no penalty for failing to send the form back. Rather, if the owner fails to return the form the claimant may simply obtain the affidavit of the person who sent the preliminary notice pursuant to A.R.S. § 33-992.02(2).

To the extent the owner receives the notice, and certain information contained therein is incorrect, the statute requires the owner to give written notice back to the would-be lien claimant within ten days correcting the following items:

1. The legal description, subdivision plat, street address or location with respect to commonly known roads or other landmarks in the areas, or any other description of the jobsite sufficient for identification.
2. The name and address of the owner or reputed owner.
3. The name and address of the original contractor or reputed contractor.
4. The name and address of the construction lender, if any, or reputed construction lender.
5. If a payment bond has been recorded pursuant to A.R.S. § 33-1002, a copy of the bond and the name and address of the surety company and bonding agent, if any, providing the payment bond.²⁸

The failure of the owner or other interested party to furnish this information stops the owner from raising the inaccuracy as a defense. Upon receipt of a notice from the owner containing correct information, the would-be lien claimant must provide an amended preliminary notice within thirty days containing the correct information.²⁹

 C. REQUIREMENTS FOR FILING A NOTICE AND CLAIM OF LIEN

After the preliminary notice has been sent, and the labor and/or materials have been provided, the lien claimant may record a notice and claim of lien in the county recorder's office. The lien must be recorded within the following time limits.

1. 150 days after final inspection³⁰ and written final acceptance by the governmental body which issued the building permit³¹; or
2. 180 days after a work cessation of labor except for strike, shortage of materials or act of God³²; or
3. 60 days after recordation of a notice of completion pursuant to A.R.S. § 33-993(A) and (C)(1). If the person who records the notice fails to send a copy of the notice within 15 days to any party who previously issued a preliminary notice, the party who did not receive notice of recordation of the notice of completion still has the full 150 days to record a lien pursuant to A.R.S. § 33-993(H). Notice of the recordation of the notice of completion must be sent via certified or registered mail. The notice of completion form that must be "substantially followed" is set forth in A.R.S. § 33-993(F).
4. 150 days from the 'last date on which any labor, materials, fixtures or tools were furnished on the property,' if there is no final inspection in the jurisdiction in which the building is located.³³

Although the statute provides a form that must be substantially followed for the preliminary notice, notice of completion, and waiver forms, the statute does not include a form that must be followed for the lien itself. The statute merely states that the following 6 items must be provided in the lien:

1. The legal description of the lands and improvements to be charged with a lien.
   
2. The name of the owner or reputed owner of the property concerned, if known, and the name of the person by whom the lienor was employed or to whom he furnished materials.
   
3. A statement of the terms, time given and conditions of the contract, if it is oral, or a copy of the contract, if it is written.³⁴
   
4. A statement of the lienor's demand, after deducting just credits and offsets.
   
5. A statement of the date of completion of the building, structure or improvement, or any alteration or repair of such building, structure or improvement.
   
6. A statement of the date the preliminary twenty day notice required by § 33-992.01 was given. A copy of such preliminary twenty-day notice and the proof of mailing required by § 33-992.02 shall be attached.

The statute requires that the lien claimant send a copy of the lien to the owner within a "reasonable time" after recordation.³⁵ The definition of reasonable is up to the court to decide. But in one reported appellate level decision, the court opined that a lien served for the first time with a copy of the lien foreclosure complaint was not served in reasonable time and invalidated the lien.³⁶ Accordingly, at the very least the lien should be served upon the owner prior to the foreclosure lawsuit in order to allow the owner to resolve the matter short of litigation.

