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.
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?