(Originally published in the August 2008 Housing Journal)
Explanation of the Stop Notice Act
In 1989 the Legislature became concerned about numerous examples of homeowners having to pay twice for improvements to their property. How did this happen? The homeowner paid the “original contractor” for a construction project, but that contractor did not pay the subs and suppliers for their work on the job. Under the Lien Law, these subs and suppliers had a right to claim against the property to get their money. In order to have the liens released, the homeowner had to pay them, in effect, paying twice for the same work. The result was the Stop Notice Act.
This special law within the Lien Law pertains only to “residential properties containing not more than four dwelling units”. The Act begins by documenting the complaint of the Legislature: “The legislature finds there are practices within the industry of constructing residential properties…resulting in certain financial inequities…and declares that the purpose of the Stop Notice Act is to provide for timely payment by the original contractor to persons contracted with to furnish labor or materials…”
The most important words, somewhat paraphrased, are these: “Payment by the owner …. (for any construction) which could give rise to a lien …shall discharge all such liens, unless, prior to (that) payment …(the lien has been filed).” Therefore, to determine if any lien rights still exist on a residential construction project simply answer this question: “Has the Original Contractor been paid in full for the job?” If the answer is “Yes” then the regular lien rights are gone. If the answer is “No,” then regular lien rights may still exist, depending on how much time has gone by since the work was put in place. Of course, there are many exceptions and special circumstances which may cloud a particular case, but in general that is how the Stop Notice Act applies.
This Act goes on to set out a very complicated procedure whereby the Original Contractor must EITHER pay subs/ and suppliers for work done and materials installed PRIOR to accepting final payment (on new construction we usually call this a closing) OR, have notified unpaid subs and material suppliers that they are about to lose their lien rights, and in addition, to disclose to the buyer the names of those who remain unpaid and who have not signed a release of their lien rights. Admittedly, this is a very rudimentary explanation of this provision of the Stop Notice Act; it covers the basic intent.
Upon acceptance of the final payment by the Original Contractor, he “shall” sign an affidavit that all invoices received from suppliers and subs have been paid, and supply the owner with the names and addresses of all subs and suppliers. If some of the invoices have not been paid, money shall be placed in an escrow account and the money disbursed upon the signed approval of the Original Contractor.
The Stop Notice Act has teeth that can rip an unwary or inattentive Original Contractor. Section 48-2A-11, DISCHARGE. PENALTY, reads as follows: “Any contractor or subcontractor justly indebted to a supplier of material or labor who accepts payment for construction … and knowingly and intentionally applies the proceeds to a use other than paying those persons with whom he contracted is guilty of a fourth degree felony and shall be sentenced pursuant to the provisions of…(the law)…”.
If you are a contractor in New Mexico, you must have a working knowledge of the Lien Law and the Stop Notice Act. Does everyone involved in a construction project dot the “i” and cross the “t” with respect to the Stop Notice Act? No. But when the payment processes begin to break down everyone wants to know the details so they can begin assessing their position. Don’t wait until a problem occurs. Become familiar with the obligations and rights you have as a New Mexico contractor, and do your part to keep things functioning smoothly.