 D. THE REPUTED OWNER EXCEPTION

Both the preliminary notice form set forth in A.R.S. § 33-992.01(O) and the informational requirements for inclusion in liens set forth in A.R.S. § 33-993(A)(2) permit the lien claimant to send copies to the "owner or reputed owner." This essentially means that it is possible to affix a valid lien without notice to the actual owner. Service on the owner of record is sufficient under the statute even if the property has since been sold.³⁷ The Midway Lumber court's rationale for this holding was that allowing service on the owner of record prevented owners from entering into secret, unrecorded sales, for the purpose of defeating an otherwise valid lien claim. Id. The decision also held that lien claimants must make a reasonable effort to ascertain the owner or reputed owner. The fact finder at trial makes the ultimate decision of whether a lien claimant's efforts to identify and give notice to the owner have been reasonable.³⁸

 E. WHAT CAN BE INCLUDED IN A LIEN CLAIM?

A person in direct contractual privity with the owner may file a lien for the contract amount for labor and materials provided in the improvement of real property.³⁹ Generally, a contract is considered to be prima facie evidence of the value of goods and services provided.⁴⁰ But, where contract is not completed or at least substantially completed, a contractor is limited to reasonable value of goods and services despite the contract price.⁴¹

Lien claimants who do not have a direct contract with the property owner are likewise limited to the fair market value of the labor and materials they provide regardless of their contract amount.⁴² Value is measured by the value to the owner rather than the cost to the mechanic.⁴³ In practice, this rule gives owners the right to challenge the price a material supplier charges on its lien. Although this generally isn't a hard item to prove, it gives owners an added defense. Further, it can require that a subcontractor or material supplier use an expert witness as to pricing in some instances.

Contractors are not permitted to lien for lost profit expectation damages on work that has not been performed, or for liquidated damages.⁴⁴ Further, where a supplier's invoice provides a discount for timely payment⁴⁵, Arizona courts will assume the discounted rate is the reasonable value.⁴⁶

 F. REQUIREMENTS FOR FILING SUIT TO ENFORCE A CLAIM OF LIEN

To foreclose on a lien, the claimant must file suit in superior court within six months of recording the lien pursuant to A.R.S. § 33-998. To prevent the owner from selling the property during the pendency of the foreclosure action, the claimant must file a lis pendens against the property at the county recorder's office. Under A.R.S. § 12-1191 the claimant must record the lis pendens within five days of filing suit or face dismissal of the lien foreclosure lawsuit. In other states, lien claimants are allowed to enter into written agreements with property owners to extend the time for filing a lien claim (e.g. Nevada), and while a similar procedure is available in Arizona for stop notice claims, there is no such statutory enactment in Arizona for extension of time to file lien claims. Lien claims must be filed within the six months of recordation or be lost.

 G. PRIORITY AND THE EQUAL FOOTINGS RULE

The equal footings rule becomes relevant when the sale of the property does not produce sufficient funds to pay all lien claims. In such an event, the lien claimants and mortgage holders vie for the funds that become available when the property is sold. The general rule is that the first party to record its interest in the property is paid first. Hence the use of the terms "first position mortgage holder," and "second position" etc. among lien claimants at a given project, however, the liens are treated as if they had all been recorded on the same day. Interestingly, the effective date of the liens is not the date any one of the liens was actually recorded. Rather, all lien claims under a common general contract are treated as if they had been recorded on the date labor or materials were first provided on the project.⁴⁷ Thus the excavator (generally first contractor on a job) and carpet installer (the last) are on "equal footings" for purposes of lien rights and their liens are treated as being of equal priority. The equal footings rule is set forth in A.R.S. § 33-1000, which reads as follows:

1. Except as otherwise provided in Section 33-992, the liens for work and labor done or professional services or material furnished, as provided for in this article, are on an equal footing without reference to the date of recording the notice and claim of lien, and without reference to the time of performing the work and labor or furnishing the professional services or material.
2. When a sale is ordered and the property sold, the proceeds of the sale, if not sufficient to discharge all liens against the property without reference to the date of recording the notice and claim of lien, shall be prorated over the respective liens that have equal footing with the foreclosing lien. (Emphasis added)

Unfortunately for lien claimants, all such liens are inferior to encumbrances recorded against the property prior to the time, labor or materials were first supplied to the project pursuant to A.R.S. § 33-992(A). It is possible for a contractor to verify there are no bank loans recorded against a property, and begin providing labor or materials under the mistaken assumption that it will be in first position -- only to have a lender record its loan within 10 days, and by so doing obtain superior priority over all lien claims. In practical terms, this means that loans to purchase land as well as construction loans, which are generally recorded prior to the time construction begins, are paid out first at any foreclosure sale. The remaining proceeds, if any, are then used to pay lien claims. Although the equal footings rule provides for fair treatment among lien claimants, it is difficult for would-be lien claimants to know in advance if the property will have sufficient, available equity to payout all lien claims.

