Mechanic’s Liens and Payment Bonds FAQs
1. What is a mechanic’s lien?
In the context of construction, a lien is a secured interest in either or both the real property improved and the funds flowing from the owner of the real property improved through the contractor (defined as anyone who contracts with an owner) to and possibly through a first-, second- or third-tier subcontractor supplier. These types of liens are asserted when a party provides improvements to a construction project, and payment is wrongfully withheld.
2. What is a construction payment bond?
In the event of non-payment on a construction project, a payment bond is a form of security that allows covered parties to make a claim against a third-party surety (typically an insurance company) for payment of materials and/or labor provided to a bonded project. There are also performance bonds that insure that if a contractor or subcontractor is terminated or quits, the project will be completed.
3. What is the difference between a public and private project, and how does that impact my remedies for non-payment?
It depends on who owns the dirt. If the land where a construction project takes place is owned by a private party (individual or company), then the project is generally considered private such that the mechanics lien regime applies. If a government entity owns the land where a construction project takes place, the project is generally considered public such that the construction payment bond regime applies. Complex situations can modify these standards, but these general rules usually apply.
4. What is a first-, second-, third-tier subcontractor supplier?
Think of the contract chain on a construction project. Owner → Contractor → Electrician (1st Tier) → Electrical Supplier (2nd Tier); Owner → Contractor → Lumber Supplier (1st Tier); Owner → Contractor → Plumber (1st Tier) → Plumbing Supplier (2nd Tier); Owner → Contractor → Mechanical (1st Tier) → MBE (2nd Tier) → HVAC Supplier (3rd Tier). Note that the term “contractor” is statutorily defined as anyone who contracts with an owner.
5. When are the deadlines to pursue my lien claims?
Notice to Lien Agent: The notice should be issued 15 days from the first date of furnishing for absolute protection. If furnishing labor or material within 15 days of closing, then ASAP, but not less than within 15 days of first furnishing. If you miss the 15-day deadline, file ASAP for maximum protection.
Claim of Lien on Real Property: The real property lien must be filed and served within 120 days of date of last furnishing. Similarly, it must be perfected by lawsuit within 180 days of last furnishing.
Claim of Lien upon Funds: A Lien upon Funds has no specific time limitation (except perhaps the statute of limitations), but it is worth noting that a Lien upon Funds is not effective until actually served on a party holding money on a project.
6. When are the deadlines to pursue my payment bond claims?
A Notice of Public Subcontract must be served on contractor (he who has a contract directly with the owner) within 75 days of first furnishing.
If the 75-day limit is missed, then serve ASAP, but there will be a 75-day “look back” (can only recover for invoices issued in the 75 days prior to receipt of the notice).
If all else fails or if project is small, then there is a right to recover up to $20,000 if no notice is served.
Unless you have a direct contract with the contractor, demand for payment on bond must be served on the contractor on or before 120th day of last furnishing.
A lawsuit to perfect claim on construction payment bond should be filed within one year of last date of furnishing.
7. What is a Notice to Lien Agent?
Under the new law, the idea of pre-notice is to provide the owner and contractor with a method of knowing who is on a given project. By providing the notice, suppliers let the owner know who their contractor and the various subcontractors have invited onto the project (those who may be able to claim a lien). Conversely, subcontractors and suppliers on the project have a reliable means of obtaining contact information for the contractor and for the owner. Opening lines of communication may well/should reduce the necessity for filing liens.
8. Where/How do you find information about a lien agent?
There are two avenues: (1) the easiest should be by either checking www.liensnc.com or by locating the building permit and/or the Designation of Lien Agent on the job site and accessing www.liensnc.com using the QR code on the posted notice; or (2) sending a written request to the owner requesting they provide a written copy of the Designation of Lien Agent.
9. What projects require a Lien Agent?
All construction projects with a total contract value in excess of $30,000 (determined by value of contract between owner and contractor at the time that contract is executed), which is not the primary residence of the owner if the project is a retrofit or addition to that residence. When in doubt, check www.liensnc.com for a lien agent. No lien agent is required for a project where the owner is a public/government entity.
10. Is it still necessary to file/serve a lien if a Notice to Lien Agent is posted?
Absolutely, however, you can potentially wait a bit longer to do so. A Lien on Real Property must be filed with the clerk of superior court within 120 days of the date of last furnishing. A Notice of Lien upon Funds must be served to be effective, so when in doubt of payment, it is time to serve the Notice of Lien upon Funds. Discuss this with a Hannah Sheridan & Cochran, LLP (HSC), construction attorney in North Carolina for more information and advice.
11. What is a Notice of Public Subcontract?
This is a form that is served by a second- or third-tier subcontractor on a general contractor as another means of ensuring the contractor knows who is on their project. While the Notice to Lien Agent is designed to make sure a closing does not occur without those who have given notice being paid, the Notice of Subcontract is designed to open lines of communication between contractors and remote subcontractors/suppliers when money is moving on a project (think progress payments). If a contractor posts a Notice of Contract on a project site and a supplier or subcontractor does not answer with a Notice of Subcontract, then the right to claim a mechanics lien against the real property can be cut off.
