Nonresidential Construction Industry Seeks Changes to Lien Law Requirements

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Guest Editorial by Lindsey Powell, Safran Law Offices

NC Representative Sarah Stevens opened a meeting with construction industry stakeholders on Wednesday, January 30 stating that the purpose was to discuss a proposal to exempt commercial construction from the recently-passed notice to lien agent requirements.

Dave Simpson of Carolinas AGC spoke first explaining that AGC was not expressly endorsing the proposal, but wanted to bring it to the table to open the subject dialogue. He stressed that NC’s recent lien law changes were largely modeled after Virginia’s and Virginia does exempt commercial construction from its statute. Holt Gwynn’s draft proposal is intended to mitigate the burden on the construction industry as the risk of harm to the title insurance companies and lenders is minimal and the documented or acknowledged issues are few in the area of commercial construction. Taking this into account, it seems unfair to shift the burden from the lenders and title insurance companies to the construction industry. Further, the practical issue of implementing an effective system for giving notices to lien agents is difficult. The title insurance companies have had problems implementing an online system in Utah, and the same issues should be expected in NC.

Richard Vick, Vice President of ST Wooten, spoke in favor of the proposal. He stated that the general contractors would be unlikely to pass along the costs of compliance to their subcontractors and would ultimately bear the brunt of the administrative burden and how the costs would outweigh any potential benefit. He also questioned why commercial construction was even included in the legislation since it was modeled after Virginia, which limits the applicability to residential construction, and the title insurers’ main concern during this process has been residential construction.

Scott Bengel, CFO of Shelco spoke in favor of the proposal. While he admitted the value of being aware of the potential liens on construction projects, he stated his belief that Senate Bill 42 was hastily drafted. In the residential setting, especially large tract development projects, the owner and contractor are often related and therefore the contractor is more closely involved with construction financing, sales, and refinancing, which is rarely the case with commercial construction.

Mr. Bengel also pointed out differences in the practical aspects of residential and commercial construction, namely the progress payments made on commercial projects. In this instance, one lien can stop the cash flow for the entire project, causing delays, and potentially subjecting the general contractor to liquidated damages, as are often found in industry contract documents.

Mr. Bengel noted that the subcontractors would be required to give notice to the lien agent, and not the general contractor which would prevent the general contractor’s ability to resolve payment disputes before liens are filed. He also noted that the number of subcontractors and suppliers on commercial projects are much higher, thereby increasing the burden on general contractors primarily engaged in the business of commercial construction.

Matt Bouchard, standing in for Holt Gwynn, spoke in favor of the proposal. He distinguished the general goals of constructing residences versus constructing commercial properties. Generally residential properties are constructed for immediate sale whereas commercial properties are constructed with the intent of leasing spaces for revenue.

He also noted that the title insurers initially only complained of the need for lien agents with regards to residential construction and their threat to stop writing policies in North Carolina rushed the legislation without the change to properly vet it. Finally, because construction financing almost always precedes construction, the subcontractors’ rights are almost always subordinate to the lenders’. He likened the motto that risks should be allocated to those most capable of preventing them to the medical hypocratic oath stating that the legislation as written is unfortunate, unnecessary, and unfair.

Following Matt Bouchard’s comments, Representative Stevens invited those in opposition of the proposal to speak.

Dave Ferrell, with the NC Land Title Association, spoke against the proposal stating that residential and commercial construction projects have both been problematic in the past and that it was only for a brief period of time that the focus of this legislative reform was solely on residential construction. He noted that limiting the lien agent requirement would cause problems for mixed use developments, and the absence of a uniform system would create confusion. He described the lien agent process as simple and stated it would be available on the Department of Insurance website. The vendor that implemented the Utah system would be available to develop North Carolina’s and though the Utah system has experienced technical difficulties, this will not be a problem for NC because its lien agent statute is less complex.

Tabatha Cruden, an underwriter for commercial projects with First American Title, also spoke against the proposal, stating that hidden liens are in fact a problem with regards to commercial construction projects. Because there is often furnishing, particularly architectural and engineering services, prior to financing, it can be difficult to write mechanic’s lien coverage.

Nathan Batts with the NC Banking Association, spoke against the proposal stating that creating 2 sets of requirements for residential and commercial construction would be problematic. He also stated that the Virginia Bankers’ Association was looking to the NC law to push legislation reform there.

Elizabeth Hansen, a Triad-area real estate attorney, spoke in favor of a uniform system of notices to lien agents. She described the “archaic” system of title examinations and the ease with which she could prepare for closings where there is a centralized system for locating potential hidden liens.

Henry Batten, with Concrete Supply in Charlotte, opposes the proposal because as a concrete supplier, his company has difficulties determining whether their materials are going to residential or commercial construction projects, and therefore favor a uniform system as well.

Representative Stevens invited questions and a representative from the Aggregates Association asked about infrastructure, particularly utility work within public right-of-ways. Within residential developments, would this work require a notice to lien agent? Or is this work even lienable because it is technically public property. The suggested fix was to have Holt bring such services into the definition of one- to two-family dwellings in the draft proposal.

Input based on today’s meeting was requested to be sent in by Friday. The bill filing deadline is March 28, and Rep. Stevens suggested another meeting for mid- to late-February.

Bill Patterson, Staff Attorney with the NCGA Research Division, set up set up a Google location for various submissions, both relating to SB42 and for other lien law revision proposals. Patterson also requested that any party having a response or comment to any of the other lien revision proposals should submit those statements by February 15, 2013.  Read More.