The North Carolina construction world was abuzz during 2012 about new legislation bringing significant changes to North Carolina’s mechanic’s lien and payment bond laws. Governor Perdue signed SB 42 and HB 1052 into law this past summer. Key provisions of the laws are set to take effect on January 1, 2013, with other changes coming on April 1, 2013. Chief among these are the establishment of a new construction actor, the “lien agent,” and new procedures for serving and perfecting claims of lien upon funds and on real property.

With these changes upon us, it is crucial that contractors, suppliers and their attorneys understand and are prepared to meet these statutory requirements. This article discusses a few of the more significant changes to existing lien laws, but it is important to note that the new legislation affects other areas as well, including contractor lien waivers and payment bonds on public projects.

I.    The Lien Agent.

The most significant change to North Carolina’s lien laws is the addition of a new construction participant—the “lien agent”—which has not previously existed in the state.
 

          A.    When Is a Lien Agent Required?

Beginning April 1, 2013, project owners must designate lien agents for all private projects where the total cost of improvements is $30,000 or more, excluding improvements to existing family residences. The lien agent must be a title insurance company or title insurance agency chosen from a list of registered lien agents maintained by the Department of Insurance.

          B.    How Does the Owner Designate a Lien Agent?

The owner must designate the lien agent no later than the time the owner first contracts with any person to improve the real property. An owner designates a lien agent by providing the lien agent with written notice that details certain required information about the property to be improved. After choosing the lien agent, the owner must post the identity of the lien agent at the property by including it on the building permit or, if no building permit is required, by posting a sign “conspicuously and continuously on the property” until all labor and furnishings of material are complete. If the owner fails to satisfy the posting requirement, then it must provide written identification of the lien agent within seven days to any potential lien claimant that requests it.

          C.    So My Project Has a Designated Lien Agent, Now What?

Potential lien claimants who may wish to lien the real property on a project subject to the new law must first have provided written notice of their involvement to the designated lien agent. As with most lien notices, the General Assembly has provided a statutory form that should be used. The potential lien claimant must serve the notice on the lien agent within 15 days after first furnishing labor or materials or, at a minimum, before the owner conveys any interest in the property. Providing notice is required before the lien claimant can perfect its claim of lien on the real property. If the lien claimant has not provided timely notice to the lien agent, then its lien rights may either be terminated or subrogated to any new lender upon sale or conveyance of the real property.
    
For the most part, it is the responsibility of the potential lien claimant to provide notice to the lien agent; however, there are two situations where an owner must give notice. First, when improvements are made to a single family residence and the contract between the owner and contractor contains an identification of the lien agent, the owner must give the notice to the lien agent. Second, when the contract is between a design professional (architects, engineers, land surveyors and landscape architects) and an owner and the contract does not provide the identification of the lien agent, the owner must provide notice to the lien agent on behalf of the design professional.

Contractors must also provide written notice of the lien agent’s information to any lower-tier subcontractor or material supplier that is not required to furnish labor at the site of the improvements (and therefore would not see the posted designation). The contractor must provide this written notice within 3 business days of contracting with the lower-tier contractor. Failure to timely supply the required downstream notice by any contractor who has previously received notice of the lien agent’s contact information will result in the upstream contractor being held liable for any actual damages incurred by the lower-tier subcontractor as a result of the failure to give notice.

Practically speaking, contractors and suppliers furnishing labor or materials to a project subject to the new scheme should make it their practice to send the statutory notice to the lien agent on every new project within the first 15 days. Contractors should also make a point to supply the lien agent’s contact information to their lower-tier subcontractors or material suppliers within their subcontracts, or at least within 3 days after contracting. Contractors should note that the law has specific requirements for how the various new notices must be served. All contractors should consult with an experienced construction lawyer to set up their processes so they comply with these requirements.

         D.    I’ve Given Notice to the Lien Agent, Do I Now Have a Lien?

It is important to note that the newly required notice to the lien agent does not replace the existing requirements in North Carolina with respect to serving and filing claims of lien upon funds and claims of lien on real property. Rather, the new notice merely preserves the potential lien claimant’s lien rights and serves to give the title insurers and other upstream parties notice of a potential lien claimant’s existence. The potential lien claimant must still follow the necessary steps to assert and perfect claims of lien upon funds and claims of lien on real property.

II.    Changes for Claims of Lien on Real Property.

The General Assembly has also enacted important changes to the procedure for perfecting claims of lien on real property.

          A.    Serving the Claim of Lien up the Contractual Chain.

Effective January 1, 2013, lien claimants must actually serve their notice of claim of lien on real property up the contractual chain. Previously, perfecting a claim of lien simply required filing with the local Clerk of Superior Court. Now, lien claimants wishing to perfect a claim of lien on real property must file the claim of lien with the Clerk of Court and serve the claim of lien on the owner and, in the case of a subcontractor or supplier asserting a subrogation lien, on the upstream contractor through whom subrogation is claimed. For subcontractor or supplier subrogation liens under N.C.G.S. 44A-23, the claim of lien must include the identification of the contractor through who the subrogation of rights is being claimed.

          B.    Certifying Service: Update Your Forms Now.

Along with the new service requirement is the corresponding requirement that the claim of lien include a certificate of service certifying that it has served the required parties in accordance with the statute. Although a familiar requirement to attorneys used to practicing in the courts, the new certificate of service requirement is an easily overlooked change from the previous lien practice. Luckily, the General Assembly has enacted corresponding changes to the statutory Claim of Lien on Real Property form to reflect these new requirements. Contractors should consult with their counsel now to ensure their lien forms are up to date.

           C.    Choosing the Furnishing Dates.

Notably, effective January 1 the new law permits a subcontractor filing a claim of lien on real property for a subrogation lien under G.S. 44A-23 to establish its lien priority and potentially extend its time for filing the claim of lien by using either its own date of first or last furnishing or that of the contractor through which the claim of lien on real property is being asserted.

III.    Clearing Up Priority for Claims of Lien Upon Funds.

In another significant change, the new law clarifies that, effective January 1, 2013, claims of lien upon funds now arise, attach and are effective immediately upon the first furnishing of labor, materials or rental equipment at the site of the improvement by a subcontractor. Service of the notice of claim of lien upon funds serves simply to “perfect” the lien upon funds. This statutory change is intended to return us to the accepted practice before a trio of recent federal decisions, which held that the lien upon funds did not arise until the lien claimant served its notice of claim of lien upon funds and threw the priority date for such liens into disarray.

IV.    Protecting Subcontractor Lien Rights from Contractor Waivers.

As a perk to subcontractors for following the new lien agent notice requirements, effective April 1, 2013, no action or waiver by the contractor can prejudice the rights of a subcontractor without its consent provided the subcontractor has given the required notice to lien agent, served its notice of claim of lien upon funds on the owner, and delivered a copy of the notice of claim of lien upon funds served on the owner to the lien agent.

V.    New Penalties for False Lien Statements.

Currently, fraudulent lien statements of the amount claimed to be due are punishable as a Class 1 misdemeanor. In addition to these criminal sanctions, after January 1, 2013, such fraudulent statements will also constitute deceit and misconduct subject to disciplinary action (revocation, suspension or restriction) against the lien claimant’s contracting license.

VI.    Is Your Company Prepared?

For six months, the lien law changes have loomed large on the horizon. Now they are upon us. As with any new regulation and legislative scheme, there are bound to be many questions while the industry adjusts to these new requirements. Changes to the payment bond statutes will also significantly and immediately affect how contractors do business on public projects. Experienced construction counsel can ensure that their construction clients have the procedures and forms in place to protect their rights and navigate the changes without disruption.