That decision of the lower court was very negative in its implications for contractors in North Carolina because before that decision, a lien’s priority in NC was based upon the date that labor and materials were first furnished. As we mentioned in our previous blog post, linked to above, that meant that if you furnished labor and materials on day 1 of a project and then decided to file a lien on that project on day 600, your lien would have taken priority over other liens filed after you first furnished labor and materials (way back on day 1).

It was a big deal that this well-settled NC rule was changed. And thanks to the Court of Appeals of North Carolina’s decision rendered on July 20th of this year (Wachovia Bank v. Superior Construction et al), the lower court’s decision has been reversed and the rules I just explained now apply again. All is well in the world of North Carolinian contractors once again.

This is a huge win for contractors and other similar workers in that state.  And if you read the Court’s reasoning, it all comes down to interpretation of the lien waiver language. The lower court interpreted the language in that particular case to refer to the contractor’s lien priority while the Appeals Court interpreted the language to refer to the contractor’s lien rights regarding payment. The Appeals Court did not see the language as having anything to do with priority.

The first furnishing date, which once again determines priority of lien, also determines a lot of other important things, including whether or not a claimant will receive proceeds from a foreclosure, as mentioned in Gregory Shelton’s great blog post on the topic. It determines your lien’s priority, which effects ultimately how much money your business will bring in.  Huge.

Other implications of this new decision? I agree with Gregory Shelton’s musings that perhaps the Court of Appeals is leaving the door far too open for language to take control in allowing statutorily determined dates of first and last furnishings to be altered by contract.  All we can do is wait to see how this ruling plays out over time, but it’s definitely a positive thing to return the interpretation of NC lien waiver language back to where it aligns with settled notions of NC lien law.

We’ll monitor the progress of this bill here on the Construction Lien Blog. Here is a summary of the changes proposed by the original text:

Off-Site Prefabricated Material Suppliers Protected

The new law would allow parties to lien for the “off-site design, fabrication and related labor and materials in connection with noncommodity prefabricated materials, product systems or equipment customized for the use and benefit of improving particular real property whether delivered to the real property or not.” There are only few instances in lien laws across the country when folks can obtain lien rights without having their materials or labor installed into the jobsite. Specially fabricated materials is one of those instances in some states…and North Carolina is looking to add themselves to the mix.

Notice of Commencement Filing Requirement

A Notice of Commencement must be filed for all North Carolina projects with the county clerk. While initially the owner is required to file the notice, if the owner fails to do so, the contractor may file the notice. In addition to the filing requirement, the notice must also be displayed on the job site, and a copy distributed to anyone who requests the same within 5 days of the request. Building inspections will not go forward on the project unless the notice of commencement is properly filed, and displayed on-site.

A special type of notice is required when an owner is acting as the general contractor to build a residential structure that is a four family residential building or less. In this instance, a Notice of Owner Built Project must be filed and displayed on site.

Effective Date of Lien Filing

This particular proposed legislative change is in direct response to a case pending with the North Carolina Appeals Court, previously discussed here on the Construction Lien Blog:  Preserve Holdings LLC v. Superior Construction Corp.

Preserve Holdings is a lien priority case, with a lien claimant contractor pitted against a construction lender, fighting over whose claim has priority over the other’s. The contractor argues its lien claim starts when materials and labor were first delivered, and the construction lender argues that each time the contractor got paid (and executed a lien waiver), the lien claim for that period was waived and the claim only related back to the last unpaid portion of work.

§44A-10 used to read very simply: “A claim of lien on real property….shall relate to and take effect from the time of the first furnishing of labor or materials at the site of the improvement by the person claiming the claim of lien on real property.”

The proposed amendment complicates things a bit, but is certainly more specific:

A claim of lien on real property…shall relate to and take effect from the earlier of (i) the time that the claimant files its claim of lien on real property with the clerk of superior court; (ii) the time that a notice of commencement is filed with the clerk of superior court; or (iii) for a first, second or third tier subcontractor, the date of filing its notice to owner if there has been no notice of commencement previously filed for the contractor through which the subcontractor has provided labor and materials for the improvement of property. In the event there are insufficient proceeds to satisfy all claims of lien on real property, claims of lien shall be satisfied as follows:
(1) Claims of lien on real property shall be satisfied in full by the priority of their effective dates.
(2) Claims of lien on real property with the same effective date shall be satisfied on a pro rata basis with the other claims of lien on real property with the same effective date.

Lien Waiver Policy More Fully Explained

In Another nod to the pending appeals case (Preserve Holdings), the bill proposes some changes to the lien laws treatment of lien waivers.

