When certain prerequisites are satisfied (see below), the owner is authorized to withhold funds from the general contractor in order to satisfy debts owed to a claimant by the general contractor or its subcontractors. These withheld funds (referred to as “trapped funds”) are in addition to the 10% statutory retainage that the owner is required to withhold from the general contractor until thirty days after the project is complete.
Thus, by satisfying the below prerequisites you can potentially create an additional source of funds from which to possibly satisfy the debt. More importantly, if you then demand the owner to pay the debt from the trapped funds and the general contractor does not provide written notice to the owner that it disputes the amount being claimed, then the owner is required to immediately pay the debt.
Additionally, if the general contractor disputes the claim and if the claimant satisfies additional prerequisites (see below), then the owner becomes personally liable for the debt and his property is subject to a lien for any money paid to the original contractor after receiving notice of the claim.
To authorize the owner to withhold funds from the general contractor, you must include the following language in the pre-lien notice letter:
If the claim remains unpaid, the owner may be personally liable and the owner’s property may be subjected to a lien unless you withhold payments from the contractor for payment of the claim or if the claim is otherwise paid or settled.
The owner must retain the funds until either: (1) the time for filing the lien affidavit has passed; or (2) if a lien affidavit was timely filed, until the lien claim has been satisfied or released. Click here to Serve A Pre-Lien Notice Letter.
Prerequisites for Personal Liability Against Owner
If the owner fails to withhold the trapped funds from the general contractor after the below requirements have been satisfied, then the owner will be personally liable for the debt:
- The owner must have received proper notice as described above;
- A lien affidavit has been perfected; and
- The claim has been reduced to a final judgment.