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Understanding NC

Understanding NC's Amended Lien Law


SML Perspectives
(May 1, 2013)

Significant changes have come to North Carolina's construction industry in 2013. The North Carolina General Assembly has overhauled the lien statutes and the results will affect every new construction project, regardless of whether it is publicly or privately funded. The main thrust of the changes relates to the General Assembly's desire to resolve the "double pay" problem that has plagued the construction industry in recent years.

Double pay situations arise when the owner pays its general contractor but either the general contractor or one of its subcontractors experiences financial difficulties and ultimately fails to pay its subcontractors or suppliers. The unpaid subcontractor or supplier then files a lien on the project or makes a claim against the payment bond, and the owner ends up paying for the same work twice. To address this issue, the amended lien laws require contractors, subcontractors and suppliers to provide notice of their involvement on a construction project (whether it's public or private) or risk losing their ability to obtain payment for the work performed or the materials provided.

The changes in North Carolina's lien laws have been implemented in a phased approach with most of the revisions related to publicly funded projects going into effect on Jan. 1, 2013, and most of the revisions related to privately funded projects becoming effective on April 1, 2013.

Changes effective January 1, 2013
One of the first changes is the new requirement that a claim of lien on real property must be served on the owner of the real property within 120 days of the last date on which services or supplies were furnished to the property by the contractor or supplier. Contractors and suppliers must utilize an amended lien form which includes a certification that the lien has also been served on the owner of the property within the 120 day period. Failure to do so will render the lien invalid.

The amended lien laws also address the longstanding problem of false lien waivers – a criminal misdemeanor offense committed when subcontractors use the money from the owner's payment to pay their subcontractors and suppliers rather than paying them in advance as contemplated by the lien waiver forms. Beginning Jan, 1, 2013, however, filing a false lien waiver can also subject contractors to discipline from the contractor licensing board, including revocation or suspension of their contractor's license. Penalties could be levied against both the licensed company and the person who is the qualifier for the license. Subcontractors must carefully review all lien waivers presented to them and confirm the use of conditional language stating that their subcontractors and suppliers either have been paid or will be paid once the contractor receives payment.

Another major change, effective on Jan. 1, 2013, is the requirement for a Project Statement and a Notice of Public Subcontract on every public project more than $20,000. The Project Statement is prepared by the general contractor and must include identifying information such as the name and address of the project, the name of the contracting entity and general contractor, and the contact information for the person authorized to accept service of requests for copies of the payment bond, the notice of public subcontract, or the notice of claim on a payment bond. Each contractor working on the project must be provided with a copy of the Project Statement. If a subcontractor is not provided with a copy of the Project Statement, no provisions of the contract with the subcontractor can be enforced against the subcontractor.

Unless a subcontractor or supplier has a direct contract with the general contractor, it must file a Notice of Public Subcontract. The Notice of Public Subcontract must be provided to the general contractor within 75 days of the date the subcontractor begins work on the project. If the subcontractor fails to file the Notice of Public Subcontract within 75 days of beginning work on the project, it will be unable to pursue a claim over $20,000 under the payment bond for any work or materials provided to the project more than 75 days prior to service of the notice of claim on the payment bond. The revised lien laws also grant subcontractors and suppliers the right to receive a copy of the payment bond from the general contractor. If a subcontractor or supplier provides a written request for a copy of the payment bond and the general contractor fails to provide it to the subcontractor or supplier within 7 days, the subcontractor or supplier is exempted from the 75 day recovery limitation, even if the general contractor later provides a copy of the payment bond to the subcontractor.

Changes effective April 1, 2013

As of April 1, 2013, owners of all privately funded construction projects will be required to designate a "lien agent" if the estimated cost of the project is more than $30,000 unless the project is for improvements to an owner-occupied, single-family residential dwelling. The lien agent must be a title insurance company that is included on the list of registered lien agents maintained by the NC Department of Insurance. The owner must post a sign on the property, which discloses the contact information of the lien agent. The contact information can be contained in the building permit or in a separate sign disclosing the lien agent information. The owner is also required to respond to a written request for the lien agent's contact information within seven days. Once the owner designates the lien agent, all contractors, subcontractors, and suppliers are required to serve a Notice to Lien Agent form with the lien agent within 15 days of the date that they begin supplying labor or materials to the project. Failure to do so can result in the loss of lien rights if the property is sold or the subordination of lien rights if the property is refinanced prior to service of the Notice to Lien Agent. Contractors, subcontractors, and suppliers must also provide the contact information for the lien agent to any subcontractor or supplier they contract with to provide labor or materials to the site. The contract information for the lien agent must be provided within three days of the date of the contract with the subcontractor or supplier. If it is not provided to the subcontractor or supplier and the subcontractor or supplier later loses its lien rights, the party failing to provide the lien agent's contact information will be liable for the actual damages suffered by the subcontractor or supplier. The title insurance industry has created a web site (http://www.liensnc.com) to assist owners, contractors and suppliers with compliance with these requirements.

Conclusion
The amended lien statutes place significant additional requirements on contractors, subcontractors and suppliers seeking payment for labor and/or supplies that they provided to construction projects. Contractors and subcontractors will bear the burden of proving that they have complied with the notice requirements on both publicly and privately funded projects. They will also be required to establish that they have informed those with whom they contract for supplies or services regarding these notice requirements. The importance of keeping proper records will be heightened following implementation of these amendments to the lien law statutes; an inability to document compliance with the amended lien statutes could result in the loss of the contractor's ability to obtain payment for its work. Each contractor, subcontractor, and supplier should carefully evaluate its procedures and determine what modifications are necessary to insure compliance with the amended lien statutes.

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