Questions Answers 2012 Legislation Amending Lien and Bond Statutes

Legal Update:2012 Legislation Amending Lien and Bond Statutes – Some Common Questions and Answers

During the recent legislative session, the North Carolina General Assembly made substantive changes to the manner in which liens can be asserted on private projects. It also modified the manner in which claims are preserved and submitted on payment bonds for state/local government projects (S.L. 2012-158; 2012-175). This memo addresses the legislative changes according to the following three categories:

(1) those made to the payment bond laws for state/local government projects that take effect January 1, 2013;

(2) those made to the lien laws that take effect January 1, 2013; and

(3) those made to the lien laws that take effect April 1, 2013.

This memo is primarily in Q&A format. We have not outlined every change made to the law. You should consult with legal counsel to address your particular situation.

 

THARRINGTON SMITH, LLP

CHANGES TO THE PAYMENT BOND LAWS

EFFECTIVE JANUARY 1, 2013:

STATE AND LOCAL GOVERNMENT PUBLIC PROJECTS

 

Overview: The legislature’s primary goal in amending the payment bond laws was to address the “double-payment” dilemma that some general contractors faced: e.g. the general contractor on a state project paid its first-tier subcontractor but the first-tier subcontractor did not pay the second-tier subcontractor. The second-tier sub then files a bond claim, which ultimately is a liability for the general contractor (and, thus, exposing the general contractor to double payment). The idea behind this legislation is to prevent double payment from occurring. In short, this is accomplished by requiring subcontractors to provide the general contractor with a written Notice of Public Subcontract. This puts the general contractor on notice that there is a subcontractor and, in theory, to ensure the subcontractor has been paid. Failure of the subcontractor to provide the Notice of Public Subcontract to the general contractor could limit the subcontractor’s ability to recover funds from the surety liable under the bond.

Does this new law apply to all public projects (federal, state and local)? No. The new law only applies to projects in which the owner is the State of North Carolina or a political subdivision of the state, such as a community college, municipal or county government, or school board. It does not apply to projects in which the federal government is the owner (e.g. military installations).

Do all state/local government projects have to be bonded? No. Only projects that exceed $300,000 require a payment bond.

How will I know if a project is bonded? What is this I’ve heard about a ‘project statement’, and what does that consist of? Not knowing if a project is bonded was a chronic problem for lower-tier subcontractors and suppliers. The new law requires the general contractor to provide a project statement to all of its subcontractors/suppliers, who must in turn provide the project statement to all of its subcontractors/suppliers, and so on. The project statement must include the following:

  • name of the project

  • physical address of the project

  • name of the contracting body (e.g. county, municipality)

  • name of the general contractor

  • name, telephone number and mailing address of the general contractor’s agent authorized to receive any request for a copy of the payment bond, the notice of public subcontract and the notice of claim on payment bond

  • name and address of the surety issuing the payment bond for the project

Is the project statement required to be provided on all projects for which a bond is required? Yes.

What happens if I do not receive the project statement from my customer/higher-tier contractor? If your customer/higher tier contractor fails to provide you with a copy of the project statement, the customer/higher tier contractor cannot enforce its contract against you. This provides some leverage to subcontractors who are laborers, because their remedy for not receiving the project statement is to suspend performance of the work. For materials suppliers, the remedy is less appealing because your only leverage at that point is to suspend delivery of materials. So, the point to take away is this: do not deliver materials on a bonded public project unless and until you have received a copy of the project statement.

I noticed the project statement does not include a copy of the actual payment bond. Is there a way for me to get a copy of that? Of course. Under current law, you can always obtain a copy of the payment bond from the owner of the project. Under the new law, the general contractor must also provide you with a copy of the payment bond within seven days. If you request a copy of the bond from the general contractor, the request must be sent by certified mail (or other signature confirmation method through the U.S. Postal Service), and must be sent to the general contractor or its agent identified in the project statement.

