Protecting Lien Rights on Arkansas Residential Projects

Protecting Mechanic’s Lien Rights on Arkansas Residential Projects

If you furnish materials or services to a private project in Arkansas, make sure you know whether it’s considered residential or commercial, as there are varying notice requirements. These are the notice requirements for private projects in Arkansas, according to The National Lien Digest©.

Residential (with 4 or fewer units):

  • Include notice in contract or serve residential notice upon the owner before first furnishing materials or services. (The notice may be served after furnishing, but the lien, when later filed, will only be effective from the date the notice was served.)
  • A residential contractor who fails to give the notice may be fined up to $1,000.00, and is barred from bringing an action to enforce any provision of the residential contract.
  • No residential notice is required when:
    • the notice is incorporated within your contract,
    • the prime contractor or another lien claimant has served the notice upon the owner,
    • the prime contractor furnishes a payment and performance bond, or
    • when contracting directly with the owner and providing services or materials.

Commercial and Residential (with more than 4 units):

  • Serve notice of non-payment upon the owner and prime contractor after last furnishing materials or services, but within 75 days from last furnishing materials or services.
  • The 75-day notice is not required of prime contractors contracting directly with the owner.

Case: Was the Notice Required? 

In April 2016, an appeals court in Arkansas reversed a circuit court’s ruling, which shifted an invalidated lien to a valid lien. The case is Hammerhead Contracting & Development, LLC V. Ladd, 2016 Ark. 162 – Ark: Supreme Court 2016. Hammerhead Contracting & Development, LLC (Hammerhead) contracted with Dale Ladd (Ladd) for the construction of Ladd’s new home – making this a residential project.

In Arkansas, there is a notice requirement for those furnishing to a residential project. BUT, there are exceptions to this notice requirement and the appeals court determined Hammerhead was not required to serve the notice, based on one of these exceptions.

There are two sections within the Arkansas code that appear to conflict, however, as the appeals court states “The first rule of statutory construction is to construe a statute just as it reads, giving the words their ordinary and usually accepted meaning…” Let’s take a look.

Owner’s Argument

Ladd’s argument was based on 18-44-115 (a) 1 and 4, which indicates that if a residential contractor does not serve a notice, they forfeit their mechanic’s lien rights.

18-44-115.  Notice to owner by contractor — Definitions.

(a)(1) No lien upon residential real estate containing four (4) or fewer units may be acquired by virtue of this subchapter unless the owner of the residential real estate, the owner’s authorized agent, or the owner’s registered agent has received, by personal delivery or by certified mail, a copy of the notice set out in this subsection

(4) If a residential contractor fails to give the notice required under this subsection, then the residential contractor is barred from bringing an action either at law or in equity, including without limitation quantum meruit, to enforce any provision of a residential contract.

Contractor’s Argument

Hammerhead’s argument was based on 18-44-115 (a) 8(A) & (B), which indicates that selling directly to the owner eliminates the notice requirement.

18-44-115.  Notice to owner by contractor — Definitions.

(8) (A) If the residential contractor supplies a performance and payment bond or if the transaction is a direct sale to the property owner, the notice requirement of this subsection shall not apply, and the lien rights arising under this subchapter shall not be conditioned on the delivery and execution of the notice.

(B) A sale shall be a direct sale only if the owner orders materials or services from the lien claimant.

According to the appeals court decision:

“… Ladd asserted that, given the statutory definition of “contractor” in Arkansas Code Annotated section 18-44-107(1), “`contractor’ means any person who contracts orally or in writing directly with a person holding an interest in real estate, or such person’s agent, for the construction of any improvement to or repair of real estate,” there was no “conceivable” scenario in which any transaction between a homeowner and a contractor would not be a direct sale. According to Ladd, that construction of the statute would “lead to an absurd result” and defeat the “plain purpose” of the law, which required that contractors give customers notice of the potential for a lien to be filed.”

Theoretically, Ladd isn’t wrong – a contract between an owner and a general contractor would always be a direct sale, making the preliminary notice optional at best. Fortunately for Hammerhead and unfortunately for Ladd, the appeals court interpreted statute “just as it reads”, which affords Hammerhead the ability to proceed with a valid mechanic’s lien despite not serving a preliminary notice.

Commentary

This case went before the circuit court & the appeals court – likely to go back to court on another appeal – that is a lot of litigation and even more time and money. No, I’m not an attorney, but I do see both sides to this case and must admit the statute seems a bit contrary. When examined for too long and interpreted for anything other than words on a page, nearly anything could be argued for or against.

As a credit professional, I understand the immense benefits of properly securing mechanic’s lien rights. I can’t help but wonder how much money Hammerhead could have saved, if they served preliminary notices as a regular business practice. Not serving a simple document could have prevented some of this litigation (recognizing that litigation would have ensued when Hammerhead filed suit) – why wouldn’t you take advantage of that simple document?

 

Note: In the event statute changes, based on the arguments in this or any other case, The National Lien Digest information provided at the time of this post may become inaccurate. NCS updates The National Lien Digest in real-time, as statute changes occur, and we recommend you access The National Lien Digest for the most current information.

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