September 18, 2018
Author: Brian J. Schoolman
Organization: Safran Law Offices
A mechanic’s and materialman’s lien is a special statutory right granted to those who contribute labor, materials, equipment, or services for the purpose of improving real property. In North Carolina, the right to an “adequate lien” is guaranteed under Article X, Section 3 of the State Constitution. Under that provision, the responsibility is placed upon the General Assembly to pass “proper legislation” to give a lien to mechanics and laborers on the subject matter of their labor. Chapter 44A of the North Carolina General Statutes includes the lien laws intended to enforce this guarantee.
A lien gives a party security by allowing it to place a claim on real property or funds when moneys are owed, until those moneys are paid. The right to file a claim of lien on real property is available to anyone “who performs or furnishes labor or professional design or surveying services or furnishes materials or furnishes rental equipment pursuant to a contract, either express or implied, with the owner of real property for the making of an improvement” to that property. N.C. Gen. Stat. § 44A-8. Thus, to have a lien right, a person must (1) perform or furnish labor or professional design or surveying services or furnish materials; (2) do so pursuant to a contract; (3) with the owner of real property; (4) for the making of an improvement. “Improving” of real property means to “build, effect, alter, repair, or demolish any improvement upon, connected with, or on or beneath the surface of any real property, or to excavate, clear, grade, fill or landscape any real property, or to construct driveways and private roadways, or to furnish materials, including trees and shrubbery, for any of such purposes, or to perform any labor upon such improvements, and shall also mean and include any design or other professional or skilled services furnished by architects, engineers, land surveyors and landscape architects..., and rental of equipment directly utilized on the real property in making the improvement.” N.C. Gen. Stat. § 44A-7(3).
In a 2013 North Carolina Court of Appeals opinion, a report detailing the status of driveway permitting by an engineering firm was held to qualify as an “improvement” under the statute, as well as a “furnishing” to extend the period of time for the filing of a claim of lien. See Ramey Kemp & Associates, Inc. v. Richmond Hills Residential Partners, LLC, 737 S.E.2d 420 (N.C. App. 2013).
Depending on the relationship between the party and the owner, the lien right may be a direct claim on the real property, or a claim by subrogation. A “contractor” is one who contracts with an “owner” to improve real property. N.C. Gen. Stat. § 44A-7(1). A contractor can have a direct claim of lien on the real property. By contrast, subcontractors who are not too remote from the contractor may make a claim of lien by subrogation. A “first tier subcontractor” is a person who contracts with a contractor.
N.C. Gen. Stat. § 44A-7(2). A “second tier subcontractor” is a person who contracts with a first tier subcontractor. N.C. Gen. Stat. § 44A-7(8). A “third tier subcontractor” is a person who contracts with a second tier subcontractor. N.C. Gen. Stat. § 44A-7(9). Only those three tiers have any potential claim of lien by subrogation; more remote subcontractors are not permitted a claim of lien upon real property.
1. Direct Claim of Lien on Real Property
A claim of lien on real property applies to the improvement, and to the lot or tract of land on which the improvement is situated. N.C. Gen. Stat. § 44A-9. The claim extends to the extent of the interest of the “owner.” Id. An “owner” is a person who has an interest in the real property improved and for whom an improvement is made. N.C. Gen. Stat. § 44A-7(6). The term “owner” includes successors in interest of the owner, and agents of the owner acting within their authority. Id. Because of the definition, an “owner” can include a leasehold tenant, but the tenant does not necessarily act as an agent for the owner or allow a claimant to reach more than just the leasehold interest. See Pete Wall Plumbing Co. v. Sandra Anderson Builders, Inc., 721 S.E.2d 663 (N.C. App. 2011). A claim of lien relates back to the date that the claiming party first furnishes labor or materials at the site of the improvement. N.C. Gen. Stat. § 44A-10. A claim of lien is perfected by filing the claim of lien on real property in the office of the clerk of superior court in each county where the real property subject to the claim of lien is located. N.C. Gen. Stat. § 44A-12(a).
A party performing improvements has a limited time to file and perfect its lien. In North Carolina, the claiming party has 120 days from the last date of furnishing to file the lien. N.C. Gen. Stat. § 44A-12(b). Once a claim of lien is filed, it cannot be amended.