OK. So now I have a copy of the project statement and I know this is a bonded state/local government project. Now what? If you are a subcontractor (e.g. not contracting directly with the owner of the project), you should complete and send to the general contractor a Notice of Public Subcontract by certified mail, return receipt requested. Again, remember that the Notice of Public Subcontract is your opportunity to formally put the general contractor on notice that you are providing labor and/or materials to the project, thus minimizing the risk of a double payment down the road.

What if I am contracting directly with the general contractor? Do I still have to provide the GC with a Notice of Public Subcontract? Apparently so. Although it seems counterintuitive to provide the Notice to a general contractor you directly contract with, the statute does not expressly provide the obvious exclusion to do so in this instance. Therefore, in order to preserve your bond claim, we recommend that you provide the Notice of Public Subcontract to the general contractor even when you have a direct contract with that company. This was not the apparent intent of the law, but doing this will remove that argument from potential litigation.

 

What information must be included in the Notice of Public Subcontract? The Notice of Public Subcontract should be on your company letterhead and should include the following:

[date]

[name, address of general contractor]

[manner of delivery to general contractor (e.g. via U.S. Mail, Return Receipt Requested, FedEx or UPS)]

 

NOTICE OF PUBLIC SUBCONTRACT

 

  • Name and address of the subcontractor giving notice of public subcontract:
  • General description of the real property on which the labor was or is to be performed or the material was or is to be furnished (street address, tax map lot and block number, reference to recorded instrument, or any description that reasonably identifies the real property):
  • General description of the subcontractor’s contract, including the names and addresses of the parties thereto:
  • General description of the labor and material performed and furnished thereunder:

Dated:__________

 

__________________________

[Your Name, Title, and Name of Company]

Is there any particular delivery method required in sending the Notice of Public Subcontract? Yes. The notice should be sent in written format by either certified mail, return receipt requested; FedEx; or UPS. You should staple the return receipt to a copy of the Notice of Public Subcontract and maintain those documents in a safe place with the project file.

Do I have to provide the Notice of Public Subcontract on all state/local government bonded projects? What are the consequences if I do not provide the Notice? The obligation to provide a Notice of Public Subcontract does not apply to bond claims of $20,000 or less. However, unless you know for certain that the labor/materials you are providing on a publicly-bonded project will not equal or exceed $20,000, you should provide the Notice of Public Subcontract to the general contractor. The difficulty here is that you won’t know in advance that you will not receive payment later, so you won’t know if you will ever have to file a bond claim. If there is even a remote chance that you could be owed $20,000 for labor/materials you should provide the Notice of Public Subcontract to the general contractor in order to preserve your potential bond claim.

Is the $20,000 figure based on what is owed to me or is it based on the total project cost, including other contractors and subcontractors? The $20,000 threshold is based on what is owed to you only at the time the bond claim is submitted.

What happens if I never provided the Notice of Public Subcontract to the general contractor, or provide it during the middle of the project? There are a number of possible scenarios:

  • If you are owed $20,000 or less, your claim to the surety can include the full amount that you are owed (even if you seek to recover money owed for labor/materials provided more than 75 days beyond when the claim is made). Most bond claims, though, are for more than $20,000, especially on large public projects.

  • If you are owed more than $20,000, your claim will be limited to the value of the labor/materials provided within 75 days of the claim, or $20,000, whichever is greater. This is why it is a good idea to serve the Notice of Public Subcontract at the beginning of your first delivery of labor/materials to the project.

Is the Notice of Public Subcontract the same thing as a bond claim? No. Remember, this memo discusses three documents related to state/local government public projects: (1) the project statement provided by the general contractor, which flows down to all subcontractors; (2) the Notice of Public Subcontract provided by each subcontractor directly to the general contractor; and (3) the bond claim, which should be served on the surety, owner, general contractor, and any subcontractor in between you and the general contractor within 120 days of your last delivery of labor/materials.

When do the requirements in this part of the memo take effect? This portion of the new law applies to any project permitted or begun on or after January 1, 2013.

 

THARRINGTON SMITH, LLP

CHANGES TO THE LIEN LAWS EFFECTIVE JANUARY 1, 2013:

NON-PUBLIC (“PRIVATE”) PROJECTS

 

What changes to the lien laws are included in this legislation? There are several.

