Find Payment Security in Washington's Stop Notice Statute
Curtis A. Welch
Published in DJC Oregon
Those who provide labor, materials, equipment or professional services for Washington projects involving construction financing have an effective, but underutilized, procedure under the Revised Code of Washington (RCW) for creating additional security for payment due to them. It's called the "stop notice." Provided that they otherwise qualify under RCW 60.04.221, the stop notice procedure can be used by anyone who is authorized to file a construction lien on a project. This list includes prime contractors, subcontractors, suppliers, laborers, architects, engineers and surveyors.
The stop notice is given to both the construction lender and the owner, and states, among other required information, that the claimant has not received payment within five calendar days after payment first became due. The notice must be given no earlier than five calendar days after the payment first became due and no later than 35 calendar days after the payment first became due. Notices from subcontractors, suppliers and those other than a prime contractor must also be given to the prime contractor – as well as the construction lender and project owner.
Upon receipt of the notice, the construction lender is required to withhold from the next construction-financing draw and from any subsequent draws the amount specified in the notice, as well as future sums that will become due to the claimant.
Thus, the word "stop" in the term "stop notice" means stopping or reducing the project's construction financing to the borrower to the extent of the overdue sums stated in the notice. RCW 60.04.221 does not use the exact words "stop notice," but the statute is commonly known as the stop notice statute.
The stop notice procedure is typically used by subcontractors and suppliers in connection with construction loan disbursements to the prime contractor. However, the procedure is also available to the prime contractor in connection with construction loan disbursements to the owner.
Not a substitute for a construction lien
The stop notice procedure is not a substitute for recording a construction lien. Rather, the procedure is to be used as an additional measure to the timely recording of a construction lien. Further, the stop notice procedure is only available to one who is authorized to record a construction lien. For example, if a prime contractor or subcontractor is not registered as a contractor with the Washington State Department of Labor and Industries, and it is not exempted from the registration requirement, then it cannot use the stop notice procedure. Also, if a claimant has failed to take the steps required to record a valid construction lien, such as failing to give a pre-lien notice if one is required, the claimant may not use the stop notice procedure.
Moreover, the sum stated in the stop notice must be for lienable items – that is for labor, materials, equipment or professional services for which the claimant may claim a lien under RCW 60.04.021.
Form of notice/delivery of notice
The form of the stop notice is set forth in the statute itself, in RCW 60.04.221 (4)(d), as is the information required to be in the notice. Generally, the stop notice must contain the names and addresses of the owner(s), prime contractor, lender(s) and the claimant; the location of the subject project and property; a description of the labor, equipment, services or materials provided; the sum due and the date it became due; and a demand to the lender to withhold the claimed sum from construction financing draws.
The notice must be in writing and sent by certified or registered mail to, or personally served upon, the lender and owner, and where appropriate, upon the prime contractor. The claimant is permitted to deliver multiple notices, provided that each one is delivered more than five calendar days after a payment first became due and not more than 35 days after the payment first became due.
Penalty for lender's failure to abide by notice
If the lender fails to withhold sums from the next and/or subsequent draws sufficient to cover the amount stated in the stop notice, or fails to obtain a payment bond for the benefit of the claimant for those sums, the lender's trust deed or mortgage is subordinated to the claimant's lien in an amount equal to the sums not withheld. This is a significant penalty, because in Washington the priority of a construction lender's trust deed or mortgage is commonly higher in priority than that of a construction lien.
Challenging the notice
There is a procedure in the stop notice statute for challenging the notice. It involves a shortened procedure for setting a hearing. If, after the hearing, the court finds that the stop notice was frivolous or without reasonable cause, the court must declare the stop notice to be void, and must award attorney fees and costs to the party challenging the notice. If the amount specified in the notice is found to be excessive, the court must reduce the amount. The party challenging the notice must be certain of its challenge, however, because the court may reject the challenge and enter an order finding that the stop notice was made with reasonable cause and is not clearly excessive. If the court enters such an order, it will also award attorney fees and costs to the claimant that were incurred in relation to its opposition of the challenge.
In summary, the stop notice is an effective tool, when used correctly, for creating additional security for payment of labor, materials, equipment and professional services provided to a Washington project financed by a construction loan.
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