The Future of North Carolina Lien Law:
“What to Expect When You’re Expecting”…to File a Mechanics’ Lien or Bond!
By: Victor A. Anderson, Jr., M. Caroline Lindsey, and Daniel J. Knight
On July 13, 2012, Governor Perdue signed into law two bills which make significant changes to North Carolina’s lien laws. Though a few of the changes will take effect immediately, a substantial number of changes will not take effect until 2013. By educating themselves on these changes and incorporating them into project management procedures, contractors and subcontractors can better protect themselves and their lien rights.
Upon first glance, these new requirements may seem tedious, frustrating, and, quite possibly, just another way to further consolidate power in the hands of title insurance companies, title insurance agencies, and owners of the subject property. States like Minnesota, New Jersey, and Tennessee, however, have passed similar provisions, and contractors and subcontractors have learned to adapt to them.
The following is a review of some of North Carolina’s changes.
Senate Bill 42: “Lien Agent” Provision
Beginning April 1, 2013, North Carolina will require that a lien agent be designated for certain construction projects. Potential lien claimants will then be required to serve the lien agent with a pre-notice in order to preserve their lien rights.
In order to truly understand the purpose of the lien agent, a brief look at North Carolina’s pre-Senate Bill 42 Lien Laws is necessary. Before the bill which added the lien agent to the lien equation was ratified, North Carolina was what some have called a “hidden lien” state. The so-called “hidden lien problem” arises from the concept of “relation back.” Currently, lien rights arise from the date a contractor first begins working on a piece of private property. However, because liens are typically filed after a contractor’s last date of furnishing, liens often do not become public record until months, or even years, after their effective date. The phrase “hidden lien” was established to describe this aspect of North Carolina’s lien laws in that the lien rights of a subcontractor were never revealed unless a claim was made on those lien rights. The purpose of the lien agent is to ensure that a contractor’s or subcontractor’s lien rights are visible to anyone who has or might have a stake in the property on which the project is occurring.
Though the title implies that a lien agent is a specific individual, a lien agent, as defined by the North Carolina General Statutes, is actually “a title insurance company or title insurance agency designated by an owner.”
A lien agent will only be designated for certain projects. While those projects make up a substantial section of the construction industry, the projects subject to designation include any projects on which the cost exceeds Thirty Thousand Dollars ($30,000.00) at the time the original building permit is issued unless the improvements are being made to an existing single-family dwelling being used by the owner of the project as a residence.
Notice to Lien Agent
The addition of a lien agent means contractors and subcontractors working in North Carolina must actively preserve their lien rights. Contractors and subcontractors must inform the lien agent of their lien rights. Before the new lien laws were ratified and signed, a claim of lien on real property was perfected upon the filing of the claim of lien as noted above. Beginning April 1, 2013, however, perfection cannot occur unless the lien agent has been previously notified of the claimant’s lien rights.
Notice to the lien agent can be accomplished in one of three ways:
(1) the lien agent has received a “Notice to Lien Agent,” also known as a “Pre-Notice,” from the claimant within fifteen (15) days after the first furnishing of labor or materials by the claimant;
(2) the lien agent has received a Notice to Lien Agent before the date on which the property was sold has been recorded; or
(3) a Claim of Lien has been filed before the date on which the property was sold has been recorded.
Any one of these three methods will be sufficient to notify the lien agent of your lien rights and, subsequently to preserve your lien rights. This notice, however, does not fulfill the filing and notice requirements for a Claim of Lien – it only preserves the contractor or subcontractor’s right to later file a Claim of Lien. Additionally, a Notice to Lien Agent is not a Notice of Claim of Lien.
Design Professionals
In addition to contractors and subcontractors, design professionals have their own Notice to Lien Agent requirements. Under the new laws, a design professional’s notice requirement is dependent upon the contract that the design professional entered into with the owner of the project. If, at the time the design professional and the owner of the property enter into a contract and the lien agent has not been named in the contract, then the notice requirement for the design professional is met when the lien agent receives notice from the owner that it has been designated as the lien agent on the project. If this is the case, then the owner must provide the lien agent with design professional’s contact information so that the lien agent can copy the design professional on all responses by the lien agent to persons who have served a Notice to Lien Agent. If the lien agent has been identified in the contract between the owner and the design professional, then the language of the statute implies that the design professional is required to send a Notice to Lien Agent.
