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
• Establishment of a new “lien agent” regime which places pre-project obligations on the project owner

The summary below discusses some of the most significant upcoming changes for project owners. As you review the information below, keep in mind that a “contractor” for mechanics’ lien purposes is not necessarily 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. GENERAL MECHANICS’ LIENS CHANGES

1. Notice of Contract. A “Notice of Contract” is a special document posted on a project site which has the potential to cut off the subrogation lien rights of second-tier and third-tier subcontractors who do not give notice of their involvement in the project. Previously, only a contractor could post a “Notice of Contract.” However, effective January 1, 2013, an owner will also be permitted to post the “Notice of Contract.”
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.

II. 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 Required. For any improvement to private property for which the cost of the undertaking at the time the original building permit is issued is $30,000 or greater, the owner must designate a lien agent no later than the time that the owner first contracts with any person to improve the property. The sole exception is for improvements to an existing single family residential dwelling unit that is used by the owner as a residence.
2. Lien Agent Identity. The lien agent must be “a title insurance company or title insurance agency” chosen from among the list of registered lien agents that will be maintained by the Department of Insurance. The lien agent may collect a fee from the owner up to $50.00 for its services. If a lien agent ceases service prior to completion of all improvements (by revoking consent, being removed by the owner, or otherwise), then the owner is required to designate a successor lien agent within 3 business days. The identity and contact information for the successor lien agent must be provided by the owner (1) to the inspection department who issued the building permit and (2) to any persons who had requested information from the owner relating to the predecessor lien agent.
3. Notification of Lien Agent Information. The owner is required to give notice of the lien agent’s contact information (name, physical and mailing address, telephone number, facsimile number, and electronic mail address) as follows:
           (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.
4. Provision of Contractor Information to Lien Agent. 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 to have met the lien agent notice requirements on the date of the lien agent’s receipt of the owner’s notice of designation. In that event, the owner is required to provide written notice to the lien agent containing all of the contractor’s information required for a “Notice to Lien Agent” (the contractor’s contact information, the name of the party with whom the contractor has contracted, and a description of the real property being improved).
5. Provision of Design Professional Information to Lien Agent. 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 to have met the lien agent notice requirement on the date of the lien agent’s receipt of the owner’s notice of designation. In that event, the owner is required to provide written notice to the lien agent containing all of the design professional’s information required for a “Notice to Lien Agent” (the design professional’s contact information, the name of the party with whom the design professional has contracted, and a description of the real property being improved).

To view the entire statute, please click here.