BILL REQ. #:  S-4007.1 

Read first time 01/30/2004.   Referred to Committee on Commerce & Trade.

     AN ACT Relating to protecting homeowners who hire contractors to remodel or build their homes; amending RCW 60.04.021, 60.04.250, 18.27.020, 60.04.035, 60.04.011, and 60.04.031; adding new sections to chapter 60.04 RCW; creating a new section; and prescribing penalties.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF WASHINGTON:

NEW SECTION.  Sec. 1   The legislature finds that the vast majority of contractors engaged in the business of constructing or remodeling owner-occupied single-family homes are both technically proficient in their trade and able to manage their business dealings in accordance with the highest standards. The legislature also finds, however, that in those relatively few, but all-too-frequent, instances where prime contractors on such construction or remodeling projects intentionally or unintentionally mismanage payments received from homeowners that are intended for subcontractors, suppliers, and others, existing provisions are inadequate to protect homeowners. Additionally, the toll on an individual homeowner's personal economic and emotional condition that such financial mismanagement by this small fraction of prime contractors is not adequately balanced against the responsibilities, obligations, and possible penalties that contractors bear for such mismanagement. Consequently, the legislature finds that it is necessary to (1) clearly establish that prime contractors have a duty to properly manage funds received from homeowners that are intended for suppliers, subcontractors, and others, and to hold those who fail in this duty personally responsible for such financial mismanagement; (2) reduce the exposure of homeowners to lien liability, particularly when contractors fail to pay suppliers and subcontractors as promised; (3) clarify the right of homeowners to require that prime contractors maintain deposits and other similar payments in a trust account for the homeowner, when the homeowner elects to do so; and (4) increase opportunities for homeowners to become better educated about ways to protect themselves from financial mismanagement by those few contractors who are unable or unwilling to meet the financial management standards set by the vast majority of residential contractors in this state.

NEW SECTION.  Sec. 2   A new section is added to chapter 60.04 RCW to read as follows:
     (1) A prime contractor, and a prime contractor's principals, partners, officers, directors, managers, vice principals, and authorized purchasing agents, have the duty to act in the best interest of a residential homeowner in the management and disbursement of all amounts paid by the homeowner to the prime contractor for labor, professional services, materials, or equipment supplied by a potential lien claimant. A prime contractor shall defend the homeowner against all such lien claims for which the homeowner paid the prime contractor.
     (2) Funds paid to a prime contractor by a residential homeowner for labor, professional services, materials, or equipment supplied by a potential lien claimant shall not be used by the prime contractor for any other purpose.
     (3) All funds paid to a prime contractor by a residential homeowner shall be presumed to be for labor, professional services, materials, or equipment supplied by potential lien claimants unless, before accepting payment from a residential homeowner, a prime contractor provides written notice to the homeowner identifying:
     (a) The amount of the homeowner's payment that the prime contractor will retain in compensation for services provided by the prime contractor;
     (b) The potential lien claimants, if any, to which payment is due, and the amounts due to each potential lien claimant; and
     (c) Which of such potential lien claimants the prime contractor (i) does not intend to fully pay from the homeowner's payment, and the reason for less than full payment; and (ii) intends to fully pay from the homeowner's payment.
     (4) A prime contractor and its principals, partners, officers, directors, managers, vice principals, and authorized purchasing agents are liable for the full amount of any lien claim filed pursuant to RCW 60.04.091 if the prime contractor, or any principal, partner, officer, director, manager, vice principal, or authorized purchasing agent of the prime contractor, having knowledge of such use of funds or failure to comply:
     (a) Permits the use of or uses for any other purpose funds paid to the prime contractor by a residential homeowner for labor, professional services, materials, or equipment supplied by a potential lien claimant and a notice of claim of lien is filed, pursuant to RCW 60.04.091, against a homeowner by a potential lien claimant to which payment was due when the prime contractor received payment from the homeowner; or
     (b) Fails to comply or otherwise interferes with the lien protection choice made by the homeowner under RCW 60.04.250.

