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Various Options for Strengthening Liens on Leaseholds in North Carolina

Monday MemoThe House Committee on Mechanics’ Liens and Leasehold Improvements of the N.C. General Assembly reconvenes at 1:00 p.m. on Monday, March 3.  Now that the Committee has spent its first two of four meetings considering the pros and cons of potential legislative action, the expectation is that its members will turn their focus to considering actual legislative proposals next week.

Contractors and suppliers are likely to push for legislation extending liens on leaseholds to the underlying “fee simple” ownership interest of landlords in virtually all circumstances, while commercial realty and banking interests are likely to ask the General Assembly to do nothing.  You can read more about these polar opposite approaches in my previous liens-on-leasehold blog posts here and here, respectively; a white paper from the N.C. Subcontractors Alliance, Inc., embracing an expansive approach to contractor protection, can be found here.

Between these poles, might a middle ground be found?

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N.C. General Assembly Mulls Liens on Leaseholds

Committee Co-Chair Rep. Sarah Stevens

Representative Sarah Stevens

I had the pleasure yesterday of attending the first of four meetings of the “House Committee on Mechanics’ Liens and Leasehold Improvements,” a non-standing legislative research committee of the North Carolina House of Representatives co-chaired by Representatives Sarah Stevens (R-Mt. Airy) and Dean Arp (R-Monroe).  The Committee’s work is focused primarily on whether the state’s mechanics’ lien statutes should be tweaked to strengthen the lien rights of contractors performing work for project owners who lease, rather than own, the property being improved.

Represenative Dean Arp

Represenative Dean Arp

Current statutory law allows contractors to place a lien on so-called “leasehold estates” (see N.C. Gen. Stat. § 44A-7(7)), but as Raleigh construction attorney Henry Jones, counsel to the Carolinas Electrical Contractors Association and N.C. Association of Plumbing & Mechanical Contractors, explained, such liens, in practice, are “illusory,” for two reasons: (1) when the lease is terminated, so are any lien rights asserted against the tenant’s leasehold interest; and (2) a successful levy against a leasehold generally means accepting not only the lease’s benefits, but also its burdens, including the obligation to make rent payments.

The 2011 Pete Wall Plumbing decision of the N.C. Court of Appeals, which Research Division staff member Shelly DeAdder did a terrific job of summarizing, is a vivid example of how a contractor can be left holding the bag when a leasehold interest is terminated.  As Representative Stevens put it, “Poor Pete Wall did the work, but didn’t get paid,” and the expiration of its lien rights when the leases at issue were terminated by the record owner represented an “unfair result.”  Judge Steelman’s concurring opinion in Pete Wall Plumbing, while acknowledging the majority opinion “reaches the correct legal conclusion under the present state of our statutory and case law,” called upon our state legislature to “consider revising the provisions of Chapter 44A to prevent this unjust result.”

The big question for the Committee to consider over the coming weeks is this: under what circumstances might it be appropriate to permit a contractor performing a tenant improvement to place a mechanics’ lien on the record owner’s “fee simple” interest?

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