A.R.S. 33-1005: Construction Payments Held in Trust in Arizona

When you write a check to your builder, Arizona law does not treat that money as simply theirs to spend. It is trust money, earmarked for the subcontractors and suppliers who put labor and materials into your home. That rule sits behind much of the protection you have if a builder gets paid but the trades do not.

What the statute requires

When an owner-occupant pays a contractor for labor, professional services, materials, machinery, fixtures, or tools, that payment is not an ordinary business receipt. The statute makes it a trust:

deemed for all purposes to be paid in trust and shall be held by the contractor for the benefit of the person or persons furnishing such labor, professional services, materials, machinery, fixtures or tools.

In plain terms, the contractor holds your money for the subs and suppliers. The builder cannot spend it on other jobs or other debts, and has to pay the right people when their payment comes due. The rule runs to owner-occupant payments, using the same owner-occupant definition as the owner-occupied dwelling exemption.

Why this protects you as the owner

This is the flip side of the lien system. A subcontractor who never got paid can still record a mechanics lien on your home even after you paid the builder in full. Section 33-1005 explains why that is the builder's fault, not yours: your money was never the builder's to keep, it was a trust fund for that sub. A builder who takes your draw and stiffs the trades has misapplied trust funds. For a licensed contractor, that is a far more serious problem than a simple billing dispute, and it can become grounds for ROC discipline.

This is why builders and title companies insist on a lien waiver at each draw. The waiver is your proof that the trust money actually reached the sub or supplier who signed it.

What it means for your build

Take the framing draw, for instance: sixty thousand dollars. You pay it to your builder, and under 33-1005 that sixty thousand is trust money for the framing crew and the lumber yard. If the builder instead spends it to cover a shortfall on another project and your framers go unpaid, the builder has diverted trust funds. Your framers can still lien your home, and the builder now faces a misapplied-funds problem on top of the contract fight. Your defense is the paper trail: the draw, the signed waiver, and proof the trades were paid before you released the next payment.

How this connects to the rest of the lien process

The trust-fund rule works hand in hand with the lien waivers you gather at each draw and the release of a satisfied lien once payment clears. If a sub liens you despite your payments, start with can a subcontractor put a lien on my house if I already paid the builder. The trust duty itself is set out in A.R.S. 33-1005.