Sec. 3   RCW 60.04.021 and 1991 c 281 s 2 are each amended to read as follows:
     (1) Except as provided in subsections (2) and (3) of this section and RCW 60.04.031, any person furnishing labor, professional services, materials, or equipment for the improvement of real property shall have a lien upon the improvement for the contract price of labor, professional services, materials, or equipment furnished at the instance of the owner, or the agent or construction agent of the owner.
     (2)(a) With respect to labor, professional services, materials, or equipment for the improvement of an owner-occupied single-family residence where the aggregate lien claims relating to transactions constituting violations of section 2 of this act exceed twelve thousand dollars, any person furnishing labor, professional services, materials, or equipment for the improvement of an owner-occupied single-family residence shall have a lien:
     (i) In the amount of the contract price of labor, professional services, materials, or equipment furnished at the instance of the owner, or the agent or construction agent of the owner, upon any real property owned by the prime contractor, and any real property owned in their respective personal capacities by: (A) The owner if the prime contractor is an individual proprietorship; (B) each partner if the prime contractor is a firm or partnership; (C) the corporate officers if the prime contractor is a corporation; and (D) all members of any other business entities; and
     (ii) Upon the improvement for no more than one-half of such contract price.
     (b) No lien against improvement to an owner-occupied single-family residence shall be foreclosed unless the lien claim or claims against all of the entities and persons identified in (a)(i) of this subsection are insufficient to satisfy the lien.
     (3) No person furnishing labor, professional services, materials, or equipment for the improvement of an owner-occupied single-family residence shall have a lien upon the improvement for labor, professional services, materials, or equipment furnished on behalf of the homeowner at the instance of a prime contractor or construction agent employed by a prime contractor if the person knew or should have known that the prime contractor had been the prime contractor or construction agent on a single-family residential improvement project with respect to which (a) a residential homeowner paid the prime contractor for goods or services supplied by a potential lien claimant; (b) the prime contractor failed to pay the potential lien claimant; and (c) the potential lien claimant filed or otherwise pursued a claim of lien against the homeowner in the previous three years.

NEW SECTION.  Sec. 4   A new section is added to chapter 60.04 RCW to read as follows:
     (1) At the option of the residential homeowner, a prime contractor shall deposit in a trust account, or other accounts authorized by rule, maintained in a federally insured financial institution located in Washington state all sums received from the residential homeowner for services not yet provided or goods not yet received.
     (2) The trust account shall be established and maintained for the benefit of residential homeowners paying money to the prime contractor for services not yet provided or goods not yet received. The prime contractor shall not in any manner encumber the amounts in trust and shall not withdraw money from the account, except the following amounts may be withdrawn at any time:
     (a) Partial or full payment to a potential lien claimant that has provided goods or services to the homeowner;
     (b) Refunds of amounts to the homeowner;
     (c) Interest earned and credited to the trust account; or
     (d) Remaining funds of a homeowner owed to the prime contractor, provided all potential liens against the homeowner have been released.
     (3) The prime contractor may deposit nonhomeowner funds into the trust account, or other approved account, as needed in an amount equal to a deficiency resulting from dishonored homeowner payments made by check, draft, credit card, debit card, or other negotiable instrument.
     (4) The prime contractor shall notify the department of any change in the account number or location of the trust account, or other approved account, within one business day of the change.
     (5) The director, by rule, may allow for the use of other types of funds or accounts only if the protection for consumers is no less than that provided by this section.

