12.12.17 Mechanic's Liens

Mechanic’s Lien Coverage Requires Underwriter Approval.

Priority

Can a construction loan deed of trust have initial priority over mechanic's liens?

Yes, if no labor or materials has been furnished to the real property pursuant to an express or implied contract, prior to the date of recordation of the deed of trust.

How Contractors who have a contract with the owner of the property may obtain a mechanic's liens on the real estate.

Under North Carolina law, a mechanic's liens takes effect upon the first furnishing of labor or materials at the property pursuant to either an express or implied contract with the owner of the property. N.C. Gen. Stat. Sections 44A-8 and 44A-10. These lien rights remain inchoate until perfected by the filing of a claim of lien in the county where the property lies within 120 days after the date of the claimant's last furnishing of materials or labor to the property. N.C. Gen. Stat. Sec. 44A-12. Also, in order to retain priority of his lien, the claimant must bring an action to enforce the lien within 180 days after the date of last furnishing of labor or materials to the property. N.C. Gen. Stat. Sec. 44A-13. In interpreting N.C. Gen. Stat. Sec. 44A-10, the North Carolina Supreme Court has ruled that the lien is to be dated from the first visible commencement of work. George v. Town of Edenton, 294 N.C. 661 (1978). In the case, the court held that partial clearing of the property and staking out the location of a building would be enough to constitute visible commencement. Id. Thus, a mechanic's liens claimant who has furnished labor or materials to the property prior to the date of recordation of a construction loan deed of trust will have priority over the deed of trust as long as the mechanic's liens claimant (1) files a claim of lien within the prescribed time limit to perfect his lien and (2) timely files an action to enforce his lien.

There are two situations where a subcontractor who has not dealt with the property owner may obtain a mechanic's liens on the real estate.

NOTE 1: For the purpose of clarity in describing the rights of different subcontractors throughout this section on mechanic's liens, listed below are definitions for different tiers of subcontractors from N.C. Gen. Stat. Sec. 44A-17:

"First tier subcontractor" means a person who contracts with a contractor to improve real property;

"Second tier subcontractor" means a person who contracts with a first tier contractor to improve real property;

"Third tier subcontractor" means a person who contracts with a second tier contractor to improve real property; and

"Contractor" means a person who contracts with an owner to improve real property.

Subcontractor's Lien on Real Property caused by Owner's Improper Payment of Funds following Notice under N.C. Gen. Stat. Sections 44A-18 and 44A-20.

If a first tier subcontractor notifies the property owner, and such notice contains all the elements required by N.C. Gen. Stat. Sec. 44A-19, that he claims a lien on funds owed to the contractor with whom he dealt, and the property owner proceeds to pay the contractor without making sure that the first tier subcontractor is paid, the first tier subcontractor has a right to a lien on the property which was improved by the first tier subcontractor's work. In order to perfect his lien, the first tier subcontractor must file a claim of lien pursuant to N.C. Gen. Stat. Sec. 44A-12. However, the first tier subcontractor may not file the claim of lien until after the date the owner of the property pays the contractor and fails to make sure that the first tier subcontractor is paid. Also, the first tier subcontractor must bring an action to enforce his lien pursuant to N.C. Gen. Stat. 44A-13.

Under N.C. Gen. Stat. 44A-20(b) and (c), second tier subcontractors are subrogated to the rights of the first tier subcontractor and third tier subcontractors are subrogated to the rights of the second tier subcontractor and the first tier subcontractor. Thus, a second tier subcontractor may obtain a lien on the owner's real property if he first sends a notice of claim of lien on funds to the owner of the property and the contractor and then follows the steps described in (i) above. A third tier subcontractor may obtain a lien on the owner's real property if he first sends a notice of a claim of lien on funds to the first tier subcontractor, the contractor and the owner of the property and then follows the steps in (i) above.

Under N.C. Gen. Stat. Sec. 44A-20, it is unclear whether priority of the subcontractor's lien on the owner's real estate is established by the date that the contractor first furnishes materials or labor to the property or the date that the subcontractor first furnishes materials or labor to the property. Likewise, it is also unclear under N. C. Gen. Stat. Sec. 44A-20 whether the subcontractor's claim of lien must be filed within 120 days, and the action to enforce the lien within 180 days, of the date of last furnishing of materials or labor to the property by the contractor or the date of last furnishing by the subcontractor.