N.C. Gen. Stat. § 44A-12(d). However, if the time to file a lien has not expired, the claim of lien may be cancelled and a new one submitted. N.C. Gen. Stat. § 44A-12(d). In addition to filing the claim of lien, the lien claimant must also attempt to serve the claim of lien upon the record owner. N.C. Gen. Stat. § 44A-11. Service may be accomplished by personal delivery or by regular mail, and proof of actual delivery is not required. N.C. Gen. Stat. § 44A-11(b).
Once a claim of lien has been filed, it must be enforced by filing a lawsuit. See N.C. Gen. Stat. § 44A-13(a). In North Carolina, the complaint must be filed within 180 days of the last date of furnishing. N.C. Gen. Stat. § 44A-13(a). The complaint may be filed in the county where the real property was located, or in any other county where venue is proper. Id. If the complaint is filed in another court, the claimant must also file a notice of lis pendens in the county where the property is located. Id. If the claiming party prevails in the lawsuit, he may execute on the real property to fund the judgment. See N.C. Gen. Stat. § 44A-14. Under the appropriate circumstances, the real property may be sold prior to judgment, or attached to secure judgment. N.C. Gen. Stat. § 44A-14(b), 44A-15.
The claim of lien on real property may be discharged under six specified ways under Section 44A-16. Those ways are: (1) acknowledgement of satisfaction of the claim before the clerk of superior court; exhibition of an instrument of satisfaction by the owner, and signed by the claimant; (3) by failure to enforce the claim of lien on real property within the time prescribed in this Article; (4) by filing a judgment dismissing or adversely determining the claim; (5) by depositing with the clerk of superior court cash to secure the amount of the lien; or (6) by depositing a surety bond with the clerk of superior court in an amount 125% above the amount claimed.
2. Claim of Lien on Real Property by Subrogation
A subcontractor or supplier does not have a right to a direct lien against the improved real property. Rather, he may claim a lien on the real property only by subrogation to the rights of the general contractor (and any higher-tier subcontractors).
See N.C. Gen. Stat. § 44A-18. The same time limits generally apply to a subcontractor as to the general contractor. See N.C. Gen. Stat. § 44A-23. However, as of the lien revisions effective April 1, 2013, “a first, second, or third tier subcontractor may use as the date upon which labor or materials were first or last furnished on the real property either any date on or after the date of the first furnishing of labor or materials on the real property, or any date on or before the date of the last furnishing of labor or materials on the real property by the subcontractor making the claim, or any date on or after the date of the first furnishing of labor or materials on the real property, or any date on or before the date of the last furnishing of labor or materials on the real property by the contractor through which the claim of lien on real property is being asserted.” N.C. Gen. Stat. § 44A-23(d).
The rights of a subcontractor or supplier against the real property are subject to the rights of the general contractor. As such, the subrogation rights of certain lower tier subs may be potentially extinguished through the use of a “Notice of Contract.” N.C. Gen. Stat. § 44A-23(b). To be effective, a Notice of Contract must be filed within 30 days following the date the building permit is issued with the Clerk of Court for each county in which the project is located. Id. The Notice of Contract must also be posted on the property in a visible location next to the building permit. Id.
If the contractor has properly filed and posted the Notice of Contract, a second tier or third tier subcontractor must then serve a Notice of Subcontract in order to be potentially entitled to claim a lien on the real property. N.C. Gen. Stat. § 44A- 23(b)(1)(a). For a sub or supplier who serves the Notice of Subcontract, the contractor may still cut off lien rights by serving a Notice of Payment to that sub or supplier within five days following each payment to the first tier subcontractor in the contract chain. N.C. Gen. Stat. § 44A-23(b)(1)(b).
A subcontractor’s subrogated lien rights may also be affected by the actions of the contractor up until the subcontractor files its claim of lien on the real property. A lien waiver signed by the general contractor waives the subcontractor’s right to enforce the claim of lien by subrogation, unless the subcontractor has already filed its own claim of lien. See N.C. Gen. Stat. § 44A-23(c). Similarly, other actions by the contractor, including acceptance of payment, may prejudice the rights of the subcontractor if they occur prior to the filing of the claim of lien. See N.C. Gen. Stat. § 44A-23(a1).
