North Carolina Legislature Uncovers "Hidden Liens"

Executive Summary: North Carolina implements “lien agent” law for construction projects.
The North Carolina General Assembly recently enacted significant changes to North Carolina's mechanics lien laws. These changes become effective on April 1, 2013. As of that date, potential lien claimants must identify themselves (by written notice to the property owner's designated "lien agent") soon after they become involved in a project in order to retain their lien priority vis a vis purchasers and lenders. Generally, a property owner must designate a lien agent in order to obtain a building permit. The designee's contact information will either be on the permit or posted conspicuously on a separate job site sign. If the owner/developer fails to conspicuously post, update and provide on request the lien agent contact information, the potential lien claimants are exempted from the statute's limitations on their lien priority.
In the course of a loan closing or a purchase, the closing parties will check with the owner/developer's lien agent (rather than relying merely on an owner's identification of parties with whom the owner has contracted). A group of North Carolina title companies have designed a website [www.liensnc.com] that will be operational on April 1. Through this site, contractors can provide notice of their involvement in a project, and lenders, owners and purchasers can monitor lien rights claimed by contractors. Closing parties will then obtain waivers, subordinations or other documentation from those who have formally identified themselves to the developer's lien agent.
The title insurance industry promoted the new laws in an effort to reduce "surprise" lien claims that take priority over a lender's mortgage or purchaser's title. Lenders that have relied on title insurance for protection against such liens should not experience a significant change in their standard closing procedures. However, to reduce any disruptions or distractions caused by the post-closing emergence of hidden liens, lenders may want to consider adding compliance with the statutory amendments to their loan covenants. In particular, lenders may wish to include the following covenants in their loan documentation: (i) require the borrower to notify the lender of the name and contact information for the borrower's lien agent, including any replacement lien agent; (ii) require the borrower to direct its lien agent to notify the lender of any potential lien claimants giving notice to the lien agent; and (iii) represent and warrant that the borrower has complied with all requirements of the "lien agent" provisions of the new law.
Blending the new requirements into the existing statutory framework was not a simple process. Having been stirred by many "cooks," the new regulatory "brew" will no doubt require amendments. All parties involved in real estate development-related transactions should consult their attorneys to confirm the amendments' impact on their business. A copy of the statute as augmented by the soon-to-be-effective amendments is available at: