North Carolina Has Passed a Mechanic’s Lien Agent Statute
North Carolina has passed a Mechanic’s Lien Agent Statute, effective April 1, 2013. This Bill is patterned to a large extent after the Virginia Mechanic’s Lien Agent Statute. This bill will significantly impact the construction industry in North Carolina, although the final bill is a tremendous improvement over earlier versions. Fullerton & Knowles, P.C. are Mechanic’s Lien lawyers in Virginia Maryland, Pennsylvania and the District of Columbia. We do not practice law in North Carolina, however, so you should consult your North Carolina counsel with questions on any particular case and do not consider this newsletter legal advice.
North Carolina Mechanic’s Lien Agent Statute (S42) was generally intended to prevent “hidden liens,” filed after a property is sold or after a new mortgage had been placed on the property. The Statute will generally require all potential lien claimants to notify an owner identified Mechanic’s Lien Agent prior to filing a lien on real property. Prior to this Statute, a mechanic’s lien could have priority over a bona fide purchaser or mortgage lender, even if the lien was filed after a property was sold or the new mortgage filed. Now a notice to the Mechanic’s Lien Agent (MLA) will be necessary to preserve this priority in most cases. See a copy of the ratified Statute here: http://www.ncleg.net/Sessions/2011/Bills/Senate/PDF/S42v5.pdf
The North Carolina Mechanic’s Lien Agent Statute (S42) applies to all construction projects, except improvements to existing residential dwellings or any project less than thirty thousand dollars ($30,000). On all other projects, residential or commercial, an owner must designate a Mechanic’s Lien Agent when the owner enters into a contract for improvements. The Mechanic’s Lien Agent must be a title company on a list of registered MLAs. Any building permit must contain the identity of the MLA. A sign on the property must post the building permit or contain the identity of the MLA.
The owner must provide MLA information within 7 days to any potential lien clamant that sends a written request by certified mail, physical delivery with a delivery receipt, facsimile with a facsimile confirmation, or by email with delivery receipt. It is not clear how a potential lien claimant should get the contact information for the owner. Presumably the owner information would be available in the tax assessment office. In any event, however, it is advisable that any subcontractors or suppliers refuse to supply labor or material to a project until they have MLA information, a copy of the building permit, or at least owner contact information.
General contractors do not need to give notice to the lien agent, as long as the MLA information is in their contract. Accordingly, it is advisable that any contractors with a contract directly with the owner make sure the MLA information is in the contract. There are also special rules for design professionals, who do not need to give notice to the lien agent, as long as the MLA information is NOT in their contract. It appears that design professionals DO need to give notice to the lien agent if the MLA information is in their contract. Subcontractors that supply labor on the project must either look at the building permit or request lien information from the owner and then give notice to the lien agent. It is advisable that any subcontractors or suppliers make sure they do not supply labor or material to a project until they have MLA information, a copy of the building permit, or at least owner contact information. Subcontractors or suppliers should then provide Notice to the MLA within 15 days of the first deliveries of labor or material to the project. The MLA is required to confirm receipt of the notice within three (3) days.
The Notice to the MLA in the Statute should be substantially in the form provided in the statute:
NOTICE TO LIEN AGENT
(1) Potential lien claimant’s name, mailing address, telephone number, fax number (if available):
(2) Name of the party with whom the potential lien claimant has contracted to improve the real property described below:
(3) A description of the real property sufficient to identify the real property, such as the name of the project, if applicable, the physical address as shown on the building permit or notice received from the owner:
(4) I give notice of my right subsequently to pursue a claim of lien for improvements to the real property in this notice.
Potential Lien Claimant
General contractors and subcontractors must provide material suppliers that DO NOT supply labor on the project a written notice containing lien agent information within 3 days of contracting with the material supplier, if the MLA information is not in the purchase order or contract with the supplier. If they do not, then the general contractor or subcontractor that does not provide the information is guilty of an unfair trade practice and is liable to the potential lien claimant for damages. However, material suppliers that DO NOT supply labor on the project still have the obligation to give notice to the lien agent to preserve rights. This may be a sinkhole. By definition, the reason you care about lien rights is the fear your buyer will become insolvent. If your buyer becoming insolvent, they may not care or be able to comply with legal requirements to provide MLA information. Then how do you collect damages from an insolvent contractor buyer? The best practice for material suppliers will be to require lien agent information, a copy of the building permit, or at least owner contact information before supplying labor or material to a project and then notify the lien agent within 15 days of the first material delivery.
However, a failure to give notice does not necessarily eliminate all lien rights. In order to have lien rights under the Statute, the potential lien claimant may perfect a claim of lien on real property only if any of the following conditions is met:
- The MLA has received notice from the potential lien claimant no later than 15 days after the first furnishing of labor or material by the potential lien claimant
- The MLA has received notice from the potential lien claimant OR the lien claimant has actually filed a mechanic’s lien prior to the date of recordation of a sale of the property to a non-insider or recordation of a mortgage to a non-insider
I read the Statute to say that a claimant has lien rights if ANY of these conditions are met. You can file a lien if EITHER:
A) you notify the lien agent within 15 days of labor or material delivery OR
B) you notify the lien agent prior to the sale or mortgage of the property to a non-insider
C) you file an actual lien claim prior to the sale of the property to a non-insider.
The deadline of notice to the MLA within 15 days of labor or material delivery would be most important to subcontractors 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 a few days prior to the settlement, they could not give notice to the MLA prior to the sale or mortgage of the property. As ratified, the Statute would still give these late contractors lien rights, if they notify the lien agent within 15 days of labor or material delivery.
Subcontractors and suppliers at the beginning of a job may not need to worry as much about MLA information, as long as payment problems become apparent and the claimant can send a MLA notice and/or file a lien before prior to the sale or mortgage of the property. In any event, however, it will be the best practice for subcontractors or suppliers to require a copy of the building permit before supplying labor or material to a project and then notify the lien agent before beginning labor or material delivery. This is currently the best practice in Virginia for all subcontractors and suppliers.
The North Carolina Mechanic’s Lien Agent Statute has some problems or questions in common with Virginia’s Mechanic’s Lien Agent Statute. What if a claimant 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? 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? It is common to have such unanswered questions in the law, especially with a new statute, but we will need some additional legislative work and court case law to know the answers to these questions.
North Carolina has also passed House Bill 1052, effective January 1, 2013. This bill also impact mechanic’s liens. The bill makes it clear that a Lien on Funds “arises, attaches, and is effective immediately upon the first furnishing of labor, materials or rental equipment at the site of the improvement. This amendment will protect subcontractors in the event of general contractor bankruptcy. We believe that the lien on funds was always effective immediately upon the first furnishing of labor, materials or rental equipment, but this amendment was passed in response to bankruptcy court rulings to the contrary.
This bill can also give a subcontractor more time to file a Claim of Lien on real Property, by allowing the subcontractor to count their deadline from their own dates of first and last furnishings or the first and last dates of their contractor. House Bill 1052 will also extend lien protection for prefabricated materials, even if never delivered to the site. Contractors could not waive lien on funds or real property rights for subcontractors or suppliers without their written consent. Penalties would be increased for falsified lien waivers. House Bill 1052 also significantly modifies public work bonding statutes.
See a copy of House Bill 1052 here: http://www.ncleg.net/Sessions/2011/Bills/House/PDF/H1052v6.pdf