12. How do you find the information for a Notice of Public Subcontract?
Whoever you contract with on a public project is obligated by statute to pass along the contractor’s project statement. However, you can also request the information directly from the contractor. It is best to do this in writing via certified mail so you can prove the request was made. If the contractor fails to provide the requested document within seven business days, the contractor loses the protections against having to pay twice.
13. What is a Notice of Subcontract?
This is a form that is served by a second- or third-tier subcontractor on a general contractor as another means of ensuring that the contractor knows who is on their project. While the Notice to Lien Agent is designed to make sure a closing does not occur without those who have given notice being paid, the Notice of Subcontract is designed to open lines of communication between contractors and remote subcontractors/suppliers when money is moving on a project (think progress payments). If a contractor posts a Notice of Contract on a project site and a supplier or subcontractor does not answer with a Notice of Subcontract, then the right to claim a lien against the real property can be cut off.
14. What information should be included on a Notice of Subcontract?
The information required should be available on the jobsite in the permit box on a form entitled Notice of Contract. It is best practice to serve a Notice of Subcontract even if a Notice of Contract is not readily evident, so the information needed is a general description of the real property (street address is sufficient; if no street address then lot number and subdivision information at the very least). You also need to know the chain connecting you to the project (who you contracted with and who then connects the dots up to the contractor).
15. Can you lien the real property for a public project?
No. The payment bond claim is your only secured option, so the pre-notice is critical. The bond replaces the value of the real property as security for your work on the project since you cannot sell real property owned by the government.
16. Can you lien funds on a public project?
Yes, but limited. You may lien funds up to the hands of the contractor, but not funds held by the governmental entity. An HSC construction attorney in North Carolina will be able to provide more information on this topic.
17. What is a public/private project?
The best way to think of this project is any project that involves property owned by governmental entity where via lease or other arrangement a private entity is responsible for payment down the construction chain. In the Triangle area, many such projects are found on the University of North Carolina System schools – think about some of the apartment complexes being built on the Centennial Campus. If taxpayer money purchased the dirt and if a private entity is building the structure, it is a public/private project and may or may not be subject to a payment bond or lien on real property.
18. What remedies are available on public/private projects?
Some of these projects require construction payment bond, but many do not, and if a payment bond is available, it will probably be a “private bond”, meaning it is essential you obtain a copy of the payment bond at the outset so that you can evaluate your risks and your requirements before you start providing material. Lien rights are limited.
19. What are the different types of lien waiver?
A lien waiver is a document given in exchange for payment where a subcontractor or supplier relinquishes its right to file a lien. The key is understanding each type of lien waiver and the language within the document you are being asked to sign:
- Conditional – Language of the agreement creates a condition or conditions that must be completed before the waiver becomes fully effective. Example: Upon receipt and payment of the sum of $XXX, supplier waives its lien rights through the date of March 31, 2014. Result: You give contractor this lien waiver after double-checking the amount and the effective date to make certain that sum will clear your books through the specified date; the contractor sends you a check for that amount; you deposit the check; contractor takes copy of cleared check and staples it to the lien waiver creating a record that the conditions were met (the check cleared). Can be partial or final waiver (those definitions are coming)
- Unconditional – Be wary of these. Usually the language includes payment in the sum of $XXX, receipt and sufficiency of which is hereby acknowledged. If this is signed and delivered before you actually are paid (cash in hand), you are buying a lawsuit and will be fighting from behind. You are signing a document upon which others will rely, which indicates you have been paid in full and are freely surrendering your right to file a lien. If payment is not received and you try to file a lien, imagine yourself on the witness stand at a trial explaining why you signed this document if you had not been paid. “Because they told me to” will not cut it.
- Partial – Used for progress payments where work on the project is ongoing. These waivers usually contain an amount, a date or both (see “conditional” example above).
- Final – The work is completed and there is no chance you will be asked to perform any further work or supply any more material.
20. What is a subordination agreement?
To subordinate is to voluntarily place your interest behind that of another party. Usually, this document is used if the construction lender is either late getting the construction loan in place and therefore uses the subordination agreement to ensure its deed of trust securing the construction loan is in first place, or when a project runs over budget and the construction loan has to be re-financed. Again, the lender is not going to alter its loan without assurances that its deed will remain in first place. For the latter, subs and suppliers will often negotiate to ensure they receive payment to make them current as of the date of subordination. Recently, subordination agreements (Form 7) have been appearing in odd places on projects up to and including immediately before closings. Advice – these documents may have to be signed at times, but should never be signed without a full understanding of why it is being suggested, what its purpose is in the specific instance, then a careful evaluation of the risk/benefit of signing. “Because we won’t pay you unless you sign it” is not a sufficient explanation.
If you have a legal issue that may require the assistance of a construction attorney in North Carolina, please contact the lawyers at Hannah Sheridan & Cochran, LLP, at 919-859-6840.