 H. OWNER AND GENERAL CONTRACTOR ISSUES AFTER A LIEN IS FILED BY A SUBCONTRACTOR OR SUPPLIER

An owner faced with a recorded lien has the right to pay the claim and deduct the amount due from the general contractor if, after giving 10 days' written notice, the general contractor fails to give written notice back to the owner that the contractor intends to contest the lien. A general contractor who fails to give timely, written notice of intent to contest the lien is treated as having assented to the owner's payment of the lien claim pursuant to A.R.S. § 33-994. The general contractor is required to defend an action (except its own claim) brought by a lien claimant.⁴⁸ The owner is entitled to withhold the amount in dispute from the general contractor pending litigation.⁴⁹ To the extent the owner has to defend against the claim or incurs a loss, he may recover the loss from the general contractor to the extent the owner previously paid the general contractor. See A.R.S. § 33-995(C).

 I. ASSIGNMENT OF LIEN RIGHTS

Lien claims may be assigned from one entity to another pursuant to A.R.S. § 33-982. Assignments of lien claims commonly occur between materials suppliers and their customers: subcontractors. This generally occurs because suppliers' credit applications with their subcontractors are more onerous and have higher default rates than is provided at law. Thus, a subcontractor who is legitimately not paid, and thus did not pay its supplier, may find interest and fees accruing against it, which are not recoverable in a lien action. More practically, a subcontractor may simply find it is unable to order additional materials necessary for other projects from the supplier until the debt is paid.

III. LIEN WAIVERS AND OTHER ISSUES

The placement of liens on a property is the method by which a contractor, subcontractor, or material supplier can protect its interests by securing payment. But how can an owner who pays its general contractor protect itself from liens filed by subcontractors or material suppliers? That is, how can an owner ensure that its payment to a contractor eliminates lower tiered subcontractors and suppliers lien rights and that the owner will not be made to pay twice? The statutory answer is lien waivers.

 A. THE PURPOSE OF LIEN WAIVERS

A lien waiver is a form signed by the party releasing all or a portion of its lien claim for a particular project. Arizona law allows owners to condition payment to a contractor on the contractor providing lien waivers from the contractor and each of the subcontractors or suppliers that provided a Preliminary 20-Day Notice.⁵⁰ Because a pre-lien must be sent to the general contractor, owner, and construction lender, each should have a record of the potential lien claimants. And each may protect themselves by requiring appropriate lien waivers prior to making payment. That is, as a condition to issuing payment, a construction lender may require the owner to provide lien waivers of the general and all lower tiered subcontractors and suppliers, the owner may require the same from the general contractor, who may likewise require all subcontractors and suppliers provide lien waivers. But a subcontractor or supplier would never agree to waive its lien rights on the mere promise of payment. After all, the agreement by which goods were supplied or services rendered already, presumably, contained a promise for payment. Accordingly, Arizona law has a slightly more complex system that allows for conditional waivers when payment is not yet made and final waivers when payment has been made and payment cleared. And since particular issues and the right to lien at all hinge upon final payment, there are additional forms for waiver of liens upon final payment.

 B. THE FOUR LIEN WAIVER FORMS

Prior to the 1992 amendment of the lien statutes, owners and general contractors wrote their own lien waiver forms. Most law firms that practiced in this area had their own lien waiver forms as well. The waivers were written so as to favor owners and general contractors at the expense of subcontractors and suppliers. In an apparent response to the unjust and inconsistent results that followed use of one-sided lien waiver forms, the Arizona Legislature all but mandated the use of four standardized forms.⁵¹

The first waiver form is the "conditional waiver and release on progress payment." This form should be used when the project is not complete and the party signing the waiver is being paid with a check. The form states that the waiver is conditioned on the check clearing the bank; not simply upon its receipt. Most owners and general contractors insist on the second form titled "unconditional waiver and release on progress payment." As the title suggests, this waiver document releases lien rights even if the bank does not honor the check. Although subcontractors and suppliers are within their legal rights to refuse to sign the unconditional waiver until the check has cleared, many sign the form when owners and general contractors insist. Both the conditional and unconditional waiver on progress payment forms set forth the effective date of the waiver. The forms read in relevant part as follows.

