N.C. Liens/Bonds, They Are A-Changin’ Part IV: The Lien Agent Rises

In previous installments in this series, I discussed how last year’s lien and bond law revisions protect subs and suppliers via the “Bankruptcy Fix,” while also protecting prime contractors via double payment protection on bonded, public projects.

What about the title insurance industry?  Well, their legislative “holy grail” was protection from so-called “hidden liens,” and their quest succeeded when the North Carolina General Assembly approved a preliminary notice procedure that creates a new party soon to be integral to the mechanics’ lien preservation process: the owner’s “lien agent.”

While I’ve never questioned the need to address the “hidden lien” issue, I am squarely on record as opposing this particular legislation in the particular manner in which it was passed.  Candidly, however, that battle’s been lost, and the industry’s focus needs to be on complying with the new regime.  Indeed, the statutory provisions governing the preliminary lien notices called for by the legislative revisions go into effect for virtually all private construction projects for which the first construction work commences today, April 1, 2013 (happy April Fool’s Day!), or later.

In other words, the horse it out of the barn, and it ain’t goin’ back in.  Time to saddle up and ride.  And so this post provides an introduction to the new preliminary lien notice each potential lien claimant must provide to the owner’s “lien agent” in order to fully preserve future lien rights under North Carolina’s mechanics’ lien statutes.  I’ll start with a quick primer on the problem of hidden liens, and then move through the basics of the new statute from the perspective of each party in the contractual chain, from the top down.  I’ve attached a multitude of links that should prove helpful in transitioning to this brave new world of mechanics’ lien preservation.

I keep hearing about “hidden liens.”  What the heck does that mean?

Fair question.  Let’s say you file a claim of lien on real property and serve it up the contractual chain, as is now required by virtue of last year’s legislative changes.  There’s absolutely nothing “hidden” about your lien at that point.

Now consider all of the time that has transpired since your first performance of work but before you filed and served your claim of lien.  During that time, you enjoyed lien rights against the real property.  Indeed, if you’re a prime contractor (i.e., GC, D/B, CM@R, etc.), your lien rights arose from the moment you commenced work on the project, and if you are forced to file a claim of lien down-the-road as a result of owner non-payment, your date of first furnishing is the priority date for your lien as against all other creditors who may have rights against the property.

Subs and suppliers get essentially the same deal.  By way of example, consider a general contractor who commences work on a traditional design-bid-build office building on July 1, 2012.  Now consider the GC’s curtain wall subcontractor, who orders certain specialty glass materials from a supplier on March 1, 2013.  If the glass supplier isn’t paid timely by the curtain wall sub, it might assert both a Claim of Lien Upon Funds and a Claim of Lien on Real Property.  By statute, the supplier is entitled to the same priority date applicable to the GC — i.e., the date of the GC’s first furnishing.

It’s this “relation back” of lien rights to the date of first furnishing that creates the “hidden lien” problem.  Prior to the filing of a claim of lien on property, lien rights are “inchoate,” a fancy lawyer word for “imperfectly formed.”  The lien is in existence, out there in the ether, but until the piece of paper entitled “Claim of Lien on Real Property” is filed and served, “perfecting” your lien, it’s entirely possible neither the owner nor its title insurer knows you exist — particularly if you’re a remote subcontractor.  The new lien agent statute is intended to address that problem, so there are no mechanics’ lien surprises after the owner conveys or refinances the property.

How does the statute address the hidden lien problem?

In a nutshell, it encourages owners to appoint a lien agent for the purpose of receiving preliminary lien notices from ANYBODY with potential lien rights in the property being approved.  If a lien agent is so designated, ALL potential lien claimants should submit the preliminary lien notice, referred to as the “Notice to Lien Agent” in the new statute.  It’s basically a “Hi, I’m here” notice that lets the lien agent know you’re involved in the project and could, someday, file a lien against the owner’s property.  But more on the meat of the notice later.

What are the consequences of not providing the Notice to Lien Agent?

If the property isn’t conveyed or refinanced prior to your filing of a Claim of Lien on Real Property, there are absolutely no consequences; your lien rights can be pursued as before the statute’s enactment.  If, however, a conveyance or refinancing occurs prior to your filing a Claim of Lien on Real Property and more than 15 days after your date of first furnishing, the consequences are dire: you will not be able to pursue your lien rights in the case of a conveyance, and the priority of your lien rights will be subordinate to the lender’s deed of trust in the case of a refinancing.  As I’ll discuss below, the safest course of action will be to provide your Notice to Lien Agent within 15 days of your first furnishing of labor and/or materials.

What are the owner’s responsibilities under the new regime?

