December 13, 2012 Article

Significant Changes to North Carolina's Mechanic's Lien and Bond Laws

Two controversial bills make the most dramatic revisions to the laws in 40 years

by Eric Biesecker and Greg Higgins

North Carolina Governor Perdue signed two controversial bills into law in July that make the most significant changes to the state’s mechanic’s lien and bond laws in 40 years. Senate Bill 42 was crafted by the title insurance industry and introduces an entirely new concept to North Carolina—the lien agent. House Bill 1052 was crafted by construction industry stakeholders and contains less controversial modifications to the current lien and bond law scheme. The most controversial changes involve the creation of the lien agent on private projects and the addition of front-end notices designed to help contractors control their payment bond liability on public projects.

Designation of Lien Agent

North Carolina law will require potential lien claimants to provide written notice to a “lien agent” to preserve all the lien rights they now possess. This new requirement is effective for projects for which the first furnishing of labor or materials at the site of the improvements is on or after April 1, 2013. If the potential lien claimant does not follow the new requirements associated with the lien agent, its right to lien the real property could be terminated or subordinated to others’ interests. However, the lien agent requirements do not directly affect the lien on funds that subcontractors and suppliers possess under North Carolina.

The new law requires the owner to designate a lien agent on all private projects where the total cost of the improvements is $30,000 or more, except existing single-family residences. N.C. Gen. Stat. § 44A-11.1. The owner will choose the lien agent from a list maintained by the North Carolina Department of Insurance. All lien agents will be title insurance companies or agents. The lien agent may collect from the owner a fee of $50 or less. Beyond designating a lien agent, the law does not impose any other new requirements on the owner.

Identification of Lien Agent

Section 44A-11.2 of the new law requires the identification of the lien agent down the contracting chain. If the project is one that requires a building permit, then the permit must identify the lien agent and be conspicuously and continuously posted at the job site. If the building permit does not identify the lien agent or if the permit is not posted at the job site, then a potential lien claimant can submit a written request to the owner, who is to identify the lien agent within seven days.

Contractors and subcontractors must, within three business days of contracting with a material supplier, provide the supplier with a written identification of the lien agent. Contractors and subcontractors can give the notice by any of the following means:

  • certified mail, return receipt requested;
  • signature confirmation as provided by the U.S. Postal Service;
  • physical delivery with a delivery receipt from the lien agent;
  • facsimile with a facsimile confirmation;
  • depositing with (a) DHL Express, (b) Federal Express, or (c) UPS;
  • electronic mail with delivery receipt;
  • including the lien agent contact information in a written subcontract; or
  • including the lien agent contact information in a written purchase order.

Any contractor or subcontractor who receives notice of the lien agent contact information (whether from the building permit; the inspections office; a notice from the owner, contractor, or subcontractor; or by any other means) but who fails to timely provide the lien agent contact information to its subcontractor or supplier will be liable to the lower-tier subcontractor for any actual damages incurred by the lower-tier subcontractor as a result of the failure to give notice.

Notice to Lien Agents

Section 44A-11.2 of the new law also prescribes the notice that potential lien claimants must serve on the lien agent to preserve their full lien rights. To preserve its full lien rights, a potential lien claimant should (1) serve the notice to lien agent within 15 days after first furnishing labor or materials, (2) serve the notice to lien agent before the owner conveys an interest in the real property (e.g., before the property is sold or a new deed of trust is recorded), or (3) file a claim of lien on real property before the owner conveys an interest in the real property. If the lien agent does not receive notice within 15 days after first furnishing labor or materials or prior to a conveyance of an interest in the real property, then a potential lien claimant’s lien rights are terminated if the property is sold or subordinated to the new lender if a new deed of trust or mortgage is recorded. Accordingly, the only way for a potential lien claimant to maintain control of its full lien rights will be to serve a notice to the lien agent on every project within 15 days after first furnishing labor or materials.

The notice to lien agent must include the following:

  • the potential lien claimant’s name, mailing address, telephone number, fax number (if available), and electronic mailing address (if available);
  • the name of the party with whom the potential lien claimant contracted;
  • a description of the real property sufficient to identify it; and
  • a notice of the potential lien claimant’s right later to pursue a claim of lien for improvements described in the notice.

