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A PRIMER ON CONSTRUCTION LIENS

 

What is a Construction Lien?

 

The construction industry is largely governed by contracts.  A property owner contracts with a general contractor to make improvements to the real property; the general contractor contracts with subcontractors to perform the various tasks required to make such improvements (e.g., grading, bricklaying, etc.); the general contractor and/or the subcontractors contract with suppliers to haul materials and equipment to and from the job site.  A mechanics’ lien (or construction lien) provides any party involved in the improvement of the real property with a means of collecting payment.  This means of collection exists in addition to other remedies, such as breach of contract.  As a result, it is a powerful tool in the toolkit of a construction or construction-related business.  There are three distinct types of liens:

  1. Liens on real property, which attach to the title to that property.
  2. Liens upon funds, which attach to any funds owed for the work involved in making the improvements to the property.
  3. Subrogation liens, which allow a “down-the-line” party to step into the shoes of a party in a superior position. For example, a second-tier subcontractor can subrogate the lien rights of the general contractor to enforce the second-tier subcontractor’s right to receive payment.

 

The Parties Involved

 

As discussed above, the potential parties to a construction lien action include any party involved in the improvements – general contractors, subcontractors, suppliers, etc.  However, construction  liens create more seats at the proverbial table.

 

  1. The Owner: the person who has a legal interest in the property improved and who ordered the improvements
  2. The Contractor: the person who contracts with the Owner (this is typically the general contractor)
  3. The Subcontractors: the lien statutes acknowledge tiers of subcontractors, with first-tiers contracting with the contractor, second-tiers contracting with first-tiers, etc.
  4. The Obligor: the person who owes money to another as a result of the other’s performance (the obligor could be the owner, the contractor, or a subcontractor of any tier, depending on the particular facts)
  5. The Lien Claimant: the person who claims to be owed money by the obligor as a result of the lien claimant’s performance

 

Relation Back: How and When a Lien on Real Property Originates

 

For a lien on real property – which attaches to the title to the real property, itself – the doctrine of “relation back” applies to determine the timeline of rights and obligations belonging to the lien claimant.  By operation of this rule, a lien against the real property becomes effective on the date that the first labor or materials were performed or furnished on the project.  The date of first furnishing can have a significant impact on the priority of multiple lien claimants.  Further, relation back also informs the critical deadlines, discussed in detail below.  These deadlines are measured from the last date of furnishing or performance by the lien claimant.

 

Perfection

 

A claim of lien must be filed within 120 calendar days after the last date of furnishing labor or materials.  This deadline is strictly enforced, and the 120-day deadline can only be extending in very limited circumstances.  If a lien claimant misses its deadline for perfection, it will most likely lose its ability to enforce its lien rights and must pursue payment by other means; for example, through a breach of contract lawsuit.

 

The lien statute provides a helpful template for how to construct a claim of lien.  Although certain exceptions may apply, it is best practice to strictly adhere to this template.

 

Enforcement

 

After a claim of lien is perfected, the lien claimant must then enforce its lien rights by initiating a lien-enforcement lawsuit.  This lawsuit must be filed within 180 calendar days after the last date of furnishing labor or materials.  The lawsuit must name the Owner as a Defendant.  It is usually best practice, however, to name all parties who may be responsible for the debt or have an interest in the property (e.g., bond holders, trustees of any deed of trust on the real property, etc.).  Joinder of all such parties to one action would enable the court to determine relative priority and other issues, while reducing the parties’ legal fees.

 

Similar to perfection, if a lien claimant misses its deadline for enforcement, its lien rights are extinguished and it must pursue payment by other means.

 

Lien Agents

 

For construction projects with an estimated cost of over $30,000, excluding projects for improvements to existing single-family homes, a lien agent must be appointed and designated by the Owner no later than when they first contract with any person to improve the property.  Typically, building permits cannot be obtained, and thus no work can commence, until after the lien agent is designated.  The lien agent must be provided with notice of any claim of lien on real property, typically within 15 days after the first furnishing of labor or materials.  Failure to timely and properly notice the lien agent could extinguish the lien claimant’s lien rights or affect its priority.  North Carolina centralizes the lien agent system, and relevant information can be found here.

 

Subrogation (a/k/a Substitution)

 

As discussed above, a subrogation lien is a third, distinct type of lien.  It permits a lower-tier party to step into the shoes of a party in superior position.  A subrogation lien can buttress the security of a lower-tier subcontractor because it can be sought in addition to the subcontractor’s direct claim of lien upon funds.  Importantly, the subrogating party receives both the benefits of the superior party’s position but also the superior party’s obligations – relation back, and the relevant deadlines, are measured as if the superior party is seeking the lien claim.  Further, courts hold that a subrogation claim of lien must also explain the tiered relationships between the parties and failure to do so can be fatal.

 

If you have questions regarding a construction lien dispute, please call us at (704) 457-1010 to schedule a consultation.  For more information regarding our firm, attorneys, and practice areas, please visit http://www.lindleylawoffice.com/.

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