NC lien law update: The rules are about to change

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Guest editorial by Gregory L. Shelton, attorney, Horack, Talley, Pharr & Lowndes, P.A.

Every Thanksgiving, people line up for hours outside of stores waiting for Black Friday sales.  When the doors open, the once peaceful tent city descends into an every-man-for-himself tug-of-war. Welcome to the world of the General Assembly.

Three years ago, the Construction Law Section of the North Carolina Bar Association decided to take on the “hidden lien” issue. The effort proceeded in stages. First, there was an effort to build consensus among “stakeholders” (a  term referring in this case to GCs, owners, subs, title insurers, and other segments of the construction industry). Then, earlier this year, the “hidden lien” provisions were shelved so that non-controversial but necessary revisions could be enacted.

Enter Title Insurance Lobby, stage left. Title insurers, unwilling to wait around for another year, introduced the “lien agent” bill to keep track of subs and suppliers. So now we had two bills to track.

The stampede was on, and blogging about details became pointless because the details changed on an hourly basis. To appreciate how quickly things were changing in the last ten days, just look at the history of S42, paying particular attention to the events beginning on June 20. Same story for H1052, formerly known as H864.

But it is quiet now and the earth has stopped shaking. S42 and H1052 were signed into law on July 2, 2012.  Here are the basics of the two bills:

Senate Bill 42 (Hidden Liens):

Inserts new sections 44A-11.1 and .2 defining “lien agent” designated title insurance company or agency

  • Notice must be served on lien agent for projects where original permitted work exceeds $30,000
  • Owner must provide potential lien claimants with lien agent contact information
  • Lien agent contact information must be posted on site
  • To enforce a lien on real property, potential lien claimants must do one of the following:
    • serve formal notice upon lien agent using statutory form called “Notice to Lien Agent” within 15 days after first furnishing by potential lien claimant
    • serve Notice to Lien Agent before sale of real property to bona fide purchaser
    • file Claim of Lien on Real Property before sale of real property to bona fide purchaser
  • Contractor may not prejudice potential lien claimant’s rights once notice potential lien claimant has properly given notice to lien agent, has properly served a Notice of Claim of Lien Upon Funds upon the owner, and has delivered to the lien agent a copy of the Notice of Claim of Lien Upon Funds served on the owner

House Bill 1052 (Lien Law Revisions)

Formerly H864 (2012 short session) and H489 (2011 long session)

Requires service of Claim of Lien upon record owner of property (current statute requires service of Notice of Claim of Lien Upon Funds only)

  • Former owner of real property who owned property when lien arose is not a necessary party (settles years of heated telephone calls among construction lawyers, although “heart felt” positions were subject to change depending on who the client was).
  • Lien attaches immediately upon first furnishing (technical clarification to address bankruptcy decisions holding otherwise)
  • Lien waiver executed by GC before sub/supplier files lien enforcement action on real property waives sub/supplier’s right to assert GC’s lien by subrogation, but does not cut off right to assert property lien where owner violates lien upon funds
  • Clarifies that subs/suppliers may use their own first and last dates, or GCs first and last dates (based on “subrogation” (standing in the shoes of the GC)), when filing out claim of lien forms
  • False lien waivers remain Class 1 misdemeanor (efforts to make this a felony and “unfair and deceptive trade practice” failed), but they now give rise to discipline by licensing boards
  • Requires that subs/suppliers furnish ”Notice of Public Subcontract” to protect payment bond rights under the Little Miller Act

I’m hearing doom and gloom from some subs and suppliers, who object to yet another procedural obstacle being placed between them and their constitutionally prescribed lien rights. I would caution against snap judgments. Contractors in other states have been living with pre-notice statutes for years, and have survived. And keep in mind that the easiest time to collect past due bills is right before a closing.

The lien agent provisions take effect next April, so there is some time to adopt new procedures to protect your company. I prepared the following document as a “look forward” to what certain portions of Chapter 44A might look like on April 1, 2013. Existing statutory language deleted by S42 or H1052 will not appear in this document. Additions from H1052 are shown in RED TEXT . Additions from S42 are shown in BLUE TEXT.

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