What the New “Lien Agent” Laws Mean For Subcontractors

Most people in the construction industry are generally aware of the new requirements that were recently enacted to require project stakeholders to file certain paperwork with so-called “lien agents.” Lien agents are supposed to serve as a clearinghouse for lien documentation and create a more comprehensive strategy of dealing with liens on construction projects in North Carolina. However, with some of the recent changes to North Carolina lien laws already taking effect on January 1 and even more changes set to take effect on April 1, the biggest question for most project stakeholders remains unanswered: how do the new lien laws affect me?

Not surprisingly, the answer to this question varies for project owners, general contractors and subcontractors. This alert explains the real-world application of the new lien laws, particularly as they apply to you, the subcontractor.

Other than a few exceptions, the new lien agent laws apply to all private projects over $30,000. For subcontractors on these projects, the new requirements can be distilled into four basic action items:

• Notify the Lien Agent. Immediately upon first furnishing labor or materials, the subcontractor should notify the lien agent, using the statutory notice form. If the lien agent does not receive this notice within fifteen days of first furnishing of labor or materials, the subcontractor’s future lien rights could be compromised.
• Identify the Lien Agent. A subcontractor must, within 3 days of contracting with a lower-tier subcontractor or supplier, provide the lower-tier subcontractor written notice containing the lien agent’s contact information. A statutory form may be used to provide such notice, but as a best practice, the subcontractor should include the lien agent’s contact information in the body of its contract (or purchase order) with the lower-tier subcontractor or supplier.
• Collect Lien Waivers from Lower-Tier Subs. The new statutes include greater restrictions on the ability of a subcontractor to preclude certain liens (e.g., a lien on funds by a third-tier subcontractor) by obtaining waivers and releases of liens from its second-tier subcontractors. That said, second-tier subcontractors’ lien waivers may be effective to bar certain liens in the event that the third-tier subcontractors or suppliers fail to comply with the statutory procedures. Thus, as a best practice, subcontractors should always obtain lien waivers and releases from its second-tier subcontractors periodically throughout the project and as a prerequisite to final payment.
• Provide Adequate Notices of Claim of Lien. Importantly, the changes to the lien law also include a new requirement that a lien claim must be both filed with the clerk of court and served on the project owner, as well as every party higher up in the contractual chain through whom the claim is asserted (in the case of a subcontractor asserting a subrogation lien). If a lien claimant is claiming a lien by right of subrogation, then the party through whom the lien is claimed should be identified. Subcontractors must also serve any notices of liens on funds on the owner, with a copy to the lien agent. In addition, a lien claimant must certify that it has served its claim of lien on the necessary parties in accordance with the statute. As a best practice, subcontractors should use the statutory forms provided for claims of lien, which include the necessary certification language.

Of course, merely following the above-described requirements will not preserve a party’s lien rights. These new requirements pertaining to lien agents are in addition to the old requirements under North Carolina law, and a subcontractor must also comply with the procedures already in place under North Carolina law to file and perfect its lien. Just as importantly, subcontractors should make absolutely sure that a lien claim is valid before filing it. The new statutes impose remarkably harsh penalties, including criminal sanctions, for filing a false lien.

With the enactment of the new lien statutes, an already confusing process has only become increasingly convoluted. Subcontractors seeking to preserve their lien rights – and avoid criminal penalties – should seek counsel from competent construction lawyers to ensure full compliance with the new laws.