Lien Law Change

FRAR Members… For Your Information! 

Beginning Monday, April 1, 2013, property owners must appoint a lien agent when they first contract for improvements to their property.  The owner must use a title insurance agency registered with the N.C. Department of Insurance.

Why does this law new exist?  In the past, a homeowner is held liable to pay for a subcontractor’s unpaid bill because the general contractor refused to pay the subcontractor on a project.  Under the new bill, the contractor will be required to provide additional information on the lien agent.  This information will be placed on the building permit application.

What information is included on the permit?  Name, mailing address, fax and email of the title insurance company or agency.

Exclusions?  The new lien law does NOT apply to construction work less than 30,000.

Changes to North Carolina Lien Law Take Effect April 1st  (Information is from the North Carolina Association of REALTORS®)

Effective April 1st, a significant change to North Carolina’s mechanics’ lien law took effect.  The change will affect projects to improve real property for which the anticipated cost of the project at the time the building permit is issued is $30,000.00 or more.  However, the new law will not apply to improvements to an existing single-family residential dwelling unit that is used by the owner as a residence.

This purpose of this article is to bring the existence of the new law to the attention of the real estate brokerage community and to give a very general overview of how it will work.  A real estate agent should become generally familiar with the new law; however, the identification and proper handling of potential liens on property that is the subject of a real estate transaction has been and will continue to be the responsibility of the closing attorney.

As a short refresher, the mechanics’ lien laws permit persons who supply labor, materials or certain services to property that is being improved to file a claim of lien on the property to secure payment of what is owed to them.

These liens can be filed after a property is transferred and yet “relate back” to a date before the transfer that the labor, materials or services were first provided.  Thus, such liens may be “hidden” and not show up on a title search.  As a result, a seller is required to furnish at settlement an affidavit verifying that any person entitled to claim the benefit of such a lien has been paid in full.

Title insurance policies have typically provided coverage against such liens, and for many years the title companies paid off occasional mechanics’ liens as a cost of business.  However, when the recession hit the construction industry, title insurers experienced a significant increase in title insurance claims resulting from hidden liens.  As a result, the title insurance industry successfully lobbied for changes to the lien law.

The new law is designed to protect buyers and title insurance companies from liens filed after a title policy is issued and the property is transferred by requiring potential lien claimants to provide notice of their involvement on a project before the property is transferred.  Notice must be given to a “lien agent” who must be designated by the owner of the property being improved.  The lien agent will be a title insurance company chosen from among a list of registered lien agents that will be maintained by the Department of Insurance.  The title insurance industry in North Carolina has collaborated on the development of a web site, which will enable a lien agent to be designated online.  The owner will be required to give notice of the lien agent’s contact information, either by posting the information on the project site or by providing the information to a potential lien claimant on request.

The attorney closing a transaction subject to the new law will be able to search the web site to get the names of any persons who have notified the lien agent of their potential lien.  The attorney will require all such persons to sign a lien waiver confirming that they have been paid in full.  The claim of any potential lien claimant who refuses to sign a lien waiver will need to be addressed before the closing can take place.

The great majority of real estate transactions that will be subject to the new law will involve sales of new construction and sales by investors who have purchased and made significant improvements to the property being sold.  Although, as noted above, the new law will not apply to improvements to an existing single-family residential dwelling unit that is used by the owner as a residence, it is important to understand that the existing lien law will continue to apply to the sale of such dwelling units.  Specific questions about whether the law will apply in a particular situation and how it will work should be answered by a North Carolina real property lawyer.

Work is currently underway to identify and address any changes that may need to be made to NCAR’s standard forms as a result of the new law.  Any changes likely will become effective this coming July 1st. Additional information will be made available on any changes that may be approved as soon as possible.

Any questions should be addressed to Kay Bailey in the NCAR Legal Department at 800/443-9956 or [email protected].

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Published by Angie Hedgepeth

Angie Hedgepeth, Government Affairs Director for the Association, attends all the local meetings each month, as well as NAR and NCAR meetings, and keeps members abreast of the multiple issues being addressed in local, state and national government. She prepares reports on the meetings she attends and they are included in the weekly "Government Affairs Update".