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Mechanic's Lien Agents Proposed for North Carolina

 

North Carolina Bill Draft 2011-TGz-15 (May 3, 2012 version) will:

  1. Disrupt a statutory scheme that has successfully promoted economic activity and the development of infrastructure for two hundred (200) years.
  2. Will unnecessarily benefit a very limited special interest group
  3. Will increase risk and costs to all construction labor and material providers
  4. Will increase construction prices for all property owners and tenants
  5. As written, North Carolina Bill Draft 2011-TGz-15 has conceptual and application problems as evidenced by the Virginia Mechanic’s Lien agent Statute it is patterned after.             

 

            We have grave concerns regarding the North Carolina Bill Draft 2011-TGz-15.   This Bill is patterned to a large extent after the Virginia Mechanic’s Lien Agent Statute.  I have practiced construction law in the State of Virginia for over 25 years, representing owners, banks, contractors and suppliers.  This bill will significantly impact commerce within the construction industry in North Carolina, with benefits that are limited and illusory.

            Bill Draft 2011-TGz-15 would require all potential lien claimants to notify an Owner identified Mechanic’s Lien Agent prior to filing a mechanics lien.  The Bill purports to protect against “hidden liens.”  However, this Bill will do nothing but eliminate legitimate lien rights that have been “hidden” in plain view for 200 years, increase risk and costs to all members of the construction industry, while making title insurance carriers more profitable.   

            The nation’s first mechanic’s lien law was passed by Maryland in 1791 at the urging of two Virginians Thomas Jefferson and James Madison to facilitate the speedy construction of the new capital city of Washington.  Payment security for construction activity is essential to economic growth.  The North Carolina Little Miller Act and the federal Miller Act, covering public projects are for the same purposes.  Any general contractor working for the government must post payment bonds to replace the mechanic’s lien rights that are not available on public property and guarantee payment to suppliers and subcontractors.  The cost of the project increases by the amount of the bond premiums, but this is offset by lower prices offered by suppliers because of the payment security.  It is good public policy to require payment bonds on public projects and to protect mechanic’s lien rights on private projects. 

            The “inchoate” nature of the mechanic’s lien is a constant feature in the Mid-Atlantic region.  The inchoate mechanic’s lien “relates back” to the time labor or material is supplied in North Carolina, South Carolina, Pennsylvania, Virginia and West Virginia.  An inchoate mechanic’s lien survives a sale of the property, whether or not the lien has been filed in the land records.  An inchoate mechanic’s lien also has priority over a bona fide purchaser, including a mortgage lender.  The fact that there is construction activity on the property is the public notice that the property may be subject to unrecorded mechanic’s liens. This is why property sellers and mortgagors must always sign affidavits at settlement, affirming under oath that they have not ordered labor or materials to improve the property in the 90 days prior to the settlement. Potential purchasers and lenders have notice that the property is subject to lien rights and have various opportunities to protect themselves from that risk. 

            These public policy objectives and North Carolina’s mechanic’s lien statute have held fairly steady for over two hundred (200) years.  The apparent problem currently is that title insurance carriers have suffered occasional losses insuring these risks.  It is respectfully submitted that it may be more to the point to raise premiums charged for insuring this risk, rather than upend a mechanic’s lien statute that has had strong public policy purposes for over two hundred (200) years.   Insurers can also better police their risk by requiring property sellers and builders to provide indemnities, security, or mechanic’s lien waivers, as is a common practice of general contractors to avoid similar risk on public projects. 

            The proposed changes will make title insurance carriers more profitable, but will increase risk and costs to suppliers of construction labor and material.  This will result in higher prices to all citizens purchasing construction work.   In any event, the benefits in allowing insurers to ignore management of construction projects are limited, while the costs to the construction industry as a whole are large.     

            Some states, such as Florida and California have pre lien or “Notice to Owner” requirements for suppliers at the start of a construction project.  These statutes do also increase administrative costs for suppliers on every project.  However, these statutes do also lower the risk of loss, because the owner has responsibilities on receipt of the notice to make sure that the supplier is paid.    Disputes are avoided.   These statutes add costs, but also have benefits.