Claim of Lien on Real Property
The process for filing and perfecting a Claim of Lien on Real Property underwent several significant changes as well. Assuming that the contractor or subcontractor successfully preserved his lien rights (see above), the new lien laws require that, effective January 1, 2013, all claimants must serve a copy of the claim of lien on the record owner of the property in addition to filing the claim. Additionally, if the Claim of Lien on Real Property is being asserted by a subcontractor pursuant to a contractor’s lien rights, then a copy of the claim must also be served on the contractor. Perfection of the claim occurs when the copies have been served on the respective parties and the claim has been properly filed. In addition to the current content requirements for a Claim of Lien on Real Property, North Carolina will require that the claim include the name of the contractor, if the claim is being asserted by a subcontractor pursuant to the contractor’s lien rights, and a certification that the necessary parties have been served with the claim.
If a lawsuit is required to enforce a claim of lien on real property, then it is important for contractors and subcontractors to know who they can and cannot sue. Effective immediately, the following parties are neither necessary nor proper parties in an action to enforce the claim:
(1) subsequent purchasers of the property and their lenders if the claim of lien was discharged by cash deposit with the clerk of superior court or a corporate surety bond before the action was filed; and
(2) subsequent purchasers of the property and their lenders if the claim of lien was discharged by cash deposit with the clerk of superior court or a corporate surety bond after the action was commenced.
If the claim is discharged after the action has been initiated, then the subsequent purchaser and his/her lender, if named, may be dismissed by any party to the action. Additionally, former owners of the property are no longer necessary parties to the action if they own zero interest in the property at the time the action arose and the plaintiff seeks no relief against them. Pursuant to the language of the lien laws, former owners are still proper, though not necessary.
If the action is brought by a subcontractor to enforce a contractor’s claim of lien on real property, then a lien waiver signed by the contractor may waive the subcontractor’s right to enforce the contractor’s claim of lien. Beginning January 1, 2013, a lien waiver signed by the contractor before the action is commenced will effectively waive any subcontractor’s right to enforce that contractor’s claim of lien. This does not, however, waive the subcontractor’s own right to a claim of lien upon funds or the subcontractor’s own right to a claim of lien on real property.
Claim of Lien upon Funds
In addition to a Claim of Lien on Real Property, the law governing Claims of Lien upon Funds also changed significantly. Effective April 1, 2013, a subcontractor’s lien upon funds arises, attaches and is effective immediately upon the first furnishing of labor, materials, or rental equipment at the site of the improvement by the subcontractor. Perfection occurs once a Notice of Claim of Lien upon Funds has been served on the necessary parties. Until that notice has been given, any owner, contractor, or subcontractor against whose interest the claim is made may make, receive, use, or collect payments and may use those proceeds in the ordinary course of its business. This change addresses recent decisions in Bankruptcy Court for the Eastern District of North Carolina holding that a post-petition lien claim violated automatic stay orders issued by bankruptcy courts. The lien statute now clarifies that all properly perfected Claims of Lien upon Funds are effective as of the date of the claimant’s first furnishing of labor and materials.
The Notice must be served on the person or entity who owes the money to the claimant (i.e. the obligor). Additionally, a copy of the Notice must be attached to any claim of lien on real property filed by a subcontractor on a contractor’s lien rights. The General Assembly did make substantial changes to the form of the Notice of Claim of Lien upon Funds, but the new form will not come into use until January 1, 2013.
With the addition of the Notice to Lien Agent, it is extremely important to remember that the Notice to Lien Agent is not a Notice of Claim of Lien upon Funds and does not satisfy any notice or filing requirements for such a claim. The Notice to Lien Agent merely preserves your right to make a Claim of Lien upon Funds.
