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Basics Of NC Lien Law – Part 2 – Claim Of Lien On Funds

We looked at the Claim of Lien on Real Property in Part 1.  This week, let’s take a look at the second type of lien in North Carolina, the claim of lien on funds.   Basically, a lien on funds allows a subcontractor to prevent a property owner from paying the general contractor who has failed to pay its subcontractors.

The Lien on Funds

The claim of lien on funds is available to all contractors of any tier.  This lien allows the subcontractor to have a lien right to any funds owed to the party with whom they entered into the contract.  In other words, the lien on funds exists to the extent that there is money owed to the tier immediately above the subcontractor.  A subcontractor’s lien upon funds arises, attaches and is effective immediately on the first furnishing of labor or materials.  There is no time limit by which a subcontractor or supplier has to assert a claim of lien on funds, but it is not perfected until it is served on the party holding the funds (the “obligor”).  The lien upon funds relates back to the date the contractor or supplier first furnished labor or materials to the construction project.

What are the notice requirements?

The notice must include all statutorily required information as set forth in NCGS § 44A-19 and substantially follow statutory form for the applicable tier (NCGS § 44A-19(b) and (c)).

How must the Notice of Lien on Funds be Served?

The notice of a claim of lien on funds must be served by personal delivery or by service authorized under Rule 4 of the North Carolina Rules of Civil Procedure.  Notice does not get filed with the Clerk of Superior Court, unless it is attached to a claim of lien on real property that is filed with the Clerk or filed to discharge the claim of lien upon funds.

What if I Receive a Notice of Claim of Lien Upon Funds?

Upon receiving a notice of lien on funds, the owner is obligated to retain funds subject to all liens up to the total amount received.  A perfected notice flows with any payments and obligors/owners are personally liable up to the amounts of wrongful payments, up to the total of claims received prior to payment.   But, if the owner has spent all the funds due under the contract for the project, the subcontractor cannot recover.   If the owner does become personally liable to the subcontractor, then it has a claim against the general contractor for indemnification.  But, if the general contractor has no money (as is usually the case), that claim is essentially worthless.  The better practice for the owner receiving a notice of claim of lien on funds is to stop paying anyone until the issue is resolved or to post a bond or cash payment with the Court.

Basics Of NC Lien Law – Claim of Lien on Real Property

In general, there are two types of liens in North Carolina – a claim of lien on funds and a claim of lien on real property.   For contractors and others who are owed money on a construction project, liens are a powerful method of ensuring that the money is paid.  However, for the successful recovery of money owed, it is essential to remember that the lien laws must be strictly followed.  If not, a loss of lien rights may occur.

Claim of Lien on Real Property

A lien claim on the property is available to those who contract with the owner, or those with subrogation rights – first, second and third-tier subcontractors.  The amount of the claim is for the value of the improvements to the property that were provided pursuant to an express or implied contract for labor materials, equipment, design or survey services.  The lien relates back to the time of the first furnishing or labor or materials to the project.

How Can I File a Claim of Lien on Real Property?

The claim of lien on real property must be filed within 120 days from the date when labor or materials were last furnished to the project.  The claim of lien must comply with the form that is set forth in NCGS 44A-12, which includes a certification that the lien has been served on all necessary parties.  The lien must be served on the owner within 120 days of the last work and/or materials supplied to the Project.  In the case of a subcontractor or supplier asserting a subrogation lien, the lien must be served on the upstream contractor through whom subrogation is claimed.  Finally, the claim of lien must be filed with the clerk of court in the county where the real property is located.

What are the Lien Agent Requirements?

If there is an intervening sale or deed of trust filed prior to giving notice to the lien agent, lien rights may be lost.  The owner of the property must designate the lien agent by the time it first contracts with anyone to improve the property.  The owner must also provide lien agent contact information by posting a sign, or in the building permit.  The contractor or supplier on a project must serve a Notice to Lien Agent form within 15 days of first providing labor or materials on a project.  This is required before you can perfect your claim of lien on the property.

What is Perfecting a Lien?

A lawsuit to enforce a claim of lien on real property must be filed within 180 days from the date when labor or materials were last furnished to the project.

What is the Remedy?

If a lien on real property is properly filed, perfected and a judgment is entered in favor of the lien claimant, the court can order that the property be sold to satisfy or pay the lien.  In addition, a successful lien claimant can recover attorneys’ fees to recover the costs of filing the lawsuit.