We’ve discussed lien waivers on this blog in the past:  No Lien Clauses – Are They Valid?

This article was written quite some time ago (2007), but remains completely accurate. Some states allow parties to waive their lien rights before any work begins, and others consider this type of waiver to be against public policy. North Carolina has always been a state that considered such waivers to be against public policy.

But, as the Preserve Holdings case is demonstrating, there is a blur between a pre-work lien waiver, and those partial lien waivers that are executed throughout the course of a project in every state, and understanding what the limits are upon these routine partial lien waivers can be difficult.

The proposed law makes it clear that partial lien waivers (i) do not alter or waive the lien’s effective date; and (ii) are conditional upon the claimant’s actual receipt of funds. Additionally, the proposed law also gives a partial lien waiver form that must be used.

Subcontractor Notices

Currently, North Carolina subcontractors are only required to deliver notices if the general contractor has filed a notice of contract. House Bill 489 proposes that all subcontractors must serve a notice to owner upon the owner, and file the notice with the superior court clerk. Subcontractors more remote than the first tier must also serve the notice upon the property owner.  This notice will be required within 30 days from when labor and/or materials are first provided.

Conclusion

All in all, House Bill 489 proposes some substantial changes to the North Carolina Mechanic Lien system. We’ll watch it closely here at the Construction Lien Blog, and report on any changes and progress. Remember, for now, these new laws are not effective…but merely proposed.

Guest Post by Melissa Brumback

Melissa Brumback is a litigation partner at Ragsdale Liggett PLLC in Raleigh, North Carolina where she focuses on construction law issues, often representing architects and engineers in construction defect claims. She maintains a blog for construction professionals called Construction Law in North Carolina. She can be reached at mbrumback@rl-law.com or on Twitter @melissabrumback

Each state has its own (sometimes quirky) lien laws for contractors. This post is a basic primer on the ABCs of lien law in North Carolina.

Who can file a lien?

Anyone who furnishes materials or labor to improve real property can file a lien on that property. This includes design professionals who provide services related to improvement of real property, contractors, and subcontractors (down to the 3rd tier).

What types of liens are there in NC?

There are three types of lien claims in North Carolina.

1. The Claim of Lien on Real Property (NC Gen. Stat. §44A-12) is for a person who contracts directly with the owner of the property. This can be a general contractor, a separate independent contractor, or a design professional.
2. The Notice of Claim of Lien upon Funds (NC Gen. Stat. §44A-18 and §44A-19) is available to subcontractors (down to third-tier subcontractors), and allows them to have a lien right to any funds owed to the party that contracted with them in the chain of title. In other words, if the owner still owes money to the general contractor, and the owner receives a Notice of Claim of Lien upon Funds by a subcontractor (and the lawsuit to enforce the lien is thereafter properly filed), the owner cannot pay the general contractor until the subcontractor’s lien is extinguished.
3. The Subrogated Claim of Lien on Real Property (NC Gen. Stat. §44A-23) also provides real property lien rights to the subcontractor, to the extent the party he contracted with has lien rights.

When and Where must a lien be filed?

Claims of Lien on Real Property, and Subrogated Claims of Lien on Real Property must be filed in the clerk of court where the property is located, within 120 days of the claimant’s last date of furnishing.

What must be included in the lien?

The Claim of Lien must include several pieces of precise information, including:

1. The name and address of (a) the person claiming the lien (the “claimant”); (b) the record property owner at the time the lien is filed; and (c) the person who claimant contracted with to provide labor/materials
2. A description of the real property (which can include street address, tax/block number, reference to a recorded deed, or other description of the property so long as it reasonably identifies the property at issue)
3. The dates that the labor/materials were (a) first furnished and (b) last furnished by claimant
4. A general description of the labor or materials (a general description is sufficient; no itemized list or detailed statement is required)
5. The dollar amount claimed

What does “perfecting a lawsuit” mean?

A lawsuit must be filed to enforce a claim of lien. This is called “perfecting” the lien, and it must be done within 180 days of a claimant’s last date of furnishing. The lawsuit can be filed in any proper county so long as an appropriate Lis Pendens is also timely filed in the county where the property is located.

What special remedies are available for a lien claim?

If a lien lawsuit is perfected and a judgment rendered, the court can direct the property to be sold to satisfy the lien. Additionally, you can recover attorney fees for the lien lawsuit. Pretty cool, huh?

In summary:

As you can imagine, liens can be very powerful tools to help ensure recovery of money owed to contractors and subcontractors on a project. The key to exercising your lien rights is to keep watch on the running of the claim period (use of a program such as Scott’s Lien Pilot can help with this) with this) and to ensure that the lien is (1) properly drafted; (2) timely served; (3) appropriately filed; (4) perfected with a timely lawsuit. This is not an area where you can make a mistake—liens are subject to strict rules that must be followed to the t. If in doubt about a lien issue, contact a knowledgeable construction law attorney in your jurisdiction.

