Substantial changes to North Carolina’s mechanics’ lien and bond laws are slated for 2013. These changes include:

• Curtailing a contractor’s ability to waive the lien rights of its subcontractors
• Requiring service of a “Contractor’s Project Statement” and “Notice of Public Subcontract” on bonded public projects
• Establishing a new lien agent regime which places pre-lien filing notification obligations on contractors and subcontractors

The summary below highlights some of the most significant upcoming changes for contractors. As you review the information below, keep in mind that a “contractor” for mechanics’ lien purposes is not a licensed general contractor, but rather is anyone who contracts directly with the owner of real property for the improvement of that property. In the same vein, a “subcontractor” for mechanics’ lien purposes is anyone who contracts with a contractor (or with a higher-tier subcontractor) for the improvement of real property. These definitions hold true regardless of whether the “contractor” or “subcontractor” has provided labor, equipment, materials, or professional design services.

I. MECHANICS’ LIENS

1. Service of Lien. Effective January 1, 2013, a Claim of Lien must be served on the owner of the property and the lien form must include a certification of service. Service can be accomplished by, and is deemed complete when, the Lien is: (a) personally delivered; (b) deposited for delivery with the United States Postal Service; or (c) deposited for delivery with a designated delivery service (i.e., DHL Express, Federal Express, or UPS).
2. Effect of Contractor’s Lien Waiver on the Rights of Subcontractors. Currently a contractor can waive a subcontractor’s subrogation lien rights if it signs a lien waiver prior to the subcontractor’s filing a lawsuit to enforce its subrogation lien. Effective April 1, 2013, no action of the contractor will be effective to prejudice the rights of a subcontractor if (1) the subcontractor has given notice to the lien agent (see the lien agent discussion, below), (2) the subcontractor has served a notice of lien upon funds on the property owner, and (3) the subcontractor has delivered a copy of the notice of claim of lien upon funds to the lien agent.
3. Increased Penalties for False Statements. Effective January 1, 2013, a false written statement of the sums due or claimed to be due for labor or material will be considered not only a Class 1 misdemeanor, but also “shall constitute deceit and misconduct subject to disciplinary action” under the General Contracting statutes, including “revocation, suspension, or restriction of a license or the ability to act as a qualifying party for a license.”

II. PAYMENT BONDS ON PUBLIC PROJECTS

1. Copy of Payment Bond. Effective January 1, 2013, a contractor will be required to furnish a copy of the payment bond to a subcontractor who has requested a copy in writing. The payment bond must be furnished within 7 days.
2. Contractor’s Project Statement. Effective January 1, 2013, a contractor will be required to provide to each of its first-tier subcontractors a “Contractor’s Project Statement” containing the following information: (a) the name of the project; (b) the physical address of the project; (c) the name of the contracting body; (d) the name of the contractor; (e) the name and contact information of an agent authorized by the contractor to accept service of the requests for payment bond, the Notice of Public Subcontract, and the Notice of Claim on Payment Bond; and (f) the name and address of the principal place of business of the surety issuing the payment bond for the project. No agreement entered into between a contractor and subcontractor will be enforceable against the subcontractor until the “Contractor’s Project Statement” has been provided to the subcontractor.
3. Notice of Public Subcontract. Effective January 1, 2013, a subcontractor will be required to serve a “Notice of Public Subcontract” on the contractor (or any agent identified in the “Contractor’s Project Statement”). This provision is intended to give the contractor information about which subcontractors are working on the project so that it can take steps to avoid the “double payment” problem which arises, for example, from a contractor paying a first-tier subcontractor who then fails to pay the second-tier subcontractor. With one exception, a subcontractor’s payment bond claim will not be permitted to include labor or materials provided more than 75 days prior to the bond claimant’s service of the Notice of Public Subcontract. The one exception to the 75-day rule is a “$20,000.00 carve out” which provides that (1) there is no requirement to provide a Notice of Public Subcontract where the claim is $20,000.00 or less, and that (2) where the claim is more than $20,000.00, only that portion of the claim which is in excess of $20,000.00 is subject to the Notice requirement.