False Statements
Currently, false statements by a contractor or subcontractor concerning amount owed to them for work performed on the property are punishable as a Class I misdemeanor. After January 1, 2013, however, such false statements will also be subject to disciplinary action including, but not limited to, revocation, restriction, or suspension of a license by the state licensing board.
Actions on Payment Bonds
The current statutes allow for claimants to bring an action on a payment bond if they have not been paid in full within ninety (90) days after the last date of furnishing of labor or materials for which they claim payment. However, second-tier and third-tier subcontractors may bring an action on the payment bond only if they have given written notice of the claim on payment bond to the contractor within one hundred and twenty (120) days after the date on which they last furnished labor or materials for which they claim payment.
Beginning January 1, 2013, contractors and subcontractors will have additional responsibilities if the labor or materials were furnished on a public project. Pursuant to the new laws, contractors will be required to provide their subcontractors with a Project Statement. The Project Statement must contain all the information necessary for a subcontractor to be able to make a claim on payment bond. Upon receipt of the Project Statement by the subcontractors, all subcontractors must then provide a copy of the Project Statement to their subcontractors. Upon receipt of the Project Statement, second, third, and more remote tier subcontractors must serve a Notice of Public Subcontract on the contractor. If this Notice is not served on the contractor, then second or third tier subcontractors cannot bring an action on payment bond for labor or materials furnished in excess of $20,000.00 or more than 75 days prior. If the Notice is served, then the second, third, and more remote tier subcontractors can bring an action on payment bond for labor and materials furnished seventy-five (75) days before the service of the Notice and furnished after the service of the Notice. If the public contract has a total cost of $20,000.00 or less, then the Notice of Public Subcontract is not required. If the total cost exceeds $20,000.00, then the Notice of Public Subcontract is only required for the amount in excess of the $20,000.00.
Contractors: What to Do To Protect Your Rights
The foregoing information may seem overwhelming. However, the changes to North Carolina’s lien laws are easily incorporated into an existing project management procedure. For contractors, several dates are very important to remember.
§ Beginning on April 1, 2013, contractors should send a Notice to Lien Agent the same day that they contract with the owner of the property.
- § Beginning on April 1, 2013 upon contracting with a subcontractor who is not required to furnish labor or materials on the project site, contractors have three business days within contracting with that subcontractor to provide them with written notice containing the lien agent’s contact information. This should be standard policy within your project management procedure.
- § Beginning January 1, 2013, if the project is a public project and a payment bond is required, and a second or third tier subcontractor requests a copy of the payment bond issued by a contractor, then the contractor must provide a copy of the payment bond to the subcontractor within seven calendar days of receiving the request.
- § Beginning January 1, 2013, if the project is a public project, contractors should immediately draft a project statement and provide it to their subcontractors. Project statements should include a provision requesting that subcontractors provide it to their subcontractors and suppliers. This provision is known as a “flow-down” provision.
Subcontractors: What to Do To Protect Your Rights
Subcontractors, along with contractors should also modify their project management procedures by incorporating the above changes.
§ Beginning April 1, 2013, upon entering into a subcontract all subcontractors should send a Notice to Lien Agent.
- § Beginning April 1, 2013, subcontractors must provide their lower-tier subcontractors with the lien agent’s contact information and require that they provide their subcontractors and suppliers with the lien agent’s information.
- § Beginning January 1, 2013, on public projects, subcontractors must provide their lower-tier subcontractors with a project statement. This is known as the “flow-down” provision. Subcontractors working on public projects, upon receipt of the contractor’s project statement, should immediately mail a copy to their lower-tier subcontractors.
- § Beginning January 1, 2013, second-tier and third-tier subcontractors on public projects should send a Notice of Public Subcontract to the Prime Contractor if the subcontract is, or ever could be, $20,000.00 or more.
While the changes to North Carolina’s lien and bond law seem significant, and can be pose an administrative hassle, it is clear that these modifications will rectify various problems that have arisen with pre-existing lien and bond law.
This synopsis is in no way comprehensive, and you should consult with this office, or your attorney, should you have questions.
This summary is for informational purposes only
and does not constitute legal advice or opinion.