Thus, in determining whether a construction loan deed of trust has priority over a subcontractor's mechanic's liens under N.C. Gen. Stat. Sec. 44A-20, one must determine (1) whether the contractor and/or subcontractor furnished materials or labor to the property prior to recordation of the construction loan deed of trust and (2) if so, then whether the claim of lien has been filed within 120 days of, and the action to enforce the lien within 180 days of, the date of last furnishing of property or labor by either the contractor or the subcontractor. If the claim of lien and the action to enforce have been timely filed with reference to either the contractor's or the subcontractor's dates of last furnishing of materials or labor to the property, then the mechanic's liens will likely have priority over the construction loan deed of trust.

Subcontractor's Lien on Real Property by Subrogation. N.C. Gen. Stat. Sec. 44A-23.

First, second and third tier subcontractors are subrogated to the mechanic's liens rights (as described in section 1(A) above) that the contractor has on the real estate. A first, second or third tier subcontractor who gives notice to the property owner of his claim of lien is entitled to enforce the lien of the contractor against the property by complying with the perfection and enforcement provisions contained in N.C. Gen. Stat. Sections 44A-7 through 44A-16. Thus, to perfect his lien, the first, second or third tier subcontractor will have to file a claim of lien within 120 days after the contractor last furnished materials or services to the property and will have to commence the action to enforce the lien within 180 days after the contractor last furnished labor or materials to the property. N.C. Gen. Stat. Sections 44A-12 and 44A-13. Second and third tier subcontractors are prevented from enforcing the contractor's lien when:

The contractor, within 30 days of issuance of a building permit, posts a Notice of Contract form on the property and files a copy with the Clerk of Superior Court in the county where the property is located and the second or third tier subcontractor fails to serve upon the contractor a Notice of Subcontract; or

After posting and filing Notice of Contract and service of a signed Notice of Subcontract, the contractor serves upon the second or third tier subcontractor, within five days following each subsequent payment, a written notice of payment.

Thus, in determining whether a construction loan deed of trust has priority over a subcontractor's mechanic's liens under N.C. Gen. Stat. Sec. 44A-23, one must determine (1) whether the contractor furnished materials or labor to the property prior to recordation of the construction loan deed of trust and (2) if so, then whether the claim of lien has been filed within 120 days of, and the action to enforce the lien within 180 days of, the date of last furnishing to the property of materials or labor by the contractor. If the claim of lien and the action to enforce the lien have been timely filed then the mechanic's liens will have priority over the construction loan deed of trust

NOTE 2: The right of subcontractors to a lien on real property under N.C. Gen. Stat. Sections 44A-18 and 44A-23 is limited to first, second and third tier subcontractors.

Will initial priority as to future disbursements be retained only if certain procedures are followed?

N.C. Gen. Stat. Sec. 45A-68 provides that future advances made under a security instrument which meets the requirements of this section will have the same priority as the original recorded instrument. To meet the requirements of N.C. Gen. Stat. Sec. 45A-68, a deed of trust must:

  • state that the real property secures future advances;
  • state the amount of present obligations secured, and the maximum principal amount of, including future advances that may be secured;
  • state the period in which the future advances are to be made. This period may not exceed 15 years; and
  • if the deed of trust or other loan documents require, at the time of each future advance the obligor must sign a written instrument or make a notation on the original instrument stipulating that the advance is secured by the deed of trust.

A deed of trust providing for future advances which does not meet the requirements of N.C. Gen. Stat. Sec. 45A-68 is not necessarily invalid and priority questions would be tested under case law.

If priority is lost can it be regained?

No. If the lien claimant files a claim of lien within 120 days after the date of last furnishing of services or materials to the property and the lien claimant files suit to enforce the claim of lien within 180 days after the date of last furnishing of labor or materials to the property then the lien claimant will maintain priority over other liens that are recorded after the date of the lien claimant's first furnishing of labor or materials to the property. N.C. Gen. Stat. Sec. 44A-13. Of course, if the property owner and the lien claimant are able to settle the lien action, the property owner can have the lien discharged of record by exhibiting to the clerk of superior court an instrument of satisfaction signed and acknowledged by the lien claimant. N.C. Gen. Stat. Sec. 44A-16(2).

Is there a difference between on-site and off-site work?

Yes. In order to qualify for a mechanic's liens, the claimant must have provided materials or labor or professional design or surveying services to the property for the making of an improvement thereon pursuant to an express or implied contract with the owner of the property. N.C. Gen. Stat. Sec. 44A-8. N.C. Gen. Stat. Sec. 44A-7(1) defines "improve" to include "any design or other professional or skilled services furnished by architects, engineers, land surveyors and landscape architects registered under Chapter 83A, 89A or 89C of the General Statutes." Thus, while the statute generally limits the right to a mechanic's liens to situations where the claimant has supplied labor or materials to the property, it specifically provides mechanic's liens rights for engineering, architectural and surveying services but not for other off-site work.