This release covers a progress payment for all labor, services, equipment or materials furnished to the jobsite or to ____ [the person with whom the undersigned contracted] ____ through ____ [date] ____ . . ..

Contractors should verify that the lien waiver is dated (the blank in the form is usually filled in by hand) as of the date through which payment is being made. If the date of the check is used, the contractor may inadvertently waive all claims for materials provided between the most recent progress payment request and the date of the check.

The third and forth lien waiver forms are conditional and unconditional waivers upon final payment. These two forms contain a provision whereby the contractor may specify that there are amounts in dispute that not being waived. That is, the forms provide a section whereby the parties can specify a good faith disputed amount. This form reads in relevant part:

This release covers the final payment to the undersigned for all labor, services, equipment or materials furnished to the jobsite or to____ [person with whom undersigned contracted] ____ except for disputed claims in the amount of $__________.

Although this provision in the waiver forms gives contractors a convenient way to make it clear they are not waiving lien rights on contested items, this section of the forms still works to the benefit of owners. Owners routinely refuse to pay the final draw unless the contractor is willing to agree there is no disputed claim. And contractors who sign either of the final lien waiver forms and forget to mention disputed claims (such as whether certain additional work constitutes a "change order" for which additional amounts are owed) lose such claims.

 C. WRONGFUL LIEN

Arizona's law provides that a court may remove improper liens, and a financial penalty may be assessed against the lien holder who records a wrongful or groundless lien. While this statute regards other types of recordings, A.R.S. §33-420 specifically applies to liens. Subpart A of this statute gives the court discretion to assess a penalty against a lien holder if the lien was filed ". . . knowing or having reason to know that the document is forged, groundless, contains a material misstatement or false claim or is otherwise invalid . . .." Because the statute expressly states that it only applies to "[a] person purporting to claim an interest in, or a lien or encumbrance against, real property . . ." it probably does not apply to lien services or attorneys who may record a lien on behalf of their clients. The penalty under Subpart (A) is the greater of $5,000 or triple actual damages caused by the invalid lien.

If an invalid lien is filed in good faith or without knowledge or reason to know it was invalid, the court may still impose a sanction of the greater of $1,000 or triple actual damages if the lien holder refuses to release the lien after twenty days' written notice. Subpart (C) does not place any burden to demonstrate the intent at the time of filing the lien before imposing a penalty, but rather focuses on whether the improper lien is removed and whether the failure to remove the lien is in bad faith.

This same statute permits property owners faced with an invalid lien to file suit and ask that the court ". . . immediately clear title to the real property as provided for in the rules of procedure for special actions."⁵² Additionally, although it is rarely invoked, A.R.S. §33-420(E) also makes it a class 1 misdemeanor to knowingly file a groundless lien.

 D. LEGAL FEES

The court has the discretion to award legal fees to the prevailing party in a lien foreclosure action pursuant to A.R.S. § 33-995(E). The rule pertaining to bonded stop notice lawsuits is stronger in that fees "shall" be awarded pursuant to A.R.S. § 33-1066.