No later than the time when the owner contracts with a prime contractor to improve the owner’s property, the owner must designate a lien agent for the sole purpose of receiving notices under the new regime.  The most convenient method of appointment likely will be the new online system launched by the title insurers at liensnc.com.  The title insurers have also published detailed instructions for appointing a lien agent, which I commend to your reading.

Who can the owner appoint as a lien agent, and how much can the lien agent be paid?

Only a title insurance company or title insurance agency authorized to do business in North Carolina that consents to serve in the capacity of lien agent may be appointed as same.  For improvements to one- or two-family dwelling units, the lien agent may collect a fee no greater than $25 from the owner; for all other improvements, the fee may not exceed $50.

I’m a design professional providing services prior to the execution of a contract for construction.  What if there’s no lien agent in placing during my pre-construction performance?

That depends on whether your contract is with the owner or with another design professional.  If you are in direct contractual privity with the owner and your contract does not include the lien agent information, the owner is responsible for providing your contact information to its lien agent upon the owner’s appointment of same.  If you are a design subcontractor, you should make a written request to the owner for the lien agent’s contact information.  By statute, you will have no obligation to comply with the preliminary notice requirements until you receive the contact information you have requested.

What does the Notice to Lien Agent look like, and how should I file it?

The Construction Law Section of the North Carolina Bar Association has published this form Notice to Lien Agent, which is substantially similar to the form recommended by the statute.  The statute permits filing by a variety of methods, including certified mail, return receipt requested; physical delivery to the lien agent so long as  a delivery receipt is obtained; and fax transmission so long as a facsimile transmission confirmation is obtained.  I suspect the most convenient method for contractors and subcontractors to file the Notice to Lien Agent will be the online application at liensnc.com.  In any event, I recommend reviewing the detailed instructions the title insurers have published for providing the preliminary lien notice.

I’m a prime contractor.  The owner knows who I am.  Certainly I don’t have to comply with preliminary notice requirements, right?

Wrong.  ALL potential lien claimants must provide the preliminary notice.  However, where the contract is for the construction of a single-family residence and the lien agent is identified in that contract, it is the owner’s, not the prime contractor’s, responsibility for providing the lien agent with the prime contractor’s contact information.

I’m a first-tier subcontractor providing on-site labor for the project.  How do I find the lien agent information? 

Start by reviewing the building permit in the permit box; my suspicion is you’ll find the information there, and potentially a QR Code to facilitate use of the online system.  By statute, if the lien agent’s information is not contained in the building permit or attachment thereto, a sign disclosing the lien agent’s information must be conspicuously and continuously posted on the property until the completion of all construction.

I’m a supplier who is not required to provide on-site labor for the project.  How do I receive the lien agent’s information?

By statute, the party above you in the contractual chain must provide you with the lien agent’s information within three days of contracting.  If the information is not provided, the party with whom you contracted may be liable for any actual damages you incurred as a result of the failure to give notice.  To avoid such liability, primes and sums entering into supply contracts should amend their purchase orders or other contract forms to include the lien agent information in a conspicuous location.

Does the statute apply to existing construction projects?

No; it only applies to improvements to real property for which the first furnishing of labor or materials at the site of improvements occurred on or after April 1, 2013.

I just signed my contract and don’t want to be seen as a problem out of the gate.  Should I delay filing my Notice to Lien Agent?

Repeat after me: the Notice to Lien Agent is not a lien.

Again: the Notice to Lien Agent is not a lien.

Louder: THE NOTICE TO LIEN AGENT IS NOT A LIEN!!! 

This new Notice to Lien Agent regime is about letting the owner and its title insurer know that you’re involved on the project; the preliminary notice does not encumber the property or the contract funds.  So you are not damaging the project — or, more importantly, your reputation — by filing the Notice to Lien Agent.  You are merely preserving your lien rights should you ever need to rely upon them in the future.

From this date forward, every party in the contractual chain is going to get in the habit of complying with the new preliminary lien notice requirements.  You should, too.

Boil it down for me: what’s the best way to protect my lien rights on projects commencing on or after April 1, 2013?

As mentioned above, your lien rights are only compromised under the new regime if you’ve failed to provide the preliminary notice and there’s been a sale or refinancing of the property.  You may not, however, have any advance notice of when a sale or refinancing may occur.  Since the statute provides a 15-day “grace period” for filing the notice, with the clock starting on the first day of your performance, your best bet is to establish internal protocols for obtaining the lien agent information and filing your preliminary lien notice within 15 days of first performance on EVERY project.  An experienced construction attorney can help you mind your p’s and q’s and ensure your rights are preserved timely.