The notice to lien agent can be served by any of the following means:

  • certified mail, return receipt requested;
  • signature confirmation as provided by the U.S. Postal Service;
  • physical delivery and obtaining a delivery receipt from the lien agent;
  • facsimile with a facsimile confirmation;
  • depositing with via (a) DHL Express, (b) Federal Express, or (c) UPS; or
  • electronic mail, with delivery receipt.

Serving a notice to lien agent does not satisfy the requirements for serving a notice of claim of lien upon funds, however. The notices are different. Potential lien claimants that have served a Notice to Lien Agent still must serve, and if appropriate file, a claim of lien on real property and a notice of claim of lien upon funds to perfect their lien rights. Potential lien claimants also must file a civil action to enforce their lien rights.

A Contractor’s Lien Waiver Will Not Prejudice a Subcontractor’s Lien Rights

Under current North Carolina law, a lien waiver signed by the contractor before a subcontractor files a lawsuit to enforce its claim of lien on real property waives the subcontractor’s right to enforce the contractor’s lien on real property (e.g., a contractor’s lien waiver waives a subcontractor’s subrogated lien rights). Effective April 1, 2013, section 44A-23 will provide that a contractor’s lien waiver will not prejudice the rights of the subcontractor if (1) the subcontractor has given notice to the lien agent; (2) the subcontractor has served a notice of claim of lien upon funds on the owner; and (3) the subcontractor has delivered a copy of the notice of claim of lien upon funds served on the owner to the lien agent. A contractor’s lien waiver by itself does not affect the subcontractor’s lien on funds owed to the contractor under current law or the recent changes.

Limitation of Contractor Liability on Public Projects

Current North Carolina law makes contractors on public projects in North Carolina (state and local) liable to pay lower-tier subcontractors and suppliers even when they have paid the first-tier subcontractor in full. Effective January 1, 2013, a new scheme should help contractors control their exposure for double payment on public projects in North Carolina. The new scheme requires contractors to furnish any claimant with a copy of the payment bond within seven days of the claimant’s written request and to provide all their subcontractors and suppliers with a “project statement.” It requires subcontractors to provide all of their subcontractors and suppliers with the contractor’s project statement, too. A contractor or subcontractor who fails or refuses to provide a project statement cannot enforce its contract against the lower-tier party until the project statement has been provided to the lower-tier party.

The project statement must contain the following:

  • the name of the project;
  • the physical address of the project;
  • the name of the contracting body;
  • the name of the contractor;
  • the name, phone number, and mailing address of an agent authorized by the contractor to accept service of requests for the payment bond, the notice of public subcontract, and the notice of claim on payment bond; and
  • the name and address of the principal place of business of the payment bond surety.

Upon receipt of a project statement, subcontractors and suppliers should serve a “Notice of Public Subcontract” upon the contractor. If the notice is sent within 75 days of the subcontractor’s or supplier’s first furnish date, then the subcontractor or supplier can pursue its full claim. Otherwise, unless the contractor has failed to timely furnish a copy of the payment bond to the claimant, the subcontractor’s or supplier’s claim will be limited to the greater of (1) the value of the labor or materials provided within 75 days of claim and (2) $20,000.

Claims of Lien on Real Property Must Be Served

Current North Carolina law does not require claimants to serve their claims of lien on real property. Effective January 1, 2013, claims of lien on real property must be served on the owner, and if the claim of lien on real property is being asserted by a subcontractor or supplier (e.g., by subrogation pursuant to section 44A-23 of the North Carolina General Statutes), then it must also be served on the contractor. The claim of lien on real property will not be perfected until it is both served and filed. Therefore, service and filing of the claim of lien on real property should occur before 120 days after the last furnishing of labor or materials at the site of the improvement by the person claiming the lien.

Service is deemed complete when the claim of lien on real property is personally delivered; deposited for delivery via the U.S. Postal Service; or deposited for delivery via DHL Express, Federal Express, or UPS. Parties can be served at the address the party listed on the permit relating the project, the address for the party listed on the tax rolls for any county in North Carolina, or the address for the registered agent of the party listed with the secretary of state.