First, the law now requires a lien on real property to be served upon the record owner of the real property, and upon the contractor (and any subcontractor) between you and the owner. Note, however, that “perfection” of the lien does not occur until the lien is filed and served upon all required parties. This means that the lien must be filed and served within 120 days of the last furnishing of labor or materials. Service does not require proof of actual receipt and is deemed complete upon personal delivery or, more commonly, mailing the lien by the U.S. Postal Service or an authorized delivery service such as UPS or FedEx. (Note: we strongly recommend the lien be served by certified mail, return receipt requested if sent through the Postal Service.)

Second, the law presumes the envelope is properly addressed if the address originates from the one included on the construction permit, is gathered from the county tax office, or is the registered agent for the party according to the N.C. Secretary of State’s Office.

Next, the standard Claim of Lien on Real Property form has been slightly altered to now require any subcontractors through whom lien rights are subrogated to be included in the Claim of Lien. The law also requires the form to include a certification that the parties have been properly served with the lien. Also, the standard Claim of Lien Upon Funds form has been slightly altered with technical changes.

The law now provides that a lien on funds arises, attaches and is effective immediately upon the first furnishing of labor or materials. This change was to address opinions reached in bankruptcy court that held a post-petition lien claim violated the automatic stay applicable in bankruptcy cases.

How does the new law impact lien waivers? About the only concession provided to materials suppliers is that, while a lien waiver signed by a higher tier contractor waives your ability to enforce a lien on real property, it does not waive your right to enforce a lien on funds. (It also does not waive your ability to file a real property lien arising from an unlawful payment by the owner following receipt of a lien on funds.)

Does the new law allow flexibility for the date upon which the lien is perfected? Yes. Under the new law, in selecting the date upon which labor or materials were first provided (e.g. establishing your priority relative to other creditors), you can choose either the first date you provided labor or materials or the first date your customer/higher-tier contractor provided labor or materials. The advantage to using your customer’s first date of supplying labor or materials is obvious – it could potentially move you up the ladder for purposes of priority. The potential risk of doing so is that you have to be certain the date you select is accurate and can be verified.

Does the new law alter the procedure for filing a notice of contract? Yes. Under the new law, an owner can now post a notice of contract on the property and file the notice with the clerk of court (current law only allowed a general contractor do to so). In addition, an owner/general contractor must post and file the notice of contract within 30 days from the date the permit is issued if one is required (which was the extent of the current law) or 30 days from the date the general contractor is awarded the contract, whichever occurs later.

Are there changes to the sanctions for filing a false statement related to labor or materials furnished to a project or the amount owed? Again, yes. The new law expands the scope of those who may be sanctioned for providing false statements and also provides that doing so can result in regulatory discipline for any licensed contractor.

When do these changes go into effect? The changes mentioned in this section apply to any project permitted or begun on or after January 1, 2013.

 

 

THARRINGTON SMITH, LLP

CHANGES TO THE LIEN LAWS EFFECTIVE APRIL 1, 2013:

NON-PUBLIC (“PRIVATE”) PROJECTS

 

Overview: The purpose of this legislation is to address the “hidden lien” – for example, a lien that is filed after a person purchases real property without knowing of the lien or possibility that one might be filed, since liens relate back to the date materials or labor were first provided. To remedy this problem, effective April 1, 2013, the law will require you as a potential lien claimant to notify the owner’s “Lien Agent” of the labor or materials you will provide on a project within 15 days of first furnishing them. The Lien Agent is basically a title insurance company designated by the owner. This will facilitate title searches before property is sold. If you do not notify the Lien Agent of the materials or labor provided to the project within 15 days of furnishing them, you generally cannot file a lien on the property.

Who designates the lien agent? The owner of the property designates the lien agent.

Who is the lien agent? The lien agent is almost always going to be a title insurance company. The N.C. Department of Insurance maintains a list of eligible lien agents for this purpose.

