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 lien takes effect upon the first furnishing of labor or materials at the property by either an express or implied contract with the owner of the property. N.C. Gen. Stat. §§ 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. § 44A-12. 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. § 44A-13. In interpreting N.C. Gen. Stat. § 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 that 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 if 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 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. § 44A-7:

“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.

“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. §§ 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. § 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. To perfect his lien, the first tier subcontractor must file a claim of lien pursuant to N.C. Gen. Stat. § 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 in the paragraph immediately 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 the paragraph immediately above.

Under N.C. Gen. Stat. § 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. § 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 lien under N.C. Gen. Stat. § 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. § 44A-23.

First, second, and third tier subcontractors are subrogated to the mechanic’s liens rights (as described 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. §§ 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. §§ 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. See N.C. Gen Stat. § 44A-23(B).

Thus, in determining whether a construction loan deed of trust has priority over a subcontractor’s mechanic’s liens under N.C. Gen. Stat. § 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. §§ 44A-18 and 44A-23 is limited to first, second, and third tier subcontractors. Subcontractors more remote than third tier subs are not entitled to subrogation to the rights of other parties but shall have a lien upon funds that are owed to the person with whom they dealt as discussed hereafter.  See N.C. Gen. Stat. § 44-A-18(d).

NOTE 3: Pursuant to N.C. Gen. Stat. § 44A-11.1 with regard to any improvements to real property for which the costs of the undertaking are $30,000.00 or more  (with exceptions  for  an owner who is making improvements to an existing single-family residential dwelling that is occupied by the owner as a residence or for the addition of an accessory building or accessory structure the use of which is incidental to that residence)  a lien agent shall be appointed either at the time the original building permit is issued, or in cases in which no building permit is required, at the time the owner first contracts with any person to improve the real estate. When a lien agent has been appointed a potential lien claimant may perfect a lien on real property only if at least one of the following conditions is met: (1) Lien agent has received a Notice to Lien Agent from the potential lien claimant no later than 15 days after the first furnishing of labor or materials by the potential lien claimant; (2) Lien Agent has received a Notice to Lien Agent from the potential lien claimant prior to the date of recordation of a conveyance of the property to a bona fide purchaser for value who is not an affiliate, relative, or insider of the owner, or (3)The potential lien claimant has perfected its claim of lien prior to the recordation of a conveyance of the property to a bona fide purchaser for value, who is not an affiliate, relative, or insider of the owner. See N.C. Gen. Stat. § 44A-11.2(l). For any improvements to real property subject to N.C. Gen. Stat. § 44A-11.1 the claim of lien on real property of a potential lien claimant that is not perfected pursuant to N.C. Gen. Stat. § 44A-1 prior to the recordation of any mortgage or deed of trust for the benefit of one who is not an affiliate, relative, or insider of the owner is subordinate to the previously recorded mortgage or deed of trust unless at least one of the following conditions is met: (1) The lien agent has received a Notice to Lien Agent from the potential lien claimant no later than 15 days after the first furnishing of labor or materials by the potential lien claimant, or (2) The lien agent has received a Notice to Lien Agent from the potential lien claimant prior to the date of recordation of the mortgage or deed of trust.  See N.C. Gen. Stat. § 44A-11.2(m).

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

N.C. Gen. Stat. § 45-68 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. § 45-68, a deed of trust must:

• state that the security instrument is given wholly or partly to secure future advances and/or future obligations;
• state the maximum principal amount of, including future advances that may be secured at any one time;
• state the period in which the future advances are to be made. This period may not exceed  30 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. § 45-68 is not necessarily invalid and priority questions would be evaluated under case law.

If priority is lost, can it be regained?

Yes, provided a contractor or subcontractor subordinates their lien rights in favor of a lender. See Title Company Requirements below for additional information.

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

Yes. 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. § 44A-8. N.C. Gen. Stat. § 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. § 44A-10.

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

As stated above, it is unclear under N.C. Gen. Stat. § 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. § 44A-20, there would not be a question of lien priority between the contractor and the subcontractor because 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.

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. § 44A-12. The claim of lien must contain all the information required under N.C. Gen. Stat. § 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. § 44A-13.

Subcontractors.

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

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. § 44A-20 does not 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. §§ 44A-20 does not 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. § 44A-16.

