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Proposed N.C. Lien Legislation Could Affect Financial Institutions
February 02, 2011

In the wake of recent judicial decisions by the North Carolina Business Court and Eastern District Bankruptcy Court that "muddied the waters" for contractor lien rights, the North Carolina Bar Association Construction Section Lien Law Committee is drafting proposed legislation to reform North Carolina’s lien and bond laws contained in General Statutes Chapter 44A. Given the vast changes in the lending, title insurance and construction industries since the last major revision in 1971, the Committee has solicited comments on the draft legislation from interested parties, including those in the financial industry.  

Financial institutions will be particularly interested in proposed revisions that relate to priority for liens and the operation of lien waivers. Under the proposed reforms, owners or their general contractors will be required to file a Notice of Commencement with the Clerk of Court before beginning construction or obtaining a first inspection. Once filed, the date of priority for all claims of lien on real property related to a particular project will relate back to the earlier of (1) the date the claimant files its claim of lien on real property with the Clerk of Court or (2) the date of filing of the Notice of Commencement. A primary purpose of the new notice requirement is to prevent hidden liens permitted under current law, where a lien is filed after completion of the project, but then relates back to the date of first furnishing of labor or materials, regardless of whether actual site work had begun at the time.  

Another new form required in the reform legislation is a Notice to Owner (or Notice of Furnishing), which must be served on the owner and filed with the Clerk of Court and puts the owner on notice of all contractors and suppliers involved in the project, even those without a direct contractual relationship with the owner. Service of the Notice to Owner would be a prerequisite to a claim of lien on real property by a subcontractor. The notice requirement is designed to prevent "surprise" requests for payment for materials or labor the owner or general contractor believed had already been paid and to permit claimants to be dealt with in partial lien waivers accompanying each construction draw.

The proposed legislation also contains draft forms for partial and final lien waivers to clarify the specific rights impacted by such waivers. The forms are intended to address a recent North Carolina Business Court opinion in Wachovia v. Superior Construction, 2010 WL 1655494, in which the court enforced a broadly drafted partial lien waiver to both waive the contractor’s lien rights for the period stated, but also to reset priority for the contractor’s lien to the date following the period released. Even if the proposed legislation does not pass, players within the construction industry are likely to make use these form waivers, as the language has been drafted with a mind toward clarity and consensus among stakeholders.

The proposed legislative revision and a summary of key points are available here.

Banking & Finance Law Stephanie U. Eaton