Sec. 5   RCW 60.04.250 and 1990 c 81 s 1 are each amended to read as follows:
     The department of labor and industries shall prepare a master document((s)) that provides informational material about the basics of a construction project, construction lien laws, and a list of available safeguards against real property lien claims((. The material shall include methods of protection against lien claims, including obtaining lien release documents, performance bonds, joint payee checks, the opportunity to require contractor disclosure of all potential lien claimants as a condition of payment, and lender supervision under RCW 60.04.200 and 60.04.210. The material)), which the homeowner must consider, reject, or select. Before any building permit may be issued for the construction of a new owner-occupied single-family residence or for the improvement to an owner-occupied single-family residence for an amount in excess of one thousand dollars, if the construction will involve the services of a prime contractor, the permit issuing agency shall not issue any permit until the homeowner has personally, and not through an agent, acknowledged receipt of the document. If the homeowner completes the document by making selections, as indicated in the document, and submits it to the agency, the permit issuing agency shall maintain a copy of the completed document in the file of the permit issuing agency relating to the homeowner's permit application. The document shall be in substantially the following form and shall also include ((sources of)) information describing the scope and limits of state contractor bonding requirements, the provisions of this act, and the availability of further information, including the department of labor and industries and the office of the attorney general.

     Dear Homeowner:
     You must complete the items below and select from the options below what protection, if any, you want against potential lien claims on your property as a result of the construction work for which you are contracting. If your contractor fails to pay subcontractors, suppliers, or laborers or neglects to make other legally required payments, those who are owed money can file a lien against your property for payment, even if you have paid your contractor in full. Anyone filing a valid lien claim may force the sale of your property to recover the unpaid amount. This is true if you have hired a contractor to build a new home or are buying a newly built home. It is also true when you remodel or improve your property, although the amount of your liability may be limited to the amount you owe the prime contractor at the time a lien is filed.
     Under Washington laws, those who work on your property or provide materials and are not paid have a right to enforce their claim for payment against your property. This claim is known as a construction lien.
     People who supply materials or labor ordered by your contractor are permitted by law to file a lien only if they do so within ninety days of cessation of performance or delivery of materials. The time frame is spelled out in RCW 60.04.091.
     If you enter into a contract to buy a newly built home, you may not receive a notice of a lien based on a claim by a contractor or material handler. Be aware that a lien may be claimed even though you have not received a notice. Before making final payment on the project, obtain a completed lien release form from each contractor and material supplier. A sample of this release of lien form is available from the department of labor and industries, contractor registration section.
     You have final responsibility for seeing that all bills are paid even if you have paid your contractor in full.
     If you are dealing with a lending institution, ask your loan officer what precautions the lending institution takes to verify that subcontractors and material suppliers are being paid when mortgage money is paid to your contractor. You may want to request lender supervision if your lending institution is providing interim or construction financing.
     If you receive a notice to enforce a lien, take the notice seriously. Let your contractor know you have received the notice. Find out what arrangements are being made to pay the sender of the notice.
     When in doubt, or if you need more details, consult your attorney. When and how to pay your contractor is a decision that requires serious consideration. Washington law, RCW 18.27.114, requires contractors to give you this disclosure statement if your contract exceeds one thousand dollars.
     Complete the following information, select below how you want to protect yourself from possible lien claims on your property, and inform your contractor of your selections or discuss your selections with your contractor.
     I, (owner's name) . . . . . . . . . . . . . . . . ,
     am agreeing to have (contractor's name)
     perform the following construction work (basic description)
     at (location of your property using an address, legal description or approximate address)
     in the amount of $ . . . . . . . . including all federal, state, and local taxes, and this amount may be adjusted only if authorized by me in writing.
     To protect myself against possible lien claims in the future for this work, I (select one):
     . . . . . . . . will only issue checks made payable jointly, naming the contractor and the subcontractor or supplier as payees.
     . . . . . . . . will only issue checks to the contractor and subcontractors in the amounts equal to the amounts for which lien releases that release all lien rights to those amounts, as provided by RCW 60.04.071, have been provided to me by each lien claimant requesting payment.
     . . . . . . . . want the contractor to post a bond to assure both performance of this construction work and payment to all subcontractors and suppliers in the amount of (select one) . . . the total contract amount . . . in the amount of $. . . . . . . . (Note: Your contractor may add the cost of this bond to your contract price.)
     . . . . . . . . will be using . . . . . . . . as an escrow agent to disburse construction funds and to protect my interests. (NOTE: Before making this selection, find out whether the escrow agent you plan to use will protect you against liens when disbursing payments. If you are interested in using this alternative, consult your attorney.)
     . . . . . . . . want this contractor to set up a trust account for all funds I pay to this contractor, and the trust funds must be disbursed in accordance with our construction agreement to subcontractors and suppliers.
     . . . . . . . . DO NOT want any of the above protections from potential lien claims against my property as a result of this construction work.
     In addition to the above selection, I choose ONE of the following: . . . WANT . . . DO NOT WANT the prime contractor to disclose all potential lien claimants as a condition of payment. (NOTE: A lien claimant must, under RCW 60.04.091(2), mail by certified or registered mail or by personal service a copy of the claim of lien to the owner within fourteen days of the time the lien is recorded. While an action is ongoing, the law, RCW 60.04.151, allows an owner to withhold from this prime contractor the amount of money for which a claim is recorded by a subcontractor, supplier, or laborer.)
     More information about contractors is available by visiting the department of labor and industries on the Internet at www.LNI.wa.gov/SCS/contractors/ or by calling the contractor registration hotline at 1-800-647-0982. You may also call your local department of labor and industries office. See listings under "Washington state of" in the government section or the white pages of the telephone book.
     Signed by (property owner): . . . . . . . . . . . . . . . .
     Date signed: . . . . . . . .

