As North Carolina’s Lien Agent Statute Turns 1, Three Tips for Soothing the Growing Pains

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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.

Intended to provide title insurance companies with protection from the “hidden liens” of subcontractors and suppliers, the law remains confusing to many industry stakeholders up and down the contractual chain.  Some project owners who only sporadically contract for private construction are just now getting their first taste of the statute’s requirements.  Even GC’s, subs & suppliers with a working knowledge of the statute are having some trouble mastering its intricacies.  At a minimum, the lien agent statute creates an administrative burden that my clients would be happy to do without.

Be that as it may, North Carolina’s lien agent statute is here to stay.  Don’t kill the messenger, my friends.  Instead, turn to my year-old primer on the basics of the lien agent statute, and then come back for these three new tips, which may shed some additional light on the purpose and the peculiarities of the new statutory regime:

1.  Don’t Confuse the Notice to Lien Agent with the Notice of Contract.  For nearly a quarter of a century, owners and prime contractors on private construction projects have been able to avail themselves of the Notice of Contract procedure to foreclose the subrogation lien rights of second- and third-tier subs and suppliers.  Over the past year, many of my clients have asked me whether the lien agent statute replaces this procedure.

The Notice of Contract and Notice to Lien Agent procedures are two separate and distinct animals.  Image by werner22brigitte via Pixabay.com

The answer, unequivocally, is “no.”  The two statutes are very separate and distinct animals, serving two different purposes.  The Notice of Contract procedure is intended to protect owners and primes from paying remote subs and suppliers twice; the Notice to Lien Agent statute, however, is intended to protect title insurance companies from “hidden liens” when a project owner’s property is sold or refinanced.

In practice, this means prime contractors on private construction projects should continue utilizing the Notice of Contract procedure to manage the risk of double payment to downstream parties AND also file a Notice to Lien Agent to preserve lien their own lien rights.  It also means remote subs and suppliers should both serve a Notice of Subcontract AND file a Notice to Lien Agent.  While it may be a pain-in-the-neck to manage two sets of preliminary lien notices on private construction projects, that’s what North Carolina’s got.  Prepare accordingly.

2.  It’s OK to Designate a Lien Agent for the Owner.  Just Make Sure You File a Notice to Lien Agent, Too.  Since many owners ask their prime contractors to pull the project permit, they are also turning to their primes to designate the lien agent.  That’s fine, but prime contractors should realize this: there is nothing in the lien agent statute that absolves prime contractors from the responsibility of filing their own Notice to Lien Agent to preserve their lien rights.

Sure, it could be argued that providing your information in connection with the lien agent’s designation should be sufficient to put the lien agent on notice of your project participation, but why be the test case for the North Carolina Court of Appeals?  The “belt-and-suspenders, take-no-chances” approach is to file your own Notice to Lien Agent immediately after designating the lien agent on the owner’s behalf.

3.  Don’t Overlook the Statute’s “Purchase Order” Provision.  The lien agent statute requires parties to provide the lien agent’s contact information to material suppliers and others not providing on-site labor within five days of contracting.  Failure to provide this information exposes the upstream contractor or sub to liability for a material supplier’s actual damages.

It’s unclear what “actual damages” the courts might have in mind, outside the regular breach of contract damages for non-payment.  Once again, you don’t want to be the test case.  If you’re not providing the lien agent information in your purchase orders with material suppliers, now is a good time to reverse course.