            Any type of Mechanic’s Lien Agent statute should include a responsibility for the owner and Mechanic’s Lien Agent to do something with the notices received.  Require an owner or settlement agent to escrow funds or obtain lien waivers from all contactors that have sent a Mechanic’s Lien Agent Notice before an owner pays a general contractor in full or before a settlement agent completes a mortgage transaction or sale to a homeowner.  This kind of impetus appears in the Florida and California mechanic’s lien statutes that require a pre lien notice.  North Carolina Bill Draft 2011-TGz-15 has no such redeeming virtue.  It simply makes business less risky for one special interest, the title insurance carriers, and makes business more risky for the rest of the construction industry

            The Virginia Mechanic’s Lien Agent statute passed in 1992 similarly has no redeeming virtue.  In practice, it has simply eliminated lien rights for a large percentage of contractors, because they never send a notice.  It has increased costs for contractors that do send the notice, but the owner, lender and title insurance company have no duties once they receive the notice to require payment to or a lien waiver from the supplier that sent the notice.  

            The North Carolina Bill Draft does also have some peculiar problems.  Bill Draft 2011-TGz-15 seems to apply to a general contractor that has a contract directly with an owner, in addition to subcontractors and suppliers.  What is the purpose of requiring a general contractor to notify the owner that that it seeks payment for labor or material supplied?  The owner knows whether or not they have paid the general contractor and/or that there is a payment dispute.  This additional notice for general contractors only increases costs, eliminates legal rights and helps owners avoid paying legitimate debts.

            In order to have lien rights under Bill Draft 2011-TGz-15, the potential lien claimant must send the notice at least ten days prior to the recordation of a conveyance of the property or the recordation of a mortgage lien. As an initial matter, how would a potential lien claimant know about a pending conveyance of the property or the recordation of a mortgage lien?  More importantly, why should the conveyance of the property or a mortgage lien cut off lien rights as between an impecunious owner, the general contractor and suppliers?   It would make more sense to protect only an innocent bona fide purchaser or lender.  As written, however, an owner can insulate themselves and cut off lien rights for all contractors and suppliers that have not already sent the notice, simply by recording a mortgage. 

            The deadline of notice at least ten days prior to a conveyance of the property or the recordation of a mortgage lien also simply eliminates lien rights of contractors and suppliers at the end of a job.  Flooring contractors, for example, typically install their flooring a few days prior to the settlement with a bona fide purchaser.  If they do not even start work until ten days prior to the settlement, they simply do not have lien rights under the Bill.  There is nothing “hidden” about these lien rights. Buyers, sellers, lenders and title companies must only develop mechanisms to make sure these contractors are paid from the proceeds of settlement, instead of refusing any administrative responsibility and then refusing the costs of that irresponsibility.     

            The North Carolina Bill Draft 2011-TGz-15 also has some problems in common with Virginia’s Mechanic’s lien statute.   It is folly to legislate that all building permits must be posted on the property and expect this to be any aid to potential lien claimants.   The Draft Bill states that the building permit “shall be conspicuously and continuously posted on the property.”   As a practical matter, however, if permits are ever posted, they often are removed or damaged. Permits are often “conspicuously posted” inside the construction trailer or headquarters. While this protects the permit, it makes it harder to find.   Is it realistic to expect a lumber supplier in West Virginia to drive to the construction site in North Carolina to see if a building permit is posted with a Mechanic’s Lien Agent?   This simply eliminates legal rights and increases costs with no benefit.

            The Draft Bill tries to solve this problem by stating that the “owner shall provide” information on the Mechanic’s Lien Agent to “any potential lien claimant.”    A “potential lien claimant,” however, is defined as “any person entitled to claim a lien on real property.”   Must a potential lien claimant prove that they are entitled to claim a lien on real property before the owner is obligated to provide lien agent information?   What are the ramifications to an owner who refuses or fails to provide lien agent information?   Will a lien be valid without the prior Mechanic’s Lien Agent Notice?   What if an owner fails to provide lien agent information for a week after request, but this is then long enough that the lien notice is two days late?

            The North Carolina Bill Draft 2011-TGz-15 also has some problems in common with Virginia’s Mechanic’s lien statute.  What if a claimants starts work when there is no permit, but a permit is issued after work begins?  Is the claimant required to ask once a week whether a permit has been issued or does the owner have a responsibility to tell all contractors on the project if the owner pulls a permit?  What if a building permit is amended?   Is the claimant required to inquire regularly about amendments or does the owner have responsibility?    

            I respectfully submit that North Carolina does not need Bill Draft 2011-TGz-15 in any form.   I believe that it will only eliminate legitimate legal rights, disrupt projects and business relations, generate legal fees and consume resources for limited or no purpose.    In any event, it needs some work and clarifications. 

Sincerely, 

James D. Fullerton

 

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