Sec. 6   RCW 18.27.020 and 1997 c 314 s 3 are each amended to read as follows:
     (1) Every contractor shall register with the department.
     (2) It is a gross misdemeanor for any contractor to:
     (a) Advertise, offer to do work, submit a bid, or perform any work as a contractor without being registered as required by this chapter;
     (b) Advertise, offer to do work, submit a bid, or perform any work as a contractor when the contractor's registration is suspended or revoked;
     (c) Use a false or expired registration number in purchasing or offering to purchase an advertisement for which a contractor registration number is required; or
     (d) Transfer a valid registration to an unregistered contractor or allow an unregistered contractor to work under a registration issued to another contractor.
     (3) It is not unlawful for a general contractor to employ an unregistered contractor who was registered at the time he or she entered into a contract with the general contractor, unless the general contractor or his or her representative has been notified in writing by the department of labor and industries that the contractor has become unregistered.
     (4) All ((misdemeanor)) actions under this chapter shall be prosecuted in the county where the infraction occurs.
     (5) A person is guilty of a separate gross misdemeanor for each day worked if, after the person receives a citation from the department, the person works while unregistered, or while his or her registration is suspended or revoked, or works under a registration issued to another contractor. A person is guilty of a separate misdemeanor for each worksite on which he or she violates subsection (2) of this section. Nothing in this subsection applies to a registered contractor.
     (6) The director by rule shall establish a two-year audit and monitoring program for a contractor not registered under this chapter who becomes registered after receiving an infraction or conviction under this chapter as an unregistered contractor. The director shall notify the departments of revenue and employment security of the infractions or convictions and shall cooperate with these departments to determine whether any taxes or registration, license, or other fees or penalties are owed the state.

Sec. 7   RCW 60.04.035 and 1992 c 126 s 3 are each amended to read as follows:
     (1) The legislature finds that acts of coercion or attempted coercion, including threats to withhold future contracts, made by a contractor or developer to discourage a contractor, subcontractor, or material or equipment supplier from giving an owner the notice of right to claim a lien required by RCW 60.04.031, or from filing a claim of lien under this chapter are matters vitally affecting the public interest for the purpose of applying the consumer protection act, chapter 19.86 RCW.
     (2) The legislature further finds that acts of coercion or attempted coercion by a lien claimant or potential lien claimant against a residential homeowner, including but not limited to threats to include or actually including interest, collection costs, or any amount other than the actual price charged under the agreement between the lien claimant and the homeowner for the goods and services provided, are matters vitally affecting the public interest for the purpose of applying the consumer protection act, chapter 19.86 RCW.
     (3) These acts of coercion are not reasonable in relation to the development and preservation of business. These acts of coercion shall constitute an unfair or deceptive act or practice in trade or commerce for the purpose of applying the consumer protection act, chapter 19.86 RCW.

