CSLB Law & Business ExamInsurance and LiensHard
A supplier on a private multifamily project wants to legally compel the construction lender to withhold sufficient undisbursed loan funds to cover an unpaid claim, even over the lender's objection. What must the supplier include with the stop payment notice to make this withholding mandatory?
- AWritten consent from the general contractor
- BA surety bond equal to 125% of the claim amount
- CA notarized affidavit of nonpayment
- DA recorded copy of the preliminary 20-day notice
Show answer & explanationAnswer & explanation
Correct answer: B. A surety bond equal to 125% of the claim amount
On private works, a stop payment notice served on a construction lender only legally obligates the lender to withhold funds if it is a 'bonded' stop payment notice, accompanied by a surety bond (typically 125% of the claim) protecting the lender and others against wrongful withholding. Without the bond, the lender may withhold voluntarily but is not required to.
Why the other options are wrong
- A. The general contractor's consent has no bearing on the lender's withholding obligation.
- C. An affidavit alone does not create a mandatory withholding obligation for the lender.
- D. Preliminary notice is a prerequisite to serve a stop notice at all, but does not itself compel withholding.
Bonded Stop Payment Notice (Private Works)
On private works, a stop payment notice must be accompanied by a surety bond (about 125% of the claim) to legally require the construction lender to withhold funds.
- Unbonded stop notices allow but do not require lender withholding
- Bond protects the lender/owner against wrongful withholding claims
- Public works stop notices do not require this bond because they are less commonly used given payment bonds
Memory trick: No bond, no bind — the lender can decline.