Changes to State Construction Registry Operation

On May 13, 2014 House Bill 42 will go into effect.  This new law makes the following changes to the State Construction Registry: 

First Lien Position

Contractors and suppliers will no longer be required to withdraw and refile preliminary notices.  Instead if lenders want their construction loan to be in first position, they are required to pay for all work performed before their construction deed of trust is recorded.

 Errors in Preliminary Notice

If subcontractors and suppliers file their preliminary notice by linking to the general contractor’s preliminary notice then the subcontractor or supplier preliminary notices will be deemed to “substantially comply” with the law.  This means that if there are any errors in the notice those errors can not be used to invalidate the subcontractor’s or supplier’s preliminary notice.

 How does this law go in to effect

The new law does not say how it will go in to effect.  For example, if the general contractor’s preliminary notice is filed on May 12 (one day before the new law starts), and you file on May 30, 2014, does the new law or old law apply? 

 The Division of Occupational & Professional Licensing (“DOPL”) asked the Attorney General’s office for an opinion regarding which notices are covered by the new law and which are covered by the old law.  That opinion has not been issued yet—and may not be issued at all. Therefore, in order to assist you with understanding the operation of the new rules, I offer the following guidance, but ultimately, this is just my opinion, and it is possible that your attorney or a judge may disagree.

1. Filing preliminary notices using the general contractor’s preliminary notice, and having the benefit of protection from errors should apply to preliminary notices filed on and after May 13, 2014.

 2. The lien priority rules will probably be based upon when a construction project started.  Since new laws generally apply going forward, and not backward, The old law will probably apply for projects which started before May 13, 2014, and the new law will apply to those beginning after May 13, 2014.  This means that if you are asked to withdraw a preliminary notice for a project, and that project started before May 13, 2014, you should follow the old rules and withdraw, then refile the preliminary notice.  The hard part is knowing when a project started, and the law is not clear on that point. So you need to be careful.

 I recommend that you carefully consider all requests for withdraw, because if you withdraw and refile a preliminary notice for a project which is controlled by the new law, there is a significant risk that your refiled preliminary notice will not be valid.  This is because the new law, does not recognize the validity of a refiled preliminary notice.  So if you are asked to withdraw, take the time to make sure you know which law applies to your notice.

 While we are in this transition phase, you may be asked to withdraw a notice which you know is controlled by the new law.  If that happens, tell the bank or title company that the rules have changed and you are no longer permitted to withdraw and refile a preliminary notice.  You can also send them a copy of the enclosed notice.