Sec. 8   RCW 60.04.011 and 1992 c 126 s 1 are each amended to read as follows:
     Unless the context requires otherwise, the definitions in this section apply throughout this chapter.
     (1) "Construction agent" means any registered or licensed contractor, registered or licensed subcontractor, architect, engineer, or other person having charge of any improvement to real property, who shall be deemed the agent of the owner for the limited purpose of establishing the lien created by this chapter.
     (2) "Contract price" means the amount agreed upon by the contracting parties, or if no amount is agreed upon, then the customary and reasonable charge therefor, but in no case shall "contract price" include any amount payable under the contract, or otherwise, in the event of nonpayment or late payment.
     (3) "Draws" means periodic disbursements of interim or construction financing by a lender.
     (4) "Furnishing labor, professional services, materials, or equipment" means the performance of any labor or professional services, the contribution owed to any employee benefit plan on account of any labor, the provision of any supplies or materials, and the renting, leasing, or otherwise supplying of equipment for the improvement of real property.
     (5) "Improvement" means: (a) Constructing, altering, repairing, remodeling, demolishing, clearing, grading, or filling in, of, to, or upon any real property or street or road in front of or adjoining the same; (b) planting of trees, vines, shrubs, plants, hedges, or lawns, or providing other landscaping materials on any real property; and (c) providing professional services upon real property or in preparation for or in conjunction with the intended activities in (a) or (b) of this subsection.
     (6) "Interim or construction financing" means that portion of money secured by a mortgage, deed of trust, or other encumbrance to finance improvement of, or to real property, but does not include:
     (a) Funds to acquire real property;
     (b) Funds to pay interest, insurance premiums, lease deposits, taxes, assessments, or prior encumbrances;
     (c) Funds to pay loan, commitment, title, legal, closing, recording, or appraisal fees;
     (d) Funds to pay other customary fees, which pursuant to agreement with the owner or borrower are to be paid by the lender from time to time;
     (e) Funds to acquire personal property for which the potential lien claimant may not claim a lien pursuant to this chapter.
     (7) "Labor" means exertion of the powers of body or mind performed at the site for compensation. "Labor" includes amounts due and owed to any employee benefit plan on account of such labor performed.
     (8) "Mortgagee" means a person who has a valid mortgage of record or deed of trust of record securing a loan.
     (9) "Owner-occupied" means a single-family residence occupied by the owner as his or her principal residence.
     (10) "Payment bond" means a surety bond issued by a surety licensed to issue surety bonds in the state of Washington that confers upon potential claimants the rights of third party beneficiaries.
     (11) "Potential lien claimant" means any person or entity entitled to assert lien rights under this chapter who has otherwise complied with the provisions of this chapter and is registered or licensed if required to be licensed or registered by the provisions of the laws of the state of Washington.
     (12) "Prime contractor" includes all contractors, general contractors, and specialty contractors, as defined by chapter 18.27 or 19.28 RCW, or who are otherwise required to be registered or licensed by law, who contract directly with a property owner or their common law agent to assume primary responsibility for the creation of an improvement to real property, and includes property owners or their common law agents who are contractors, general contractors, or specialty contractors as defined in chapter 18.27 or 19.28 RCW, or who are otherwise required to be registered or licensed by law, who offer to sell their property without occupying or using the structures, projects, developments, or improvements for more than one year.
     (13) "Professional services" means surveying, establishing or marking the boundaries of, preparing maps, plans, or specifications for, or inspecting, testing, or otherwise performing any other architectural or engineering services for the improvement of real property.
     (14) "Real property lender" means a bank, savings bank, savings and loan association, credit union, mortgage company, or other corporation, association, partnership, trust, or individual that makes loans secured by real property located in the state of Washington.
     (15) "Residential homeowner" or "homeowner" means the owner or potential owner who occupies or will occupy a single-family residence at the completion of the new construction, repair, alteration, or remodel of the single-family residence or garage appurtenant to the residence.
     (16) "Site" means the real property which is or is to be improved.
     (((16))) (17) "Subcontractor" means a general contractor or specialty contractor as defined by chapter 18.27 or 19.28 RCW, or who is otherwise required to be registered or licensed by law, who contracts for the improvement of real property with someone other than the owner of the property or their common law agent.

