In most cases, the “owner” of a tenant improvement project is NOT the record owner of the real property, but rather the tenant who entered into the contract for the improvement.
That distinction can be critical when perfecting and enforcing mechanics liens in North Carolina.
Take, for example, the fireproofing contractor who asserted a mechanics’ lien enforcement action against both the landlord and the tenant of a leased premises in yesterday’s unpublished Court of Appeals decision in Century Fire Protection, LLC v. Heirs. After settling claims with the tenant, the contractor continued to pursue the landlord in court, arguing that the tenant was serving as the landlord’s agent for the purposes of the improvement. If true, such an agency relationship under North Carolina’s mechanics’ lien statutes would render the landlord the “owner” of the project. Problem was, there wasn’t a shred of evidence supporting an agency relationship between the landlord and tenant. The contractor could not prove that the landlord consented to the improvement, and it could not prove that the landlord was a party to the improvement.
The landlord brought these facts to the lien claimant’s attention over and over and over again throughout the litigation. The contractor didn’t listen. On the landlord’s motion for summary judgment, not only did the trial court judge dismiss the lien claim, he also awarded the landlord its attorneys’ fees under N.C. Gen. Stat. § 44A-35. That statute permits the awarding of fees to the prevailing party in lien and bond actions when the non-prevailing party unreasonably refuses to resolve the lawsuit. The Court of Appeals affirmed the trial court’s decision.
The moral of the story? When you contract for improvements to leased property and need to enforce your lien rights to secure your entitlement to payment, aim wisely. Be sure to file and enforce your lien against the proper party or parties. Blindly suing a landlord who had nothing to do with a tenant improvement could result in you paying not only your own lawyer, but also the other guy’s. An experienced construction attorney can help you determine what parties need to be included in a lien enforcement action.
Two tweets touching upon subcontract negotiation dynamics jumped out at me this week. The first was from zlien founder Scott Wolfe, Jr., who linked to his recent blog post about general contractors who demand that their subcontractors sign away their lien rights:
Money quote from the post:
General contractors scream that relationships are important, but really, it’s relationships on their terms. … In reality, however, the subcontractor is likely feeling a bit abused. They accommodate because of the general contractor’s influence and contracting power.
The second tweet was from good friend and Virginia construction attorney Chris Hill, who linked to fellow Virginia attorney Juanita F. Ferguson’s piece discussing (among other things) forum selection clauses in subcontracts between out-of-state prime contractors and local subs:
Money quote from the post: “local contractors must be savvy in negotiating contracts with out-of-state companies.”
Which, in turn, begs the Friday Forum money question:
What factors impact the relative bargaining power of primes and subs when it’s time to make a deal?
By a whopping 116-0 margin, the N.C. House of Representatives yesterday passed House Bill 1043 (“HB 1043″), aimed at bringing objectivity and uniformity to the prequalification of contractors on public construction projects in the Tar Heel State.
Don’t let yesterday’s vote tally deceive you, however; the legislation was not without its share of controversy.
It’s typical for subcontracts to include a clause binding the subcontractor to the decisions of the project architect. Such terms help general contractors and construction managers at-risk avoid obligations to subs below that can’t be passed through to owners above. That’s a sensible and enforceable risk allocation most of the time.
But not all of the time.
Sometimes, the architect doesn’t play fairly. Sometimes, the prime contractor fights hard for itself, but not hard enough for its subs. And sometimes, a statute might provide a remedy when the subcontract does not.
On such occasions, as discussed below, subcontractors might avail themselves of an escape hatch:
Image by Shirley via Pixabay.com
I was out-scooped yesterday by good friend and fellow Raleigh construction lawyer Brian Schoolman, who announced via Twitter that the Fourth Circuit Court of Appeals has approved the filing of North Carolina mechanics’ liens even after a party higher up in the contractual chain seeks bankruptcy protection:
I highly recommend clicking the link and reading Brian’s blog post. It does a terrific job summarizing the Court’s rationale and discussing how CSSI puts the last nails in the coffins of the 2009 Shearin, Mammoth Grading and Harrelson Utilities decisions of a lower court that had reached the opposite result, before subsequently reversing itself a few years later in CSSI, which the 4th Circuit has now affirmed. (For additional legal context, check out my previous blog post on the Mammoth Grading and Harrelson Utilities cases.).
