Simply stated, a lien is a right one party has to encumber the property of another. The right to encumber real property with a lien is rooted in the North Carolina State Constitution and exists when a party who has provided labor, materials, or services to improve an owner's real property is not paid. This right, which exposes an owner to the ultimate risk of losing the property, is a powerful tool. It often is used appropriately - as a way to secure payment for work properly performed. However, it occasionally is used inappropriately - as a means to force payment for work not properly performed. Regardless of whether you are a contractor, subcontractor, or supplier (who is interested in being paid for labor, materials, or services properly provided) or an owner (whose improved property might become subject to a lien), it is important to have some understanding of lien rights.

Two Kinds of Liens

Generally, there are two kinds of liens that may arise out of the improvement of privately-owned real property. One is a lien on the real property, and the other is a lien on funds that are owed to some other party for the work that has been performed. Both kinds of liens are intended to provide a party that properly performs work with a way to secure payment. The right to exercise either, or both, usually depends on whether the party seeking payment contracts or deals directly with the owner of the real property or with a party other than the owner (i.e., a general contractor, subcontractor, or supplier) for that work. The circumstances under which either of these liens may be claimed, as well as the method for exercising the liens and the related rights, are set out in specific statutes. Unless a party claiming a lien complies strictly with the requirements of these statutes, the lien will be ineffective. The easiest way to get a general understanding of the statutory requirements and specific rights associated with these liens is to look separately at each.

Contracting with the Owner

If a party has an agreement with the owner and furnishes labor, materials, rental equipment, or professional design or surveying services, the party, often but not always a contractor, has a right to place a lien upon the owner's improved property if the owner fails to pay for the work, materials, equipment, or services. To exercise this right, the contractor must file a claim of lien. The claim of lien is a formal document that must be filed with the clerk of court in the county or counties where the property is located within 120 days from the date the party claiming the lien last performs work at the site ("last work date"). If not paid, that party must file a lawsuit to enforce the lien within 180 days from the last work date. The lien is enforced by receiving a judgment in the lawsuit in favor of the party claiming the lien and then having the owner's real property sold to pay the judgment.

A claim of lien cannot be amended. If it contains errors, it must be cancelled and a new claim of lien must be filed to correct the errors. However, a new claim of lien cannot be filed after the 120-day period has expired. Thus, if a claim of lien contains an error and the error is not discovered until after the 120-day period has expired, the party making the claim loses the right to assert a lien regardless of whether payment has been received. This policy of "zero tolerance" for errors is intended to protect an owner from being exposed to the risk of a lien for an indefinite period of time.

Contracting with Parties Other than the Owner

If parties that contract and deal with parties other than the owner (i.e., subcontractors and suppliers) to furnish labor, materials, or rental equipment (but apparently not professional design or surveying services as they are not specifically provided for in the statute) are not paid, they have a right to assert a lien on funds owed to the party with whom they dealt. The lien generally attaches to any funds on the construction project owed to the nonpaying party. To exercise this right, the subcontractor or supplier must deliver a notice of claim of lien on funds to the party that owes funds to the party that has failed to pay the subcontractor or supplier. Upon its receipt, the party receiving the notice (i.e., the owner, contractor, subcontractor, or supplier) must withhold funds in the amount listed in the notice from further payment to the party that has failed to pay the subcontractor or supplier. If the recipient of a notice of a claim of lien on funds disregards the notice and pays the nonpaying party, the notice recipient may become personally liable for satisfaction of the lien up to the amount paid.

In addition to a lien on funds, first-, second-, and third-tier subcontractors and suppliers are entitled to claim additional liens by subrogation. Subrogation simply means stepping into the shoes of another. In the context of construction, subcontractors and suppliers that have not been paid are permitted to step into the shoes of the parties that dealt directly or more closely with the owner and, importantly, to assert all of their lien rights. This includes the ability, if available, to file a claim of lien against the owner's real property. However, if there is no lien right (such as where final payment has been made by an owner to a contractor or where there are no funds owed to a higher-tier subcontractor or supplier), then there can be no lien by subrogation.

Practical Implications of Construction Liens

The exercise of lien rights, in most instances, will delay payment and interfere with the progress of construction. In many cases, it will add unanticipated expense - thereby increasing the owner's cost while reducing the net amount received by a contractor, subcontractor, or supplier. Thus, lien rights should be exercised judiciously. In situations where liens become necessary, they should be used carefully and with attention to the time restrictions and other requirements of the lien statutes. This is an area where an ounce of prevention truly is worth a pound of cure for everyone involved in the process of improving privately-owned real property.

To learn more about your lien rights and obligations, contact Donalt J. Eglinton, Ryal W. Tayloe, or Kenneth R. Wooten.