Sec. 9   RCW 60.04.031 and 1992 c 126 s 2 are each amended to read as follows:
     (1) Except as otherwise provided in this section, every person furnishing professional services, materials, or equipment for the improvement of real property shall give the owner or reputed owner notice in writing of the right to claim a lien. If the prime contractor is in compliance with the requirements of RCW 19.27.095, 60.04.230, and 60.04.261, this notice shall also be given to the prime contractor as described in this subsection unless the potential lien claimant has contracted directly with the prime contractor. The notice may be given at any time but only protects the right to claim a lien for professional services, materials, or equipment supplied after the date which is sixty days before:
     (a) Mailing the notice by certified or registered mail to the owner or reputed owner; or
     (b) Delivering or serving the notice personally upon the owner or reputed owner and obtaining evidence of delivery in the form of a receipt or other acknowledgement signed by the owner or reputed owner or an affidavit of service.
     In the case of new construction, repair, alteration, or remodel of a single-family residence or garage appurtenant to a single-family residence, the notice of a right to claim a lien may be given at any time but only protects the right to claim a lien for professional services, materials, or equipment supplied after a date which is ten days before the notice is given as described in this subsection.
     (2) Notices of a right to claim a lien shall not be required of:
     (a) Persons who contract directly with the owner or the owner's common law agent;
     (b) Laborers whose claim of lien is based solely on performing labor; or
     (c) Subcontractors who contract for the improvement of real property directly with the prime contractor, except as provided in subsection (3)(b) of this section.
     (3) Persons who furnish professional services, materials, or equipment in connection with the new construction, repair, alteration, or remodel of ((an existing owner-occupied)) a single-family residence or appurtenant garage:
     (a) Who contract directly with the ((owner-occupier or their)) owner or the owner's common law agent shall not be required to send a written notice of the right to claim a lien and shall have a lien for the full amount due under their contract, as provided in RCW 60.04.021; or
     (b) Who do not contract directly with the ((owner-occupier or their)) owner or the owner's common law agent shall give notice of the right to claim a lien to the ((owner-occupier)) owner. ((Liens of)) Persons furnishing professional services, materials, or equipment who do not contract directly with the ((owner-occupier or their)) owner or the owner's common law agent have a lien for such amounts as provided in RCW 60.04.021, which may only be satisfied from amounts not yet paid to the prime contractor by the owner at the time the notice described in this section is received, regardless of whether amounts not yet paid to the prime contractor are due. For the purposes of this subsection "received" means actual receipt of notice by personal service, or registered or certified mail, or three days after mailing by registered or certified mail, excluding Saturdays, Sundays, or legal holidays.
     (4) The notice of right to claim a lien described in subsection (1) of this section, shall include but not be limited to the following information and shall substantially be in the following form, using lower-case and upper-case ten-point type where appropriate.

DUAL PAYCHECKS (Joint Checks): When paying your contractor for services or materials, you may make checks payable jointly to the contractor and the firms furnishing you this notice.

LIEN RELEASES: You may require your contractor to provide lien releases signed by all the suppliers and subcontractors from whom you have received this notice. If they cannot obtain lien releases because you have not paid them, you may use the dual payee check method to protect yourself.