Her post, Lien Law Changes Ahead?  Add Your Voice, discusses some proposed changes to the lien statutes as prepared by the NC Bar Association’s Lien Law Committee.     Melissa’s post identifies some areas where changes are proposed (quoting):

(i) Handling the uncertainty created by recent Bankruptcy court decisions relating to liens

(ii) Reexaming the “relation back” and “double payment” issues in current lien law

(iii) Reexaming the long form lien waivers and current problems with those waivers

You can read the full proposal on her website, and she invites the reader to send in their comments about the proposed changes, which she will deliver to the Lien Law Committee.

While you’re over on her page, you may want to check out another great post on the North Carolina lien laws.   Rather than discussing what changes may be in the works, this post addresses the law as it currently stands, providing the reader with the “ABCs” of the state’s lien statutes.

This is an easy read, and will leave you with a pretty solid basic understanding of how liens work in North CArolina, and what type of liens can be filed in that state.

You can read this post here:  ABCs of Current North Carolina Lien Law.

North Carolina’s Priority Rules

Every state treat its lien holders differently.   In some states, a lien takes priority from the moment it is recorded.   In other states – like North Carolina – the lien’s priority actually relates all the way back to the date materials or labor is first furnished to the project.

So if you furnish materials and labor of day 1 of the project, and finally file a lien on day 600…you’re lien has priority over everything that was filed after the project’s day 1.   Pretty powerful stuff.

Reviewing the N.C. Gen. Stat. § 44A-10, Justice Samuel J. Ervin Jr. discussed how irrelevant the lien statues would be without the so-called “relation back doctrine:”

The doctrine is inherent in the very statutes which give the contractor the lien upon the property improved by his labor or materials…; for it is plain that unless the contractor’s lien when filed relates back to the time at which the contractor commenced the performance of the work or the furnishing of the materials, the object of the statutes can be defeated at the will of the owner of the property, by his selling or encumbering his estate.   To hold that the doctrine of relation back is not inherent in these statutes would be to ‘keep the word of promise to our ear, and break it to our hope.’   Equitable Life Assurance v. Basnight, 234 N.C. 347, 351 (1951).

Why the “Relation-Back” Rule is in Jeopardy

Big thanks to the North Carolina Construction News blog for bringing to our attention a case pending with the North Carolina Court of Appeals:  Preserve Holdings, LLC v. Superior Construction Corp.

The construction lender in this case argues that the lien claimants lien does not relate back to the first delivery of materials and labor because of partial lien waivers the claimant had executed over the course of the project.

You know these lien waivers, everyone signs them every time they get paid.   If you get paid 5% of the contract price, you waive your right to lien for that 5%.

The construction lender is arguing that the lien claimant’s lien can only relate back to the last partial lien waiver….and the trial court agreed.

So the case is now on appeal, and the American Subcontractors Association of the Carolina’s filed a “Friends of the Court” brief (that’s where we got that quote from Justice Erving Jr.).   Take a look at their brief here.

Stay tuned to the Construction Lien Blog for updates on this important case.

As soon as a lien claimant has their lien challenged as improper, the first thing they want to do is file an amendment.    And this brings us to a very important question:  Can you amend a defective lien?

In most states, claimants are only allowed to amend the lien to include missing information only if the amendment is made before the original lien period expires.

I stumbled upon a case out of North Carolina addressing this issue.    In Gaston Grading v. Young, the NC Court of Appeals explained this general rule:

…if plaintiff wished to correct the mistakes of its second lien, plaintiff was required to cancel the second lien and substitute a new claim of lien containing the correct information. Plaintiff failed to do so within the prescribed time and thus, its claim of lien is void.

While each state’s treatment of this issue may differ, it does seem the be the dominant rule in the United States.   I practice law in Washington, Oregon and Louisiana, and those three states treat amended liens similarly to North Carolina.

This is why I’ve titled this post, “You May Only Get One Shot To File Your Mechanics Lien.”  While you can – in theory – amend the lien if you make a mistake, you’re still stuck with the time restrictions of your state.   When you file the lien the first time, you should get it right.

While the general availability of filing a lien is a simple rule in North Carolina, it is more complex to determine how a party can file in the state.   The manner of filing a lien in North Carolina depends on the claimant’s role in the project.    We take a shot at explaining the North Carolina lien scheme in this post, and compare it to how liens are filed in other states like Washington and Louisiana.