IV. BOND ISSUES

 A. BONDS IN LIEU OF LIEN ON PRIVATE PROJECTS

Anyone who owns legal or equitable title to land can avoid the risk of liens by having the party with whom he/she contracts purchase a bond in lieu of lien rights pursuant to A.R.S. § 33-1003. If all the requirements of the statute are met, the only party with lien rights will be the party with whom he/she contracts -- which is usually the general contractor. The bond must be recorded together with a copy of the general contract. The contract itself must contain a legal description of the property.⁵³

The bond in lieu becomes a bar to lien claims after the bond is properly recorded. The statute of limitations to file suit on such a bond is one year from the date the claimant provided labor or materials to the project.⁵⁴

 B. DISCHARGE BONDS ON PRIVATE PROJECTS

Once a lien claim has been recorded the owner or any other person who has a legal or equitable interest in the property subject to the lien may discharge the lien by purchasing a bond in the amount of one and one half times the lien claim pursuant to A.R.S. § 33-1004. This statute permits the owner to clear the lien, and sell or finance the property. Some lien claimants mistakenly perceive their legal rights as having diminished when this statutory procedure is invoked. Although it is true that the owner is relieved of the pressure associated with a pending lien, the lien claimant's rights may actually improve. The lien client no longer has to worry about priority and whether the property has sufficient equity to payout all lien claims. As of 1992 the Legislature precluded private sureties from issuing discharge bonds, and bonds in lieu of lien rights. Now only sureties holding a certificate of authority to transact surety business issued by the Arizona Department of Insurance can sell a discharge bond. Although sureties have been known to go out of business, that risk may be far less than the risk of losing a priority fight.

After the discharge bond has been purchased, and recorded with the county recorder's office, a copy must be served on the lien claimant within a reasonable time. If suit is pending, the claimant must move to add the principle and surety as defendants within 90 days pursuant to A.R.S. § 33-1004(C). If the discharge bond is not served on the lien claimant, the lien claimant has 6 months from discovery of the discharge bond to file suit against the bond, "except that no action may be commenced on such bond after 2 years from the date it was recorded . . .."⁵⁵

At least one reported appellate level decision has held that recording a lis pendens after a discharge bond had been filed is a violation of Arizona's wrongful lien law statute found at A.R.S. § 33-420.⁵⁶