I write today to emphasize how important the 4th Circuit’s CSSI decision is to your construction business. Specifically, I write to answer this question: Why does having the right to file a mechanics’ lien, after the party immediately above you in the contractual chain seeks bankruptcy protection, matter?
Construction is a relationships-driven business. The most successful companies understand that rising to the top requires developing and nurturing solid relationships up and down the contractual chain, both before the contract is signed and throughout the period of performance. It’s the ticket to generating repeat business, increasing bonding capacity, maximizing profit and thriving over the long haul.
Of course, a relationship between two corporate entities represents the sum of the interpersonal interactions between and among the owners and employees of the respective companies to the relationship. Unfortunately, those interactions might not always be pleasant. They might even become downright abusive. And when one company’s agent harasses another company’s employee, the employer of the aggrieved employee could face hostile workplace liability.
That’s the unmistakable message driven home by the April 28, 2014 Fourth Circuit Court of Appeals’ published decision in Freeman v. Dal-Tile Corporation.
You’re a general contractor on a large commercial construction project impacted by significant delays. You place most of the blame for the delays on the project architect, who you contend issued a wrongful stop work order arising from the performance of one of your subcontractors and performed other construction administration services negligently. Both you and the sub have incurred significant extended general conditions as a result of the work suspension, and you invite the sub to make a delay claim you intend to pass through as a component of your own claim to the owner, who, under the contract documents, is legally responsible for the acts of its architect.
The sub wants to participate in a pre-litigation mediation you’ve scheduled with the owner, but you’re hesitant to oblige. The owner, after all, will spend mediation blaming your sub for the issues giving rise to the stop work order, and you worry your sub’s presence could actually hamper, rather than facilitate, the settlement negotiations.
Are you better off refusing the sub’s request to participate in the mediation, trying to settle with the owner first, and then circling back to resolve open issues with your sub once things are squared away up-the-chain?
That would be a risky play, as a 2011 North Carolina Court of Appeals decision demonstrates.
There is no milestone more significant to a commercial construction project than substantial completion. For an owner, it’s the long-awaited moment it can make beneficial use of its investment. For prime contractors, it’s the moment the owner’s rights to terminate and/or assess liquidated damages is cut off. For subcontractors, it’s the moment contractual warranties typically begin to run. The list goes on and on.
In light of how many legal rights and defenses are tied to the moment of substantial completion, you would think that contracting parties would take extra care to (1) define what constitutes “substantial completion” and (2) ensure that “substantial completion” is achieved in accordance with that carefully crafted contractual definition.
That’s not always the case, as a 2013 decision from the U.S. Court of Appeals for the Fourth Circuit (which includes North Carolina) reveals.
As the Lienguard case discussed in my prior blog post (immediately below) makes abundantly clear, the North Carolina State Bar is willing to prosecute unauthorized practice of law (“UPL”) claims against online mechanics’ lien service providers lacking a license to practice law in North Carolina.
There’s been a boisterous reaction to the decision in the blogosphere, and in the Friday Forum spirit, I commend to your reading the following: “Business Court Makes North Carolina Safe for Construction Lawyers” by Mack Sperling of Brooks Pierce; “Can Software Practice Law? The Unauthorized Practice of Law and Technology” by Nate Budde of zlien.com; and “NC Business Court Enjoins National Lien Filing Firm for UPL” by Brian Schoolman of Safran Law, all of which were promoted on Twitter over the past 10 days or so:
I also highly recommend checking out the Comments section of my previous blog post. Among the thoughts posted there are those of Scott Wolfe, Jr., founder of zlien.com, one of Lienguard, Inc.’s competitors. Scott makes a number of thought-provoking and response-worthy arguments in support of his belief that online lien filing services do not engage in UPL.
