By Luke Farley, Sr.
When you’re in a payment dispute as a contractor, your greatest leverage can be your right to file a lien on the project, so anytime there are changes to the North Carolina lien law, it’s important to take note. The biggest change to the law in the last 20 years was the establishment in 2013 of the lien agent system and the LiensNC.com website to support it. Come this fall, those laws will change again.
The state legislature recently added new rules for renewing and canceling a “Notice to Lien Agent,” one of the key document filings under the 2013 law. These changes took effect on Oct. 1. This article provides a refresher on the original lien agent law, highlights and explains the upcoming changes, and suggests some best practices to help you comply with the new law.
Since 2013, project owners have been required to appoint a lien agent for private projects where the cost of the project was $30,000 or more. The lien agent is a title insurance company that receives information about the identity of potential lien claimants who’ve supplied labor or materials to the project. After the lien agent is appointed, subcontractors
and suppliers are then responsible for filing (yet another) document, the Notice to Lien Agent, which includes the potential claimant’s contact information and a description of
the project.
The lien agent process creates a registry of potential lien claimants on a project and puts the owner on notice of the existence and identity of subcontractors and suppliers that might be owed money. This, in turn, allows the owner to be sure subcontractors
and suppliers have been paid by the general contractor and obtain the appropriate lien waivers at the end of the job. The lien agent system is meant to avoid the so-called “hidden lien” problem that arises when the lien isn’t filed until after the project is finished. Owners bear a risk that they’ll pay a general contractor and learn only later the general contractor hasn’t been paying its subcontractors and suppliers down the chain.
Filing a Notice to Lien Agent has become an important part of protecting your lien rights. The best practice is for all subcontractors and suppliers to electronically file the notice
through the LiensNC.com website for every project that meets the $30,000 threshold. While filing a Notice to Lien Agent on every project may seem time-consuming and expensive, the benefits generally outweigh the costs. Not filing a Notice to Lien Agent can result in losing your lien rights, which in a payment dispute are usually your greatest leverage.
The most important change coming to the lien agent process is that your Notice to Lien Agent will now expire after five years if you don’t renew it. In light of this change, you may need to develop a system to track when your notices expire. This could be something as simple as an Excel spreadsheet.
As a practical matter, the new expiration date may not be much of an issue unless you’re involved with a big project that takes years to finish. Most projects don’t have a lifespan
greater than five years. If, however, you have a need to keep your Notice to Lien Agent alive beyond the initial five-year term, you can renew it once for one additional five-year period. If you have to renew your notice, you need to do it before the original notice
expires. If you allow a notice to expire, you can’t renew it afterward.
Does the new five-year expiration period apply to old notices? The legislation doesn’t say whether it applies retroactively to notices filed before Oct. 1. If you have on-going projects for which you haven’t yet been paid, the safest course of action would be to figure out which notices are about to expire and file a renewal. Remember though for retroactivity to be a concern you’d need to have filed your Notice to Lien Agent sometime back in 2013,
so again it won’t be an issue for most projects.
The second major change to the lien agent process is a new obligation to cancel your Notice to Lien Agent if the project is a one or two-family dwelling. The new cancellation
requirement seems meant to ensure that houses, which are often sold soon after they’re finished, will have totally clean title at the time of sale with nothing in the public record to
suggest otherwise.
If you’ve filed a Notice to Lien Agent on a house project, the new rules require you to cancel your notice within a “reasonable amount of time” after receiving final payment. That phrase isn’t defined in the statute, but prudence dictates that you shouldn’t cancel the notice until the final check clears and you know the funds are good. After that, it’s probably best not to wait more than thirty days to cancel your notice.
The law doesn’t specify the consequences if you don’t cancel in a timely fashion, but it’s not worth finding out. The most convenient way to cancel the notice is through the LiensNC.com website and convenience here is crucial, since canceling your notice is now another administrative task to deal with. Remember, though, you have no obligation to cancel your notice unless the project is a one or two-family home. For all other types of projects, just allow the notice to expire automatically on its own.
The last change worth mentioning won’t surprise anyone in the construction industry. Like the cost of labor and materials, the cost to file a Notice to Lien Agent is going up, though the culprit here isn’t a tariff or a skilled labor shortage. The filing fee for a one or two-family house has gone from $25 to $30, a 20 percent increase. The filing fees on all
other types of projects are increasing from $50 to $58, a 16 percent increase. The fee increases could be especially costly for anyone doing high volume residential work, like
subcontractors and suppliers working for large tract home builders. An extra $5 per notice per house could add up quickly.
The new rules on renewing and canceling Notices to Lien Agent don’t make any fundamental changes to the lien agent system, but they could dramatically affect your lien rights under some circumstances and they add new costs and administrative burdens.
There are probably more tweaks coming. Adding a lien agent to the mix was the biggest change to North Carolina lien law in decades, so you can expect that the state legislature
will continue to fine tune the law as the construction industry gains more practical experience working with lien agents.
Luke J. Farley, Sr. is a construction and surety lawyer in the Raleigh office of Conner Gwyn Schenck PLLC. His practice focuses on contract disputes, lien and bond claims, and licensure of contractors and engineers. He can be reached at lfarley@cgsplic.com or by phone at (919) 789-9242.