When must the owner designate a lien agent? And for what type of projects is the designation required? The owner must designate a lien agent for any project that is anticipated to cost $30,000 or more at the time the original building permit is issued, except for improvements to an existing single-family residential dwelling (such as a bedroom addition or a detached building). Since liens cannot be filed on public projects, these laws only apply to private developments.

What if the owner doesn’t designate a lien agent? Are my lien rights affected? Your lien rights will be preserved until the owner designates a lien agent. However, a building permit should not be issued unless and until the owner designates a lien agent when one is required, so this should not happen often.

What information about the project does the owner provide to the lien agent? The owner must provide the lien agent with “the street address, tax map lot and block number, reference to recorded instrument, or any other description that reasonably identifies the real property.”

How will I know who the owner’s lien agent is? If you deal directly with the owner, the statute contemplates that you will learn of the lien agent through the contracting process (either the owner will tell you or it will become apparent on the building permits, etc.). If you deal directly with a general contractor or a subcontractor, the GC or subcontractor is required to provide you with the lien agent’s contact information within three business days of entering the contract with you (e.g. purchase order). In reality, there will be times where your customers do not provide you with the lien agent information. When that occurs, you can request the owner to provide you with this information, and the owner has seven days to provide it to you. In addition, the lien agent information must be included in the building permit before it can be issued, and on a separate posted notice, both of which must be posted on the jobsite in a visible location.

Do I have an obligation to share the owner’s lien agent information with other subcontractors “downstream”? Yes. If you contract with a lower-tier subcontractor who has lien rights on the project, you must provide that subcontractor with the lien agent information within three days of contracting with them. This is usually not applicable to materials suppliers who manufacture their own materials.

What information should be provided about the lien agent to me or my lower-tier subcontractors? And how must this information be delivered? The contact information provided to lower-tier subcontractors must include the name, physical and mailing address, telephone number, fax number and email address of the designated lien agent. The lien agent information must be provided to lower-tier subcontractors by any of the following methods:

  • certified mail, return receipt requested

  • signature confirmation through the U.S. Postal Service

  • physical delivery and obtaining a delivery receipt from the subcontractor

  • fax with a fax confirmation

  • depositing with a designated delivery service such as FedEx or UPS

  • by email with delivery receipt

  • by including the information in a subcontract.

 

What if my higher-tier contractor fails to provide me with the lien agent information as required by law (or I fail to provide this information to a lower-tier subcontractor)?Any person who fails to provide the lien agent information as required above is liable to the lower-tier subcontractor for any actual damages incurred by the lower-tier subcontractor as a result of the failure to give notice. This ordinarily will not provide you with much of an additional remedy because any contractor “above” you will already be liable to you for damages (e.g. money owed on account).

OK, so an owner has designated a lien agent. How does this impact me as a contractor or subcontractor? As further described below, generally in order to preserve your potential lien rights anyone who contracts with the owner of a project subject to the new law must provide a Notice to Lien Agent form to the lien agent such that the form is actually received by the lien agent no later than 15 days after the first furnishing of labor or materials. If you fail to provide the Notice to Lien Agent to the lien agent as required by law, your lien on real property cannot become “perfected” and will, therefore, be void.

What should I do if I am not sure if the anticipated project cost is $30,000, or if it is unclear whether the project is an improvement to a single-family residential dwelling?In order to fully protect your lien rights, we recommend that you simply get in the habit of sending the Notice to Lien Agent on all non-public projects (e.g. those in which the federal government, state or political subdivision of the state is not the owner).

Is the $30,000 threshold for me to provide the required Notice to Lien Agent based on my anticipated cost/sales, or the total project cost? Quite clearly the latter. Again, since you may not know how much the total project cost may run (e.g. not just your portion of the project), our best advice is for you to serve the Notice to Lien Agent on all construction projects.

What method of delivery must I use to provide the Notice of Lien Agent form to the lien agent? The Notice to Lien Agent form must be provided to the lien agent by any one of the following methods:

  • certified mail, return receipt requested

  • signature confirmation through the U.S. Postal Service

  • physical delivery and obtaining a delivery receipt from the subcontractor

  • fax with a fax confirmation

  • depositing with a designated delivery service such as FedEx or UPS

  • by email with delivery receipt.

