New Standard for Substantial Compliance of Preliminary Notices and Proportional Allocation of Condominium Construction Liens

Introduction

New Star General Contractors, Inc. (“New Star”) sued Dumar, LLC and Duane Shaw (together, “Dumar”) to enforce a nearly $1.2 million construction lien on twelve condominium units in Building C of the Sage Creek at Moab development. After Sage Creek at Moab, LLC (“Sage Creek”) defaulted on payments, New Star recorded preliminary notices and a notice of lien. Dumar challenged the lien on multiple grounds: they argued (1) New Star’s first preliminary notices were too broad to support a lien on Building C; (2) New Star’s second preliminary notices omitted the correct parcel numbers; (3) New Star failed to allocate lien costs between the individual units and the common areas; (4) the district court miscalculated Dumar’s share of the lien; and (5) New Star intentionally filed an excessive lien. The Supreme Court of Utah resolved each issue and remanded parts of the case for recalculation and reconsideration.

Summary of the Judgment

The Utah Supreme Court held that:

• New Star’s second preliminary notices—though they listed the original “parent” parcel numbers instead of the newly created unit‐specific “child” parcel numbers—substantially complied with Utah Code § 38-1a-501 because a reasonably diligent search of the state construction registry would have discovered them;
• Utah law does not require a construction lien notice to segregate costs between individual units and common areas; listing the total per‐unit lien amount suffices;
• Dumar’s liability under the lien is limited to its proportional ownership share (12 units plus a 12/108 interest in the common areas as set forth in the recorded condominium declaration), not the full common‐area costs of Building C; and
• The district court’s award of attorney fees must be redetermined once the lien amount and excessive‐lien counterclaim have been reconsidered on remand.

Analysis

Precedents Cited

• Projects Unlimited, Inc. v. Copper State Thrift & Loan Co. 798 P.2d 738 (Utah 1990): Emphasized that construction liens should not be defeated by inconsequential technicalities when no party is prejudiced.
• VCS, Inc. v. Utah Community Bank, 2012 UT 89, 293 P.3d 290: Held that substantial compliance is measured by the potential for harm and refusal to excuse non-compliance with an express statutory command when material prejudice could result.
• Arnold Industries, Inc. v. Love, 2002 UT 133, 63 P.3d 721: Adopted the “reasonably diligent search” standard for public records when indexing errors occurred.
• Utah Code § 38-1a-501 (preliminary notice requirements) and § 57-8-19 (lien priority in condominium developments).

Legal Reasoning

1. Substantial Compliance Standard: The court crafted a two‐step test for substantial compliance with preliminary notice statutes:

1. If the contractor’s notice fails a statutory requirement, the court first asks whether that failure caused actual harm. If so, compliance fails.
2. If no actual harm, the court examines the purpose of the requirement (here, early and clear notice to owners and lenders) and asks whether the error posed a potential for harm. If neither actual nor potential harm exists, the court will find substantial compliance.

Applying this test, the Court concluded that although New Star omitted the new unit parcel numbers, a reasonably diligent registry search—by owner, project name, address or original parcel numbers—would have revealed its second preliminary notices. Therefore, the omission posed no real risk of prejudice to Dumar or other interested parties.

2. Allocation of Unit vs. Common‐Area Expenses: The Court held that Utah Code § 38-1a-304(2) requires separate lien designations only when a lien covers multiple distinct improvements. Under the Condominium Ownership Act (§ 57-8-19), each lien is levied “against each unit and the percentage of undivided interest in the common areas appurtenant to such unit.” A single per‐unit lien amount suffices; the statute does not demand a breakdown between unit work and common‐area work.

3. Liability Limited by Ownership Share: The Court read § 57-8-19(2) to mandate that a unit owner’s obligation under a lien is computed “by reference to the percentages appearing in the declaration.” Here, each unit carried a 1/108 share of the common areas; Dumar’s 12 units equated to a 12/108 (1/9) interest. The district court had mistakenly allocated 100% of Building C’s common‐area costs to Dumar; the Supreme Court remanded for proper recalculation.

Impact

This decision sets two significant precedents in Utah construction lien law:

• Flexible, Harm-Based Substantial Compliance: Contractors will no longer lose lien rights on hyper-technical grounds so long as their preliminary notices serve the statute’s notice function and a diligent search would locate them.
• Proportional Condo Liens: Unit owners in condominium developments can be held liable under a construction lien only up to their recorded ownership share of common areas, reinforcing the importance of accurate condominium declarations and encouraging fairness between contractors and unit owners.

Complex Concepts Simplified

• Construction Lien: A legal claim allowing a contractor or material supplier to secure payment by placing a lien on the improved property.
• Preliminary Notice: A statutory notice filed early in a project to notify owners and lenders that the filer may later assert a lien for unpaid work.
• Substantial Compliance: A doctrine permitting minor statutory deviations if they neither cause actual harm nor pose a realistic threat of prejudice.
• “Parent” vs. “Child” Parcel Numbers: In a condo project, initial land parcels (“parent”) may be subdivided into individual unit parcels (“child”) when the condominium declaration is recorded.
• Condominium Declaration: The recorded document that defines each unit’s boundaries and allocates a percentage interest in common areas.
• Excessive Lien Claim: A cause of action against those who knowingly file a lien for more than is owed, intending to cloud title or extract unfair advantage.

Conclusion

New Star General v. Dumar refines Utah’s construction lien framework by emphasizing functional notice over technical perfection and by limiting a condo unit owner’s lien liability to the proportionate share set forth in the condominium declaration. Contractors gain assurance that minor registry indexing errors will not defeat their lien rights if a diligent search would uncover their notices. Unit owners receive the protection of knowing their maximum exposure is capped by their recorded ownership percentage in the common areas. The case balances the remedial purpose of the Construction Lien Statute with the need for clarity and finality in real estate transactions, and it will guide Utah courts in evaluating both preliminary‐notice compliance and lien‐amount calculations in future condominium development projects.