3. Notice of Claim of Lien Upon Funds
The North Carolina General Statutes also permit a subcontractor or supplier to serve a notice of claim of lien on funds to secure payments. See N.C. Gen. Stat. § 44A- 19. The subcontractor delivers the notice of claim of lien on funds to the owner and general contractor, as well as any relevant higher-tier subcontractors. Upon receipt of the notice of claim of lien, the obligor (the owner and/or contractor) is required to retain funds owing the party with whom he contracted up to the amount of the claim. N.C. Gen. Stat. § 44A-20. If he doesn’t, the obligor may be personally liable to the lien claimant. N.C. Gen. Stat. § 44A-20(b), (c).
If the funds held by the obligor are less that the valid liens received on the funds, the funds are required to be distributed to the lien claimants on a pro rata basis. N.C. Gen. Stat. § 44A-21.
4. Lien Agent
Another significant revision to the lien laws, which also became effective on April 1, 2013, was the creation of the lien agent. These provisions were passed as a result of pressure from title insurance companies, and aided by the banks, to address the socalled “hidden lien” problem. Title insurers claimed that they couldn’t know what liens may be coming after a closing, because the law permits a lien to be filed up to 120 days following the date of last furnishing.
Under SB 42, any party furnishing labor, materials or services – a general contractor, subcontractor, material supplier, architect, engineer, or anyone else having a lien right under Chapter 44A – must deliver a notice to a lien agent. The lien agent is a newly created role, and under SB 42 only title insurers can be registered as lien agents in North Carolina.
The theory behind the new law is that all parties who deliver notices to the lien agent will be known to the title insurer prior to a closing, thus permitting the insurer to better estimate its risk. The impact of requiring the delivery of the Notice to Lien Agent is that a party (a “potential lien claimant”) who fails to give the notice can lose some or all of its lien rights. See N.C. Gen. Stat. §§ 44A-11.2(k), (l). There are two situations under which a potential lien claimant who fails to give the notice to lien agent can be cut off. First, if the property is sold to an unrelated third party (such as when a home is sold to a family), any contractor or subcontractor who did not either file a claim of lien on the property or else deliver the notice to the lien agent before the deed gets recorded has its lien rights against the real property cut off entirely. Similarly, if the property is refinanced, any potential lien claimant who did not file the lien or serve the notice before the deed of trust get recorded has its lien priority subordinated to the lender.
The statutes provide for limited exceptions to the harsh consequences of failure to give the notice. No notice needs to be given for a contract for improvements to a single family
residence used by the owner as his residence. N.C. Gen. Stat. § 44A-11.1(a).
Design professionals are also generally excepted from the notice requirements, especially when they contract to provide services before a lien agent might be designated. See N.C. Gen. Stat. § 44A-11.1(h). The most important exception is that late-starting subs and suppliers have a fifteen-day “safe harbor” provision, whereby the potential lien claimant may still perfect its lien, even after a transfer or refinancing, as long as it provides notice to the lien agent no later than fifteen days after the first furnishing of labor or materials.
See N.C. Gen. Stat. §§ 44A-11.2(l)(1), (m)(1). Additionally, a subcontractor is not required to give the notice is the lien agent identity has not been provided through the building permit, at the job site posting board, and following a written request for the information to the owner. See N.C. Gen. Stat. §§ 44A-11.2(b1).
There are seven methods for complying with the Notice to Lien Agent requirements, including facsimile, e-mail with delivery receipt, and using the liensnc.com website created by the title insurers. When using the website, a potential lien claimant can scan a QR code of the designation of lien agent posted on a permit board, and fill the required information into a pre-populated electronic form. So far, this has proven to be the most efficient method for giving the notice.
Closing attorneys are required to contact the lien agent and request copies of the notices received by the lien agent not more than five business days prior to the date of recordation of a deed or deed of trust on the real property, in order to be deemed to have fulfilled the attorney’s professional obligation as the closing attorney. See N.C. Gen. Stat. §§ 44A-11.1(f). The closing attorney has no further duty to request notices thereafter. See id.