Is priority the same for all contractors and subcontractors on the same project?

No.

Priority of Competing Liens of Contractors.

Priority of competing liens of contractors who contracted with the property owner will be established by the date that each contractor first furnishes labor or materials to the property. N.C. Gen. Stat. Sec. 44A-10.

Priority of Competing Liens of Subcontractors under N.C. Gen. Stat. Sec. 44A-23.

Priority of competing subcontractors who contracted with different contractors is determined based on the date of first furnishing of materials or labor to the property by each contractor. Priority of competing liens of subcontractors who contracted with the same contractor will depend on whether the subcontractor is a first, second or third tier subcontractor since the subcontractors liens are based on subrogation. Under principles of subrogation, a third tier subcontractor's lien will have priority over the lien of the second tier subcontractor and the second tier subcontractor's lien will have priority over the lien of the first tier subcontractor. Priority of the liens of each of the first through third tier subcontractors will have priority over the lien of the contractor.

Priority of Competing Liens of Subcontractors under N.C. Gen. Stat. Sec. 44A-20.

As stated in Section 1, it is unclear under N.C. Gen. Stat. Sec. 44A-20 whether priority of competing liens of subcontractors is to be established by the date the subcontractor last furnishes labor or materials or the date that the contractor last furnishes labor or materials. Under N.C. Gen. Stat. Sec. 44A-20, there would not be a question of lien priority between the contractor and the subcontractor because in order for the subcontractor to have a lien, the owner must have wrongfully paid the contractor and thus the contractor would not have a lien.

Time Limits

What are the time periods for recording mechanic's liens claims by original contractors and subcontractors?

Contractors.

In order to perfect a mechanic's liens, contractors must, within 120 days of the contractor's last furnishing of goods or services to the property, file a claim of lien in the office of the clerk of superior court in the county where the property is located. N.C. Gen. Stat. Sec. 44A-12. The claim of lien must contain all the information required under N.C. Gen. Stat. Sec. 44A-12.

An action to enforce a mechanic's liens must be commenced within 180 days after the date of the contractor's last furnishing of goods or services to the property. N.C. Gen. Stat. Sec. 44A-13.

Subcontractors.

Subcontractor's mechanic's liens claim under N.C. Gen. State. 44A-23.

In order for the subcontractor to perfect a mechanic's liens under this section, he must first give notice to the property owner of his claim of lien, and then file a claim of lien in the office of the clerk of superior court where the property is located within 120 days after the date of the contractor's last furnishing of goods or services to the property. N.C. Gen. Stat. 44A-12.

An action to enforce the subcontractor's mechanic's liens must be brought within 180 days after the date of the contractor's last furnishing of goods or services to the property. N.C. Gen. Stat. 44A-13.

Subcontractor's Mechanic's liens under N.C. Gen. Stat. 44A-20.

In order for the subcontractor to perfect a mechanic's lien under this section he must first give notice to the owner of the property, and notice to any other required parties as described in section 1(B)(ii) above, of a claim of lien on funds owed to the him by the contractor with whom he dealt and then must file his claim of lien within 120 days after the date of last furnishing of goods or services to the property pursuant to N.C. Gen. Stat. 44A-12. However, the subcontractor may not file the claim of lien until after the date that the owner of the property pays the contractor and fails to make sure that the subcontractor is paid. As discussed above, N.C. Gen. Stat. Sec. 44A-20 fails to specify whether the claim of lien must be filed within 120 days after the date of last furnishing of materials or labor to the property by the contractor or the date of last furnishing by the subcontractor.

The subcontractor must commence an action to enforce the lien within 180 days after the date of last furnishing of materials or labor to the property pursuant to N.C. Gen. Stat. 44A-13. N. C. Gen. Stat. Sec. 44A-20 fails to specify whether the action to enforce the lien must be commenced within 180 days after the date of last furnishing by the contractor or the date of last furnishing by the subcontractor.

After what period of time can you waive a Mechanic's lien if no suit is filed?