Changes to the Form of the Claim of Lien on Real Property

Current North Carolina law does not require a claim of lien on real property to include a certification that it was served or require a subrogated lien to name the contractor through which subrogation is asserted. Effective January 1, 2013, each claim of lien on real property must include a certification of proper service. If the claim of lien on real property is being asserted by a subcontractor or supplier (i.e., by subrogation pursuant to section 44A-23 of the North Carolina General Statutes), then it must name the contractor through which subrogation is asserted. Revised Chapter 44A also expressly allows subcontractors and suppliers to use either their own dates of first or last furnishing of labor or materials or the contractor’s dates of first or last furnishing of labor or materials when they pursue their subrogated liens on real property.

Notice of Contract Changes

The notice of contract is a mechanism created by statute in the 1990s to limit contractors’ exposure to double payment on private projects. The notice of contract was a reaction to the North Carolina Supreme Court’s decision in Electric Supply Co. of Durham, Inc. v. Swain Electrical Co., 328 N.C. 651, 403 S.E.2d 291 (1991), which held that a second- or third-tier subcontractor or supplier could assert the contractor’s lien on real property even though the contractor had paid the first-tier subcontractor in full. The current version of section 44A-23 of the North Carolina General Statutes contemplates posting and filing the notice of contract by the contractor. It does not contemplate posting or filing by the owner. Effective January 1, 2013, the statute will allow the owner to post and file the notice of contract.

In addition, the deadlines associated with the notice of contract will be relaxed. The owner or contractor will be able to comply with the notice of contract requirements by posting and filing the notice within the latter of 30 days following the date the permit is issued for the improvement of the real property or 30 days following the date the contractor is awarded the contract for the improvement of the real property involved. The statute does not define “permit.”

Bankruptcy “Fix”

Several bankruptcy cases in the past few years generated confusion regarding the date that a lien upon funds arises or attaches, and therefore whether a notice of claim of lien upon funds could be served after a party in the contractual chain files bankruptcy. Effective January 1, 2013, section 44A-18 will make clear that a 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. This clarification is intended to permit subcontractors and suppliers to serve notices of claim of lien upon funds (and related subrogated claims of lien on real property) after another party in the contractual chain files bankruptcy. The revisions also make clear that until a lien claimant serves a notice of claim of lien upon funds, any owner, contractor, or subcontractor against whose interest the lien upon funds is claimed may make, receive, use, or collect payments thereon and may use such proceeds in the ordinary course of its business.

Sanctions for False Statements Expanded and Increased

North Carolina’s current law provides that a contractor or other person receiving payment for improvements to real property who knowingly furnishes a false statement of the sums due or claimed to be due (e.g., a fraudulent lien waiver) is guilty of a class 1 misdemeanor. Effective January 1, 2013, the sanctions for such false statements will increase. In addition to the criminal sanctions, fraudulent lien waivers will constitute deceit and misconduct subject to disciplinary action under Chapter 87 of the General Statutes. As a result, a contractor who knowingly furnishes such a false statement may have its license revoked, suspended, or otherwise restricted. An individual involved may also lose his or her ability to act as a qualifying party for a license.

Necessary and Proper Parties to Lien Enforcement Lawsuit

Effective immediately, not all owners, lenders, or title insurance companies are necessary or proper parties to lien enforcement actions. Section 44A-13 of the North Carolina General Statutes now states that a former owner is not a necessary party in a lien enforcement lawsuit if the former owner holds no ownership interest in the property at the time the lawsuit is commenced and if the plaintiff seeks no relief from the former owner. Subsequent purchasers and lenders also are not necessary or proper parties to lien enforcement lawsuits if the lien has been discharged with a cash deposit or a lien discharge bond. Nothing in the revised statute prevents a lien claimant from asserting any claims that are separate and distinct from enforcement of the lien.

Keywords: real estate litigation lien agent, notices, service

Eric Biesecker is a member of Nexsen Pruet, PLLC in Greensboro, North Carolina. Greg Higgins is counsel at Volvo Group North America, LLC.


Copyright © 2012, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).