What Construction Lenders Need To Know About The Changes To North Carolina’s Lien Law

by Poyner Spruill LLP
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[author: Brian F. Corbett]

The North Carolina Legislature recently enacted legislation significantly changing North Carolina’s construction lien law and the rights and responsibilities of owners, contractors and subcontractors on private construction projects.  Signed into law in July, S.L. 2012-158 is an attempt to resolve the “hidden lien” issue that has plagued the State during the so-called “Great Recession” and is the culmination of intense lobbying efforts by the title insurance industry, lenders, contractors, suppliers and design professionals.  The most significant changes in the law relate to the creation of “lien agents” and the rights and responsibilities of project owners, contractors, suppliers and design professionals with respect to such lien agents. 

With certain limited exceptions, beginning on April 1, 2013, a private project owner making improvements to real property in which the cost equals or exceeds $30,000 must designate a lien agent no later than the time the owner first contracts with any person to improve the real property.  The lien agent shall be chosen by the owner from a list of title insurance companies and agencies authorized to do business in North Carolina that have registered to serve as lien agents with the Department of Insurance.  In addition, building permits (or attachments thereto) for such construction projects must now identify and include the contact information for lien agents and must be continuously and conspicuously posted on the construction site until completion of the improvements.  If the lien agent is not identified on the building permit or an attachment thereto, a sign disclosing such information must be continuously and conspicuously posted at the construction site until completion of the improvements.  The new law also imposes upon the owner the burden of providing written notice of the contact information of the lien agent for the project within 7 days of receiving a written request of such information from any potential lien claimant (i.e., contractors, suppliers and design professionals).

Upon such designation, the lien agent shall have a number of duties, including the following:

• Receiving notices delivered by potential lien claimants and notices of claims of liens upon funds
• Maintaining a record of the date, time of delivery and information contained in each notice received from potential lien claimants
• If requested, providing the name of and information provided by all potential lien claimants to project owners, title insurance companies and agents, potential purchasers of property, other potential lien claimants, closing attorneys, lenders and settlement agents
• Transferring all notices and information received by it to any successor lien agents for the property

Important new responsibilities and requirements have also been imposed upon potential lien claimants.  In order to preserve their respective lien rights, potential lien claimants must now provide a notice to lien agent within 15 days after the first furnishing of labor or materials by such potential lien claimant.  Further, contractors and subcontractors must, within 3 business days of contracting with lower-tier subcontractors not required to furnish labor at the project site, provide such lower-tier subcontractors with written notice containing the contact information of the lien agent for the project.  Failure to provide this notice may expose such contractor or subcontractor to liability for the damages incurred by the lower-tier subcontractor as a result of such failure.  For more on the impact of this new legislation on potential lien claimants, please review the article written by Tom Davis by clicking here.           

While the new law doesn’t impose any obligations upon construction lenders providing financing to a project owner, construction lenders should consider some or all of the following precautionary measures: 
   
• Reviewing building permits prior to closing to ensure that each contains the contact information for the lien agent and requiring that building permits be updated upon the designation of a successor lien agent
• Adding additional covenants to construction loan agreements which require that the project owner comply in all respects with the requirements imposed upon project owners under the new law
• Requiring the project owner to (a) provide evidence of the appointment of a lien agent prior to closing, (b) notify the lender of any change to the lien agent (through resignation, removal or otherwise) and provide evidence of the designation of a successor lien agent, (c) provide evidence that parties requesting information from the owner regarding the predecessor lien agent and the inspection department issuing the building permit have been notified of any lien agent change, and (d) provide evidence that the lien agent’s and successor lien agent’s contact information is being conspicuously displayed at the construction site  
• Periodically requesting from the lien agent a list of all potential lien claimants that have provided the lien agent with a notice of contract and notice of claim of lien upon funds

While the new law does not provide for any specific financial or other penalties to project owners that fail to comply with the requirements of the new lien law, it is clear that project owners complying with the new requirements imposed upon them will better insulate themselves, their lenders and future purchasers of the property from the possibility of being surprised by hidden liens later attaching to their property.  Based on the title companies’ involvement in getting this new law passed, it is also safe to say that title insurers will be unwilling to issue lender’s title policies without exception for liens of mechanics and materialmen unless project owners have first complied with the requirements imposed upon them under the new law.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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