What if I provide the Notice to Lien Agent to my customer (e.g. higher-tier contractor or owner)? Will this suffice? No. The Notice to Lien Agent must be sent directly to the lien agent.

What information must be included in the Notice to Lien Agent? The Notice to Lien Agent should be on your company letterhead and should include the following:

[date]

[name, address of lien agent]

[manner of delivery to lien agent (e.g. via email with delivery receipt)]

 

NOTICE TO LIEN AGENT

 

  1. Potential lien claimant’s name, mailing address, telephone number, fax number (if available), and electronic mailing address (if available):

 

  1. Name of the party with whom the potential lien claimant has contracted to improve the real property described below:

 

  1. A description of the real property sufficient to identify the real property, such as the name of the project, if applicable, the physical address as shown on the building permit or notice received from the owner:

 

  1. I give notice of my right subsequently to pursue a claim of lien for improvements to the real property described in this notice.

 

Dated:__________

 

__________________________

[Your Name, Title, and Name of Company]

 

What if the project is new construction and there is no posted address for the jobsite? This is common. Regardless of whether the project is new construction, you should include in the Notice to Lien Agent the same information about the project that was provided to you by the owner or your customer/higher-tier contractor. When in doubt, you should request the owner to provide you with the notice it provided to the lien agent and the description of the property that the owner provided to the lien agent. This way, the description of the property that you provide to the lien agent will match that provided by the owner. But remember you still must provide your Notice to Lien Agent so that it is actually received by the lien agent within 15 days of first providing labor or materials to the project. The owner has seven days to provide you with this information upon request. So, when possible, you may consider delaying providing labor/materials to allow time for the Notice to Lien Agent to be received by the lien agent.

What should I do after I have sent the Notice to Lien Agent to the lien agent? Since providing the Notice to Lien Agent according to the delivery requirements noted above (e.g. verifiable email, certified mail) is required in order for you to later file a lien, if necessary, it is a good idea to save a signed copy of the Notice of Lien Agent in your project file and attach or print out a copy of the verification that it was transmitted with the Notice (e.g. attach the certified mail return receipt, or print out a copy of the email, etc.). Although the statute does not say, it appears you have the burden of demonstrating that you sent the Notice to Lien Agent as required by law.

Does the Notice to Lien Agent replace the traditional lien on real property or lien on funds? No. Providing the Notice to Lien Agent is a precondition to filing a lien on real property. The Notice to Lien Agent is not a precondition to filing a lien on funds, but if the lien on funds is disregarded you can later file a lien on real property related to this failure only if the Notice to Lien Agent has been properly provided to the lien agent.

If I later file a lien on funds and/or a lien on real property, to whom should those liens be served? Any lien on real property or lien on funds should be served by verifiable delivery (as noted above) upon the owner, general contractor, all subcontractors between you and the general contractor, and the lien agent.

If I later file a lien on real property or a lien on funds, can I serve the lien(s) on the lien agent instead of the owner? No. The lien agent is not a substitute for subsequent service of process for actual liens filed.

Is the time within which I must file a lien on real property different under the new law? No. You must still file a lien on real property within 120 days from the last furnishing of labor or materials, and file a lawsuit to enforce the lien within 180 days of last furnishing. (There is no time limit within which the lien on funds must be served, but it is not effective until it is received by the obligor.)

Geez, this seems like a lot of hoops to jump through now in order for me to preserve lien claims. How long do I have to get my ducks in a row? The new law goes into effect April 1, 2013, and applies to any project in which the first furnishing of labor or materials applied on or after that date.   

The information contained in this article and throughout the Tharrington Smith website is correct and accurate as of the date of publication of the content. This general information should not be relied on as legal advice. While accurate and informative, the content is provided to help you make a qualified decision in choosing a law firm to guide you through your legal matter. To schedule a consultation, call our Raleigh office at (919) 821-4711.

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