Those Who Contract With The Owner:

Those who contract with the “owner” on a North Carolina construction project, and who are not paid for labor or materials, may file a “traditional” mechanics lien with the county recorder.

The lien must be filed within 120 days from the last date labor or materials are furnished to the project, and must follow other formalities required by statute.   These formalities are set forth in N.C. Gen. Stat. § 44A-12, which also provides a form to be used when filing.

This lien actually attaches to the property at controversy, affecting the property’s title.

Those Who Do Not Contract With The Owner:

For those who do not contract with the property owner, the North Carolina lien scheme offers two possible remedies.

First, a “Notice of Claim of Lien Upon Funds” is something that is delivered – and not filed – to parties “up the contract chain.”   This requires those up the chain to put a freeze on funds that may be due the claiming subcontractor.    If a Notice of Claim of Lien Upon Funds is delivered to the Owner, and the Owner thereafter disburses funds to the general contractor, the claimant can then escalate its notice into an actual lien.

Second, a “Subrogation Lien” is filed by a sub or lower-tier sub within 120 days from when the general contractor last performs work, and may be filed only if a Notice of Claim Upon Funds was delivered to the Owner and some amount of money is due to the GC from the Owner.

Both of these lien remedies are discussed below in this post.

Claim of Lien Upon Funds

The rules are a bit different for those parties to a construction project who do not contract with the owner.  Who are these parties?  Subcontractors, Second-Tier contractors and suppliers, Third-Tier contractors and suppliers, etc.

Unlike parties who contract with the owner (i.e. generals), lower tier contractors cannot file a ‘traditional’ lien.   Instead, these contractors protect their right to payment by serving a “Notice of Claim of Lien Upon Funds.”   The requirements for this notice is set forth in N.C. Gen. Stat. § 44A-19.

This notice does not affect a property’s title, and it is not filed with the county records.  Instead, it is served upon every party “up the chain” from the claimant.

So, for example, a first tier subcontractor would deliver notice of claim to the owner and the general contractor.

While a traditional lien provides a claimant a lien on the property, this type of lien provides the claimant only with a lien on the funds at controversy.   After receipt of the notice, if the owner or other party makes payments down the construction chain with funds that are liened (i.e. eventually belong to the claimant), the party who improperly made the payment will be personally liable to the claimant for payment.

If the party is the owner, the claimant may then file its notice with the country recorder.

Lien Through Subrogation

In addition to the “Notice of Claim of Lien Upon Funds,” subcontractors and lower-tiered subcontractors can also file a mechanic’s lien against the property through “subrogation” of the general contractors right to lien.

With this type of lien, the lien claimant must:  (1) have served a Notice of Claim of Lien Upon Funds to the property owner; and (2) the general contractor must be owed money from the owner.    The subrogation lien must be filed within 120 days from when the general contractor last furnished labor and/or materials to the project.

Comparing with Other States: Louisiana and Washington

One of the problems with lien statutes across the country is balancing the rights of laborers and materialmen to get paid with the interests in protecting a property owner from being required to pay for the services twice, and to have its property title illegitimately affected.

Different states balance these issues differently.

In Washington, lower-tiered contractors are required to provide the owner with notices prior to filing a lien.

In Louisiana, there is a focus on the public records, allowing owners to file notices in the public records that affect the interests of lien claimants.

North Carolina balances these issues differently, essentially allowing only those who contract with the owner to immediately affect a property owner’s title.  If the contract is not with the owner, the lien at first only affects the funds.  If the parties continue to refuse the claimant payment, the problem grows, and more parties become personally liable for the debt and the property’s title is at stake.

Zlien’s Services:

Zlien prepares, files and serves both “Liens’ and “Notice of Claim of Lien Upon Funds” in North Carolina.

With regard to “Liens,” filed by those who contract with the property owner, there is a $295.00 flat charge which includes the document preparation, filing and service upon interested parties.   Also, liens that are recorded by subs and those who did not contract with the owner are also $295.00.

With regard to “Notice of Claim of Lien Upon Funds,” which are delivered and not filed, these are considered a notice, and are charged our low flat fee for preparing and delivering notices.

Get Started Now.

This is a good reminder that liens can be as small or as big as the project’s debt to a company, from $1 to $3.1 million.

Just be sure to avoid making common mistakes, send your notices and file on time.

Zlien has experience filing liens that are more than $1,000,000, and can help get your company’s lien on country or parish records.   Use the Construction Lien Blog and the online lien filing tools that comes free with your account to help understand the lien laws and requirements in your state.

Click here, and learn more about how we can help you Lien Smarter…and Get Paid.