Mechanic's Lien Changes on the Way in North Carolina?

May 29, 2014

A committee within the General Assembly of North Carolina has passed legislation onto the full House regarding potential changes in the state's mechanic's lien law.

A Judiciary subcomittee considered and “reported favorably” on a pair of two-week-old mechanic's lien-related proposals (H.B. 1101 and H.B. 1102) on May 28. They are now scheduled to be heard before the full state House on June 3, with the potential for a vote that day. H.B. 1101 seeks to improve protections provided in the state on construction projects regarding performance bonds. The only substantive change made to the proposal during the most recent hearing was the addition of the following clause: “For the purposes of this subsection, any building or other work or improvement constructed upon land owned by a contracting body shall be deemed to be a public building or other public work or public improvement.” James Hays, Esq., a partner with Gonzalez Saggio & Harlan LLP, believes the bill could be good for creditors and subcontractors.

"It requires bonds for improvements when the state or county enters a long-term lease, such as to a Development Authority," Hays said. "Some projects where the owner is still the government, and therefore no lien rights exist, are now required to be protected by bonds as if the governing body was contracting for the work." As such, Hays believes it could possibly become a more frequent tactic by state governing bodies pursuing new development to go the P3 route. Note: The June issue of Business Credit discusses an exception written into the proposal for public-private partnerships P3s.

NACM’s Secured Transaction Services’ Chris Ring said the legislation, if passed, will require performance and payment bonds on construction projects when the "reputed project" owner is in a lease arrangement with the "reputed land" owner for both public and private projects. " As North Carolina law stands now, when a material supplier is supplying materials on a project where the "reputed project" owner is in a lease arrangement, the relief is to file a Lien on the Leasehold Interest. This does not grant the material supplier a security interest in the piece of property they have improved or to file a claim against a payment bond, rather it places a Lien on the lease and puts pressure on the landlord and tenant to clear the Lien on the lease, and is traditionally used as a leverage tool to prompt payment," Ring said. "This legislation, once passed, will allow material supplier to extend lines of credit based on the value of the payment bond." He added that the proposed changes do not apply to P3 Projects.

H.B. 1102 simply clarifies information required to be provided in a notice to a lien agent. Hays noted further that the notices should not alter anyone’s current approach to the lien law and that it "merely establishes that the preliminary notice does not serve as the required lien notice after the work has concluded." No changes were reported on the General Assembly’s website.

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