Something Borrowed, Something New: North Carolina Adopts, Tweaks Virginia’s Lien Agent Statute

For this week’s Guest Post Friday post here at Construction Law Musings, we welcome back Matt Bouchard.  Matt is a partner with Lewis & Roberts, PLLC in Raleigh, North Carolina.  For over ten years his practice has focused on representing the interests of contractors, sureties and owners in connection with commercial construction projects.  You can follow his blog, “N.C. Construction Law, Policy & News.”  You can also follow him on Twitter @MattBouchardEsq.

It’s an honor and a privilege to post again on Construction Law Musings.  I owe a debt of gratitude to Chris not only for this posting opportunity, but also for his unwitting guest appearance in the text that follows.

Back in May, I received a request from Dave Simpson of Carolinas AGC (“CAGC”) to look into Virginia’s “lien agent statute,” which requires persons who make improvements to certain types of private property in Virginia to serve, at the beginning of their project performance, a notice to the owner’s mechanic’s lien agent for the purpose of preserving future lien rights.   Dave wanted my help in understanding the Virginia statute because national title insurance companies were unleashing a furious lobbying effort aimed at amending North Carolina’s mechanic’s lien statutes to require similar pre-lien notification down here in Tarheel country.   Dave needed confirmation that the Virginia statute, which the title insurers were holding up as a model for the North Carolina legislation, applied only to residential construction projects, and he wanted me to find out how well Virginia’s lien agent statute was working north of the border.

After pulling the Virginia statute and confirming that it did, in fact, apply only to “one- and two-family dwelling units,” I did what any fan of Construction Law Musings who lacks a license to practice law in the Commonwealth of Virginia would do: I gave Chris a ring and asked him how well contractors were coping with the lien agent statute up in Wahoo country.  Chris told me that Virginia’s statute had been on-the-books for about a decade, and that by and large, subs and suppliers on residential projects weren’t finding it too difficult to comply with the statute’s requirements.  He described the standard pre-lien notice as a simple “Hi, I’m here!” document that most industry participants had gotten into the habit of sending out at the beginning of their performance.  Bottom line, Chris told me that Virginia’s lien agent statute created perhaps a minor administrative burden for contractors and suppliers at the beginning of residential projects, but in the grand scheme of things, it wasn’t that big of a deal.

Well, we’re about to find out if North Carolina’s contracting community has a similar experience.  Effective for projects for which the initial building permit issues on or after April 1, 2013, all potential lien claimants in North Carolina – architects, engineers, GC’s, subs and suppliers included – will be required to provide a “Hi, I’m here!” pre-notice document to the owner’s designated lien agent, similar to what residential contractors in Virginia are already providing in order to preserve their mechanic’s lien rights.

There’s one glaring difference between Virginia’s and North Carolina’s respective lien agent statutes, however.  Despite CAGC’s best efforts to the contrary, the North Carolina pre-notice requirements are NOT limited to improvements to “one- or two-family units.”  Instead, they apply to all private construction projects in North Carolina, whether residential, commercial, institutional, industrial or otherwise.  That’s a significant difference, particularly since the consequences of failing to comply with the new requirements are so grave: namely, a complete loss of lien rights if the improved property is conveyed or the subordination of lien rights if the improved property is refinanced.  Project participants up and down the contractual chain now need to scramble to put into place internal policies and procedures for ensuring compliance with the new statute and avoiding inadvertent loss of future lien rights.

Was all of this really necessary?  The title insurance industry sure thought so, but color me skeptical.  On the one hand, I understand why lien agent statutes are so attractive in the residential construction context.  A significant percentage of new homes in this country are developed by commercial homebuilders who effectively wear two hats – one as “owner” and the other as “general contractor.”  A homebuilder serving as both owner and general contractor typically enters into a slew of contracts with the trades and suppliers needed to complete construction of the new dwelling.  In North Carolina, all trades and suppliers who contract directly with an owner/homebuilder enjoy direct lien rights against the real property, rights that survive a closing between the owner/homebuilder and the property’s first occupant/homeowner.  Lien agent statutes like Virginia’s provide vital protection to title insurers by alerting them to the identities of project participants and providing them with an opportunity to ensure that those participants’ bills are satisfied by the homebuilder prior to its conveyance of the home to the initial occupant/homeowner.  Under these circumstances, lien agent statutes make a good deal of sense.

But here’s the deal: most owners of commercial projects in North Carolina have no more than two construction-related prime contracts – one with the designer of record, and one with the project’s general contractor/construction manager.  Heck, on design-build projects, the owner typically only has one construction-related prime contract!  While there are typically dozens of trades and suppliers involved in a commercial project, the prime contractor – i.e., the party in direct contractual privity with the owner – serves as a buffer between the owner and downstream subs and suppliers.  Why is that distinction important with respect to lien rights?  Unlike in Virginia, where even remote subs and suppliers enjoy direct lien rights against real property, the lien rights of downstream subs and suppliers in North Carolina are entirely derivative: remote trades are merely “subrogated” (i.e., stand in the shoes of) to the lien rights of the prime contractor sitting above them on the contractual chain.  Through the simple act of executing a lien waiver, a North Carolina general contractor on a commercial project can terminate not only its own lien rights, but also the lien rights of all subs and suppliers beneath the GC on the contractual chain.  Under these circumstances, it is hard to understand how the lien agent protections that make sense in the residential construction context also make sense in the commercial setting.

But no matter; now that the North Carolina lien agent statute has passed and encompasses both residential and commercial construction projects, my opinion on the legislation’s overreach is merely academic.  Unless the General Assembly reverses course between now and April 1, 2013 and limits the new statute to residential construction projects – which is possible, but not likely – ALL persons and entities involved in improvements to private real property in North Carolina will need to get up-to-speed on the new notice-to-lien-agent requirements, or else risk losing the payment security afforded by North Carolina’s mechanic’s lien laws.

I suspect that over time, the vast majority of North Carolina contractors and suppliers will get into the habit of providing the required lien agent notice in a timely manner, and as Virginia contractors have discovered, compliance with the new statute ultimately won’t be that big of a deal.  I also suspect, however, that there could be some growing pains – and quite a bit of contentious litigation – in the near-term, as project participants up and down the contractual chain feel their way through the new statutory regime.

I’ll have much more on North Carolina’s 2012 lien law revisions in the coming months over at my blog, N.C. Construction Law, Policy & News, which you can visit at www.nc-construction-law.com.  I hope you’ll stay tuned.  In the interim, thanks again to Chris for his insights on Virginia’s lien agent statute and the opportunity to muse about it here.