What the ‘hidden lien’ legislation means to contractors and suppliers

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Guest editorial by Brian J. Schoolman, Safran Law Offices

Senate Bill 42, which was approved by both houses of the North Carolina General Assembly on June 27, addresses the so-called “hidden lien” issue.  In the eyes of the title insurance industry, subcontractors and material suppliers have a “hidden lien” right because those parties are not in direct contract with the owner.  However, for decades of North Carolina construction, they were not hidden, because everyone knew that a claim of lien could be filed within 120 days following the date of last furnishing of labor, material or services to the project.  The title insurers alleged that they suffered exceptional losses during the current economic downturn, and a group of insurers threatened to stop writing title insurance policies in North Carolina if their desires for protective legislation were not met immediately.

The basic effect of SB 42 is that it requires any party furnishing labor, materials or services – the general contractor, subcontractors, material suppliers, architects, engineers, or anyone else having a lien right under Chapter 44A – to deliver a notice to a lien agent.  The lien agent is a newly created role, and under SB 42 only title insurers can be registered as lien agents in North Carolina.  The theory is that all parties who deliver notices to the lien agent will be confirmed prior to a closing, and get paid what they are owed.  However, the original language of SB 42, when combined with the surviving current lien laws, did nothing to assure subcontractors and suppliers of having a seat at the closing table.  For this reason, numerous groups, including the American Subcontractors Association of the Carolinas, the Carolinas Ready Mixed Concrete Association, and the North Carolina Aggregates Association, objected to the bill, and particularly how it was being rushed through.

Because of intense lobbying by those associations and other industry groups, this problem along with others was actually addressed by the General Assembly.  The original bill had been passed through the House without taking amendments on the floor, and the fear was that the Senate would do the same.  However, as Rep. Sarah Stevens – whose countless hours of working on both SB 42 and the less-controversial HB 1052 lien and bond law revisions should be congratulated – noted on the House floor on June 27, the Senate did the House a favor by stopping the bill so the concerns could be fixed through amendments.

Under the approved version of SB 42, an owner for most construction projects must retain a lien agent at the initiation of a project.  (An exception was created in the amendments for existing single-family residences, where the owner occupies the property.)  If a construction party gives the notice to a lien agent, then that party will not lose any of its lien rights.  If a party does not give the notice prior to one of two events – either a conveyance of the real property to a bona fide purchaser for value, or a recordation of a deed of trust or mortgage on the property – then that party can lose some or all of its lien rights.  If the property is sold before a notice to lien agent is delivered, then the contractor or supplier will lose all rights to file or perfect a claim of lien on the real property.  In the case of a recordation, that party will be automatically subordinated below the priority of the holder of the deed of trust or mortgage.

One of the most hotly contested issues for SB 42 was how to get the identity of the lien agent passed down from the owner (who has to hire the lien agent in the first place) to all of the parties to the construction project.  Under the bill, a lien agent has to be identified in the building permit, and in the inspections office.  However, there is no penalty to an owner for being delayed in identifying the lien agent.

Off-site material suppliers and aggregate suppliers raised an additional concern that though they may never come to the site at all, they still have lien rights.  While all lower-tier subs and suppliers were concerned that there needed to be some sort of incentive for the general contractor and higher-tier subs to flow down the information, the original language that was inserted included making the failure to pass along the contact information an unfair trade practice.  At the insistence of Sen. Dan Clodfelter, and at the request of the subcontractor groups, the treble-damages penalty was removed in the final amendments, and replaced with a provision for an actual-damages remedy.

The most important amendment coming out of the House/Senate conference process was a change to existing lien law, whereby certain subcontractors and suppliers can now prevent the general contractor from waiving their subordinated lien rights.  New provisions added to Section 44A-23 provide that if the sub or supplier delivers the notice to lien agent, and further serves a notice of claim of lien upon funds to the required parties, as well as to the lien agent, that party’s lien rights cannot be prejudiced without its written consent.  In practical terms, this change means that a sub or supplier is no longer required to file a claim of lien on the real property, and file a lawsuit to perfect that claim of lien, in order to secure the lien right.

The expressed goal of the title insurers for SB 42 was to ensure that contractors who gave the new pre-notice would get paid.  The amendments won by the efforts of subcontractors, suppliers, and design professionals, and with the cooperation of Carolinas AGC, are expected to further that goal.

SB 42 next heads to the Governor for approval.  Following her expected signature, the changes to the law go into effect on April 1, 2013, which was a compromise date adopted to give the General Assembly time in the next session to make any technical changes needed to harmonize this bill, HB 1052, and the existing lien laws. Read More.

Click here to View a Sample Notice to Lien Agent Document

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