The subject of this blog post is Scott’s argument that under the logic of the Lienguard decision, LiensNC, LLC, the limited liability company which operates the LiensNC.com website created to facilitate the filing of Designations of Lien Agent and Notices to Lien Agent under North Carolina’s new Mechanics’ Lien Agent statute, engages in UPL:
As to preliminary notices — the NC court in this case does not, and really cannot not, distinguish between preparing a preliminary notice versus preparing a lien notice. They are both legal documents.
This case calls LienGuard’s preparation of notices illegal, but the UPL statute clearly enables or allows LiensNC, LLC – “a coalition of title insurance underwriters” – to assist contractors and suppliers with the state’s preliminary notices. See: http://www.liensnc.com/LiensNC__LLC.html
* * *
[T]here is some momentum to distinguish between “serious” legal documents and maybe “easy” legal documents. The UPL “practice of law” definition and the case law surrounding it offers no opportunity to make this distinction. Preliminary notices … are all “legal documents.”
I’ve given a fair amount of thought to these comments over the past week in trying to predict whether LiensNC.com might be among the State Bar’s next targets. For the three reasons set forth below, I highly doubt it: Continue reading
Senator Neal Hunt, Chair, and Representative Dean Arp, House Co-Chair, helm the Purchase and Contract Study Committee, which is currently considering prequalification reform in North Carolina.
Statutes governing the procurement of public construction contracts are intended to promote honest and open bidding procedures, thereby placing interested contractors on an equal footing when competing for the work. A Pennsylvania court observed way back in 1908 that it is the duty of public awarding authorities “to see that the purposes aimed at by the laws shall be effected in good faith.”
Many contractors are skeptical that standard is being met in North Carolina.
As I’ve previously written, a number of prime contractors recently testified before the General Assembly’s Purchase and Contract Study Committee about how the statute permitting prequalification of bidders is often misused so that certain contractors are favored over others, particularly in the construction management at-risk context. The opportunity for misuse arises from the utter lack of any statutory direction for exercising the right to prequalify under existing law (click image below for larger version):
Thankfully, the Committee appears ready to recommend extensive and significant modifications to this bare-bones statute.
North Carolina’s lien agent statute, which went into effect on April 1 last year, celebrated its first birthday yesterday.
Didn’t join the party? I can’t say I’m surprised.
UPDATE 4/8/2014 9:45 a.m.: The Committee voted yesterday, April 7, 2014, to embrace only the second of the three recommendations discussed in my original blog post below. I have struck through the recommendations that did not survive the final draft of the report, which is now in the hands of the Legislative Research Commission for further action. Many thanks to Raleigh construction attorneys Jason Herndon and Brian Schoolman for alerting me to the Committee’s vote, as a trip out-of-state prevented my attendance at yesterday’s meeting.
The Legislative Research Committee charged with studying the lien rights of contractors and materialmen on tenant improvement projects meets a week from today, on April 7, 2014, to vote on a series of recommendations to the 2014 Session of the North Carolina General Assembly. The Committee’s recommendations can be found in its recently released draft report.
It’s springtime in the construction industry, my friends. Banks are lending again, optimism has returned and the private, non-residential sector is heating up. Good news all.
But before you mobilize the yellow steel to your next jobsite, the deal’s gotta get done. And so ’tis the season of contract negotiation — which, if you’re not careful, could lead to the season of your discontent. That’s because some crazy stuff might be lurking in the document the party above you in the contractual chain wants you to sign.
Just ask Birmingham, Alabama construction attorney Burns Logan, the inspiration behind this post and its cheeky title:
There’s only one way to suss out the crazy in your construction contracts, and that’s by carefully reviewing them, as Sage Construction reminded us this week:
One of the three reasons cited in the linked blog post is “owners are pushing risk to GC’s.”
Tell me about it!