No Ownership, No Lien in North Carolina

No Mechanic’s Lien Rights in North Carolina for a Design Firm Hired by the Property “Owner” Who Didn’t Purchase (aka Own) the Property

In construction, there are often multiple contracts and agreements being executed simultaneously, between a multitude of parties. Frequently, the sale of a property occurs while construction is underway or construction contracts are executed, before a property is officially sold.

Unfortunately, there may be times when construction is underway and then the bill of sale on the property falls through. So, what happens if you are furnishing to a project and the party that hired you doesn’t actually purchase the property you were hired to improve? For one design firm in North Carolina, it meant mechanic’s lien rights didn’t exist.

The Case of Davis & Taft Architecture, PA v. DDR-Shadowline, LLC

DDR-Shadowline, LLC (DDR) was interested in purchasing property from Shadowline Partners, LLC (Shadowline); the property was to become a student housing complex. DDR hired Davis & Taft Architecture, PA (Davis), a design firm, to provide architectural services for the planned student housing complex.

Davis was contracted, by DDR, to provide $230,000 in design services. Within the Agreement for Purchase and Sale of Real Property between Shadowline and assignee DDR, there was a specific section outlining the amount of Davis’ contract and the terms in which Davis should be paid.

Davis was paid all but $80,000 for which it filed a lien on Shadowline’s property.

Did you catch that? “Filed the lien on Shadowline’s property.” See, the sale of the property from Shadowline to DDR never went through. And DDR is the one that hired Davis; Shadowline, the actual property owner, didn’t hire Davis. When Davis proceeded with suit to enforce the mechanic’s lien, the court said “no.” Because statute specifically states the contract needs to be with the owner of the property – not the “would be owner” or the “owner to be.”

“Any person who performs or furnishes labor or professional design or surveying services or furnishes materials or furnishes rental equipment pursuant to a contract, either express or implied, with the owner of real property for the making of an improvement thereon shall . . . have a right to file a claim of lien on real property on the real property to secure payment of all debts owing for labor done or professional design or surveying services or material furnished or equipment rented pursuant to the contract.”

Davis filed an appeal, which resulted in the same decision: you contracted with a party that had no rights to the property, therefore no lien rights exist.

My advice? Keep an eye on living documents – the documents that haven’t’ officially been executed. I recognize it is tough to wait for the annoying red tape of documents, especially when you have been hired for a job. But, in the long run, it may be best to ensure t’s are crossed and i’s are dotted before moving forward.

North Carolina Mechanic’s Lien Rights

First, let’s review the steps for securing mechanic’s lien rights in North Carolina, starting with the preliminary notice. For private projects in North Carolina, you should serve a Notice of Subcontract upon the prime contractor as soon as possible to trap funds. If you don’t serve the Notice of Subcontract, you may defeat your lien against the property. The Notice of Subcontract may not be required if: contracting directly with the owner, contracting directly with the prime contractor, or if a Notice of Contract was not properly filed and posted by the owner or prime contractor.

Then there’s the Notice to Lien Agent.  Serve the Notice to Lien Agent within 15 days from first furnishing labor or materials or before the property is conveyed to a bona fide purchaser.

A Notice to Lien Agent is not required:

  • when the Lien Agent information was not provided by the owner within 7 days from receipt of a written request from a lien claimant or was not posted at the project or included within the building permit,
  • when the lien is filed prior to the conveyance of the property to a bona fide purchaser,
  • for design professionals contracting directly with the owner when the Lien Agent information is included within their contract, or
  • to maintain a lien on funds.

You should renew the Notice to Lien Agent within 5 years from the date the Notice to Lien Agent was delivered. If not renewed within 5 years, the Notice to Lien Agent will expire.

In the event you need to proceed with the lien, you should file the lien within 120 days from last furnishing. Bear in mind, North Carolina is an unpaid balance lien state, which means the lien is enforceable for the unpaid portion of the contract.

  • Serve a copy of the lien upon the owner and, when contracting with a subcontractor, upon the contractor, within 120 days from last furnishing materials or services.
  • Serve a copy of the lien on funds upon all parties within the contractual chain.
  • When contracting directly with a third-tier subcontractor, a lien on property is not available and a lien on funds is limited to the funds owed to the third-tier subcontractor.  Serve the lien on funds as soon as possible to trap funds.

Lastly, should you need to file suit, it should be filed within 180 days from your last furnishing.

Most Recent Resources

Blog

Will Safe Harbor Ever Exist for Florida UCC Filings? Zero Tolerance

Safe Harbor couldn't save this UCC. Florida's 'zero tolerance' policy means you must strictly comply with Article 9-503(a). Learn more here!
Read More
white paper
White Paper

NCS Credit Lien Index 2022 Q3

The Lien Index increased 4 points in Q3 2022, an 11% climb over Q2 2022. As expected, Q3 mechanic's lien activity rose 11% over Q2, and activity remained lower than Q1, which peaked at 43. We anticipate the Index will increase 2%-5% in Q4. Download the full report for details.

Read More
live webinars
Live Webinar

The Basics of the UCC Process

Worried about customers filing bankruptcy? Concerned about extending credit to marginal accounts? UCC filings secure collateral in agreement with your customer’s promise to pay.
Read More