¹ English common law traditionally recognized non-consensual liens on personal property, but not real property.
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² This section regards certain "owner-occupied" projects for which liens are not available as discussed below.
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³ This section permits a party to avoid a lien by purchasing a payment bond that replaces the need for a lien. Essentially, a lien is not available if there is statutorily sufficient replacement security.
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⁴ For further information regarding license classifications, see the Arizona Registrar of Contractor's website at www.azroc.gov/l_class.html. In Arizona, all parties performing construction services for pay are required to be licensed, except in the fairly limited circumstances where a valid exemption applies pursuant to A.R.S § 32-1121. Exemptions include the so-called 'handyman exemption,' which exempts contracts totaling less than $1,000.00 for casual work from licensing requirements. Where an exemption does not apply, however, a party must be licensed to be entitled to any compensation for the work performed. This is true even where the owner knows the party lacks a valid license. See Crowe v. Hickman's Egg Ranch, 202 Ariz. 113, 41 P.3d 651 (Ct.App. 2002).
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⁵ If the license expires after the work is complete, and the lien is filed thereafter, the lien is still valid. Adams Insulation Co. v. Los Portales Associates Ltd. Partnership, 167 Ariz. 112, 804 P.2d 841 (Ct.App. 1991).
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⁶ Schlicht v. Curtin, 117 Ariz. 30, 570 P.2d 801 (Ct.App. 1977).
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⁷ Independent Meat Co. v. Crane Co., 21 Ariz. 1, 184 P. 992 (1919).
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⁸ See B.J. Cecil Trucking, Inc. v. Tiffany Const. Co., 123 Ariz. 31, 597 P.2d 184 (Ct.App. 1979).
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⁹ Price v. Sunmaster, 27 Ariz. 771,558 P.2d 966 (Ct.App. 1976).
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¹⁰ Kerr-McGee Oil Industries, Inc., McCray, 89 Ariz. 307, 361 P.2d 734 (1961).
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¹¹ Independent Meat Co. v. Crane Co., 21 Ariz. 1, 184 P. 992 (1919).
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¹² However, Arizona law and corresponding federal law, in recognition of this fact, require that a surety bond be posted by the general contractor of any project to ensure the payment of parties that would otherwise have lien rights. See A.R.S. § 34-222.
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¹³ However, as with government projects, the Legislature recognized this deprivation of a right and provided for at least some additional rights to protect subcontractors and suppliers. A.R.S. § 33-1105 provides that a general contractor who receives money from an "owner-occupant" holds such amount in trust for payment to subcontractors or suppliers. The Ninth Circuit Court of Appeals recognized that violation of this "trust" creates personal liability by an officer of the contracting company and is a breach of fiduciary duty that is not dischargeable in bankruptcy pursuant to § 523(a)(4). In re Baird, 114 B.R. 198 (9th Cir.1990).
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¹⁴ This is true even in the rare instances where a private payment bond is placed on the project. A party in direct contractual privity with the owner still has lien rights pursuant to A.R.S. § 33-1003(a).
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¹⁵ Stratton v. Inspiration Consolidated Copper Co., 140 Ariz. 528, 683 P. 2d 327 (Ct.App. 1984).
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¹⁶ Commercial Cornice & Millwork, Inc., v. Camel Constr. Servs. Corp., 154 Ariz. 34, 739 P.2d 1351 (Ct.App. 1987).
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¹⁷ James Weller, Inc. v. Hansen, 21 Ariz. 217, 517 P. 2d 1110 (Ct.App. 1973); Smith Pipe & Steel Co. v. Mead, 130 Ariz. 150, 634 P.2d 962 (1981) (rejecting lien where owner owned two adjacent parcels and subcontractor supplied work only to south parcel, but placed lien on north parcel.); Commercial Cornice & Millwork, Inc. v. Camel Construction Service Corp., 154 Ariz. 34, 739 P.2d 1351 (Ct.App.1987) (rejecting lien where subcontractor failed to state date on which labor or materials was first supplied); MLM Const. Co., Inc. v. Pace Corp., 172 Ariz. 226, 836 P.2d 439 (Ct.App. 1992) (rejecting lien where preliminary notice failed to give statutorily required language).
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¹⁸ Flooring Services, Inc. v. Radisson Group, Inc., 158 Ariz. 111, 761 P .2d 733 (Ct.App. 1988).
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¹⁹ See, e.g. Ranch House Supply Corp. v. Van Slyke, 91 Ariz. 177, 370 P.2d 661 (1962); Lewis v. Midway Lumber, Inc., 114 Ariz. 426, 431, 561 P.2d 750, 755 (Ct.App.1977) (finding substantial compliance with lien requirements sufficient); Gene McVety, Inc. v. Don Grady Homes, Inc., 119 Ariz. 482, 581 P.2d 1132 (1978).
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²⁰ See, e.g. Irwin v. Murphey, 81 Ariz. 148, 302 P.2d 534 (1956); Union Rock & Materials Corp. v. Scottsdale Conference Center, 139 Ariz. 268, 678 P.2d 453 (Ct.App.1983); MLM Const. Co., Inc. v. Pace Corp., 172 Ariz. 226, 836 P.2d 439 (Ct. App. 1992) (voiding lien for failure of preliminary notice to have statutorily prescribed language appear on document); see also James Weller, Inc. v. Hansen, 21 Ariz.App. 217, 517 P.2d 1110 (1973) and Westinghouse Electric Supply Co. v. Western Seed Production Corp., 119 Ariz. 377, 580 P.2d 1231 (Ct.App.1978) (both sustained 'misdescriptions' of property in a notice and claim of lien as "sufficient for identification" to impress a lien).