III. THE NEW LIEN AGENT REGIME

The biggest change by far to the existing mechanics’ lien laws is the adoption of a lien agent regime. The lien agent regime is designed to protect title insurance companies from liens filed after a title policy is issued by requiring that contractors and subcontractors provide notice of their involvement on a project in order to protect their full mechanics’ liens rights. The lien agent provisions are set to become effective April 1, 2013. However, early indications are that a technical revision bill will be forthcoming from the Legislature which may modify certain portions of the recently-enacted lien agent legislation, and the following summary discusses the key provisions of the lien agent regime as currently enacted.

1. Lien Agent Contact Information. The owner of any set of improvements to private property for which the cost of the undertaking at the time the original building permit is issued is $30,000 or greater must designate a lien agent no later than the time that the owner first contracts with any person to improve the property. The contact information for the designated lien agent is available to potential lien claimants in two different ways:
           (i) Posting on Project Site. If the lien agent contact information is included in the building permit or an attachment thereto, the building permit is to be “conspicuously and continually” posted on the project site until completion of all construction. If the lien agent contact information is not included in the building permit or an attachment thereto, then a sign containing the information must be “conspicuously and continuously” posted on the property until the completion of all construction.
           (ii) Individual Notice to Potential Lien Claimants. A potential lien claimant may make a written request to the owner for the lien agent’s contact information. The request must be sent by certified mail, physical delivery, facsimile with a confirmation page, or by other designated methods. The owner has 7 days after receipt of the request to provide the information to the requesting party, and is to provide such information by the same method that was used by the potential lien claimant in making the request.
2. Notice to Off-Site Subcontractors. A contractor who contracts with a subcontractor who is not required to furnish labor at the actual site of the improvements is required to give that subcontractor written notice containing the lien agent’s contact information. The notice must be provided within three (3) business days of the date the contract is entered into. If the contractor fails to provide the information, it may be liable for any actual damages incurred by the subcontractor resulting from such failure.
3. “Automatic” Notice on Single-Family Residence. For improvements to real property consisting of a single family residence, if the contract between the owner and contractor contains an identification of the lien agent then the contractor will be deemed automatically to have met the lien agent notice requirements on the date of the lien agent’s receipt of the owner’s notice of designation.
4. “Automatic” Notice by Design Professionals. With respect to design professionals only, if a lien agent is not identified in the contract between the owner and the design professional then the design professional will be deemed automatically to have met the lien agent notice requirement on the date of the lien agent’s receipt of the owner’s notice of designation.
5. Providing “Notice to Lien Agent." If it wants to protect its full lien rights, a contractor must give to the lien agent a “Notice to Lien Agent.” The Notice must contain the following information: (1) the potential lien claimant’s name, mailing address, telephone number, fax number (if available), and electronic mailing address (if available); (2) the name of the party with whom the potential lien claimant has contracted to improve the real property; (3) a description of the real property being improved; and (4) a statement that “I give notice of my right subsequently to pursue a claim of lien for improvements to the real property described in this notice.” The Notice must be given by certified mail with return receipt requested, by physical delivery and obtaining a delivery receipt from the lien agent, by facsimile with a facsimile confirmation, or by one of the other designated methods. To best protect its lien rights, a contractor should provide its “Notice to Lien Agent” within 15 days after its first furnishing of labor or materials on the project, as the failure to do so may result in the inability to later file a mechanics’ lien or in having the mechanics’ lien deemed subordinate to a mortgage or deed of trust.
6. “Notice to Lien Agent” is Not a Lien. The “Notice to Lien Agent” is not a lien. A contractor must still file its lien on real property in accordance with existing mechanics’ lien laws (as modified by the recent legislation).