The same analysis would apply to subcontractors asserting mechanic’s liens claims under N.C. Gen. Stat. §§ 44A-20 and 44A-23. However, as mentioned above in a subcontractors’ mechanic’s liens action brought under N.C. Gen. Stat. § 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. § 44A-16(a)(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. § 44A-23 who contracted with the contractor. N.C. Gen. Stat.§ 44A-23(c)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. § 44A-23, no action of the contractor will be effective to prejudice the rights of the subcontractor. N.C. Gen. Stat. § 44A-23(a1) and (b)(5). A lien waiver executed by the contractor will not affect a subcontractor’s lien rights under N.C. Gen. Stat. § 44A-20. Additionally, a lien may arise directly in favor of a first-tier subcontractor under N.C. Gen. Stat. § 44A-18(a) and 44A-20 without regard to whether the general contractor has waived its own lien rights. N.C. Gen. Stat. § 44A-18(1) provides that a first tier subcontractor who furnishes labor or materials at a job site is entitled to a “lien upon funds which are owed [by the owner of the improved real property] to the contractor with whom the first tier subcontractor dealt.”  Once the first tier subcontractor gives notice of his claim of lien upon funds to the owner, the owner is thereafter “under a duty to retain any funds subject to the lien or liens under [Article 2 of Chapter 44A] up to the total amount of such liens as to which notice has been received.”  N.C. Gen. Stat. § 44A-20(a). Under N.C. Gen. Stat. §44A-20(b) and (d), the first tier subcontractor lien claimant may thereafter acquire a lien upon the improved real property by virtue of the property owner’s wrongful payment after receiving notice. Mace v. Bryant Construction Corporation, 48 N.C. App. 297, 269 S.E. 2d 191 (1980). A claim of lien on funds is not filed with the clerk unless it is attached to a claim of lien on real property filed pursuant to N.C. Gen. Stat. § 44A-20(d) or when filed by the Obligor for the purpose of discharging the claim of lien upon funds in accordance with N.C. Gen. Stat. § 44A-20(e). See N.C. Gen. Stat. §44A-19(e).

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. See generally 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 (NCLTA Form 1 or comparable form when no work completed or contemplated); or
• NCLTA Form 5 (Owner Affidavit and Indemnity Agreement) from the owner when a lien agent has been appointed.  This form is in favor of  the purchaser, lender and title insurance company and should be used when a Mechanics lien agent has been appointed and either construction is completed, contemplated or underway.  A separate NCLTA Form 5 should be executed by each successive owner in the 120 day Lien Period. 
• Additionally, if a lien agent has been appointed and work is ongoing NCLTA Form 7 (Subordination of Liens) should be obtained from General Contractor, from all parties who have filed notice to lien agent, and from all parties who have begun work in last 15 days as identified on NCLTA Form 5 to possibly be able to provide lender any type of mechanics lien coverage, which requires underwriter approval (NCLTA Form 7 is for providing lender coverage only), or
• If a project in which lien agent is not required to be appointed but work has started or immediately contemplated NCLTA Form 3 (Owner/Contractor Affidavit, Indemnity and Lien Subordination Agreement) should be signed by owner, general contractor and first tier subs who have begun work absent underwriter approval to the contrary.  NCLTA Form 3 is for providing lender coverage only and contains an indemnity in favor of lender and title insurance company.
• Underwriter approval is always required to provide lender mechanics lien coverage if work has begun.  A mechanics lien exception (or limited exception approved by underwriter) should always remain in the owner’s title policy if work has begun.
• If a claim of lien against real property has been filed, it must be paid and cancelled of record unless the lien has been bonded off as set forth above.

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 (unless an ALTA 32 endorsement is being used). When the construction deed of trust is recorded before any work has begun and thus has priority over any potential mechanics liens, the clause reads as follows:

Pending disbursement of the full proceeds of the loan secured by the Insured Mortgage, this Policy insures only to the extent of the amount actually disbursed for improvements but increases as each such disbursement is made in good faith and without Knowledge of any defects, liens, or encumbrances on the Title, up to the face amount of the Policy. At the time of each such disbursement of the proceeds of the loan, the Title must be continued in writing by the Company for defects, liens or encumbrances on the Title intervening or recorded between Date of Policy and the date of the disbursement.

However, if work has begun before the construction deed of trust is recorded and thus does not have up front priority over potential mechanics liens a different pending disbursement clause (PDCX06STG or PDCX07STG) will typically be required.

Underwriter approval required before removing the mechanics lien exception and before using any of the above mentioned pending disbursement clauses.   

It is not customary to add a mechanic’s liens exception provided no work has started before the Deed of Trust is recorded and provided appropriate NCLTA form(s) are received evidencing this.  On occasion may be able to remove mechanics lien exception even if work has started before the Deed of Trust is recorded provided appropriate NCLTA forms (including subordinations and indemnities) are received from the appropriate parties, subject to underwriter approval. 

Also subject to any bulletins relating to mechanic’s liens.

SEE ALSO

(PDC) Pending Disbursement Clauses