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²¹ See A.R.S. § 33-992.01(B).
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²² See A.R.S. § 33-992.02.
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²³ See, e.g. MLM Const. Co., Inc. v. Pace Corp., 172 Ariz. 226, 836 P.2d 439 (Ct. App. 1992) (voiding lien for failure of preliminary notice to have statutorily prescribed language appear on document).
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²⁴ See A.R.S. § 33-992.01(C).
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²⁵ See, e.g. MLM Const. Co., Inc. v. Pace Corp., 172 Ariz. 226, 836 P.2d 439 (Ct. App. 1992) (voiding lien for failure of preliminary notice to have statutorily prescribed language appear on document).
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²⁶ See A.R.S. § 33-992.01(H)
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²⁷ See A.R.S. § 33-992.01(F).
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²⁸ A.R.S. §33-992.01(C).
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²⁹ A.R.S. §33-992.01(I).
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³⁰ It is worth noting that the 1992 amendment added the word "final" when referring to inspections. This presumably answers the question as whether temporary certificates of occupancy start the time running to record liens.
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³¹ See A.R.S. § 33-993(A) and (C)(1).
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³² See A.R.S. § 33-993(A) and (C)(2).
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³³ See A.R.S. § 33-993(D).
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³⁴ With regard to the requirement that a copy of the contract be attached if written, one court has ruled that the contract need not be attached if the parties date, purpose, and consideration are adequately described in the notice. Peterman-Donnelly Engineers & Contractors Corp. v. First Nat. Bank, 2 Ariz. 321,408 P.2d 841 (Ct.App. 1965).
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³⁵ See A.R.S. § 33-993(A).
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³⁶ Old Adobe Office Properties, Ltd. v. Gin, 151 Ariz. 248,727 P.2d 26 (Ct.App. 1986).
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³⁷ Lewis v. Midway Lumber Inc., 114 Ariz. 426, 561 P.2d 750 (Ct.App. 1977).
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³⁸ Western Insulated Glass Co. v. McKay, 174 Ariz. 597, 852 P.2d 412 (Ct.App. 1993).
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³⁹ Harbridge v. Six Points Lumber Co., 17 Ariz. 339, 152 P.2d 860 (1915).
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⁴⁰ Lenslite Co. v. Zocher, 95 Ariz. 208, 388 P.2d 421 (1964) (General contractor is entitled to lien for contract price and is not limited to reasonable value.).
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⁴¹ Fortune v. Superior Court In and For Maricopa County, 159 Ariz. 549, 768 P.2d 1194 (Ct.App. 1989).
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⁴² Lenslite Co. v. Zocher, 95 Ariz. 208, 388 P.2d 421 (1964).
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⁴³ Parker v. Holmes, 79 Ariz. 82, 284 P.2d 455 (1955).
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⁴⁴ Fortune v. Superior Court, 159 Ariz. 549, 768 P.2d 1194 (Ct.App. 1989).
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⁴⁵ It is common in materials supply contracts or invoices to have a 2% discount for payment in some brief period of time, such as 15 days from delivery.
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⁴⁶ Cashway Concrete & Materials v. Sanner Contracting Co., 158 Ariz. 81, 82, 761 P.2d 155, 156 (Ct.App., 1988) (Where the agreement provided for a discount of 19% if payment was made promptly, lien is proper for discounted amount because, "[r]easonable value does not include Draconian contract terms designed to coerce prompt payment.").
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⁴⁷ In re: Mayer Central Building Corp., 275 F. Supp. 873 (D. Ariz. 1967); Wylie v. Douglas Lumber Co., 39 Ariz. 511, 8 P.2d 256 (1932).
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⁴⁸ See A.R.S. § 33-995(A).
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⁴⁹ See A.R.S. § 33-995(B).
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⁵⁰ See e.g., A.R.S. §32-1129.01 (Arizona's Prompt Pay Act allows an owner to withhold payment for failure to provide appropriate lien waivers).
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⁵¹ See A.R.S. §33-1008(D).
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⁵² See A.R.S. §33-420(B).
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⁵³ Hartford Accident & Indemnity Co. v. Federal Ins. Co., 172 Ariz. 104,834 P.2d 827 (Ct.App. 1992).
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⁵⁴ For a more detailed explanation see Monks Const. v. Aetna Cas. & Sur. Co., 189 Ariz. 575, 944 P.2d 517 (Ct.App. 1997)
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⁵⁵ See A.R.S. § 33-1004(F).
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⁵⁶ Hatch Companies Contracting, Inc. v. Arizona Bank, 170 Ariz. 553, 826 P .2d 1179 (Ct.App. 1991).
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