Under North Carolina case law, if a contractor fails to file a claim of lien within 120 days of the contractor's last furnishing of goods or services to the property the lien becomes void. Strickland v. General Building and Masonry Contractors, 22 N.C. App. 729, 207 S.E. 2d 399 (1974). If a contractor timely files a claim of lien but fails to institute an action to enforce the lien within 180 days after the date of last furnishing of goods and services to the property then the lien may be discharged of record. [N.C. Gen. Stat. Sec. 44A-16].

The same analysis would apply to subcontractors asserting mechanic's liens claims under N.C. Gen. Stat. Sections 44A-20 and 44A-23. However, as mentioned above in a subcontractors' mechanic's liens action brought under N.C. Gen. Stat. Sec. 44A-20, it is unclear whether the 120 day period for the claim of lien and the 180 day period to enforce the action must be measured from the date of last furnishing by the contractor or the subcontractor.

Removing or Waiving Liens

Is there a statutory procedure for affidavits of completion or notices of completion?

No.

Can a statutory bond terminate the mechanic's liens as an encumbrance on the title?

Yes. When a corporate surety bond equal to one and one-fourth times the amount of the lien claimed is deposited with the clerk of court, the clerk of superior court shall cancel the lien of record. N.C. Gen. Stat. Sec. 44A-16(6).

Can the original, general or subcontractor's contract or waiver agreement subordinate or waive mechanic's liens by general contractor and/or subcontractors?

Lien waivers executed prior to or in consideration for the awarding of a contract to improve real property are unenforceable. N.C. Gen. Stat. 44A-12(f). However, once the contractor has entered into a contract and work has begun the contractor may execute a waiver waiving the contractor's right to file a lien. This waiver will also terminate the lien rights of subcontractors under N.C. Gen. Stat. Sec. 44A-23 who contracted with the contractor. N.C. Gen. Stat. Sect. 44A-23(b)(4) and Mace v. Bryant Construction Corporation, 48 N.C. App. 297, 269 S.E. 2d 191 (1980). However, if the subcontractor has already filed the notice of claim of lien and the claim of lien and commenced the action to enforce the lien under N.C. Gen. Stat. Sec. 44A-23, no action of the contractor will be effective to prejudice the rights of the subcontractor. N.C. Gen. Stat. Sec. 44A-23(b)(4). A lien waiver executed by the contractor will not affect a subcontractor's lien rights under N.C. Gen. Stat. Sec. 44A-20.

Can a bona fide purchaser or bona fide lender take free of mechanic's liens by general contractor and/or subcontractors?

No. Where a mechanic's liens claimant's first furnishing of materials or labor to the real property predates

Recordation of a deed conveying the property to a purchaser, or

Recordation of a deed of trust creating a security interest in the property for the benefit of a lender and the lien claimant properly perfects its lien, the mechanic's liens will have priority over the interests of the purchaser and lender. The issue of whether the purchaser and/or lender have knowledge of the mechanic's liens is not a factor in determining the priority of a mechanic's liens claim. There is one exception where a lender's interest will be superior to the interests of a mechanic's liens claimant whose lien predates the date of recordation of the deed of trust securing the lender. Under North Carolina case law, under the doctrine of instantaneous seisin, when a person who sells real property takes back a purchase money deed of trust securing the balance of the purchase price and the deed and deed of trust are recorded shortly after execution with no intervening recorded documents between the deed and deed of trust the purchase money deed of trust will have priority over the mechanic's liens. Carolina Builders Corporation v. Howard-Veasey Homes, Inc., 72 N.C. App. 224, 324 S.E. 2d 626, cert. denied, 313 N.C. 597, 330 S.E.2d 606 (1985).

Title Company Requirements

What are the customary requirements for issuing Loan Policies on a construction loan deed of trust:

  • Title attorney's final opinion letter; and
  • Lien Affidavit stating no work has been furnished within 120 days, executed by the owner of the property to be insured; or
  • Non-Commencement Lien Affidavit executed by the general contractor and the owner of property; or
  • Subordination of Liens Affidavit executed by each subcontractor who has begun work on the property to be insured.

Is it customary to add a "pending disbursement" clause or mechanic's liens exception in the loan policy insuring a construction loan mortgage?

A pending disbursement clause is always added to the construction loan policies whether they are for temporary construction or permanent construction mortgages. The clause reads as follows:

"Pending disbursement of the full proceeds of the loan secured by the insured deed of trust, the Company insures only to the extent of the Amount actually disbursed, but increases as each disbursement is made in good faith and without knowledge of any defects in, or objections to, the title up to the Amount of Insurance."

It is not customary to add a mechanic's liens exception provided any of the above referenced lien affidavits referenced in section 12 above is provided.