Construction and Real Estate Industry Clients Take Note: Modifications of Chapter 44A Materialman’s Lien Law Are Being Proposed

The North Carolina Land Title Association, the state association of title insurance companies, is proposing new legislation to change the existing lien statutes within Chapter 44A. Their proposed legislation seeks to fix what some consider to be the “hidden” mechanic’s lien problem, where a purchaser for value closes on his property and receives title insurance to guarantee clear title from liens, only to have a contractor later file a lien which relates back to a date prior to the purchaser’s date of purchase. The effect of the relation back provision within the lien law is that it gives priority in the property to an unpaid contractor’s interest over that of a homeowner provided the contractor’s first date of furnishing service or materials to the property preceded the date of purchase of the property by the homeowner. It is therefore regarded as a powerful tool for contractors. Because contractors have 120 days from the date of last furnishing of materials or services to file a lien, neither the purchasing homeowners or the title insurance company insuring title for those homeowners may be aware of the fact that the lien exists at the time of closing. The title insurance companies’ argument is that they cannot insure title against a lien that is not in existence at the time the coverage is made.

Specifically, the title insurance companies are proposing to amend N.C.G.S. § 44A-10 to provide that liens arising under §§ 44A-10 and 44A-23 shall not be effective against purchasers for a valuable consideration. “Purchasers for a valuable consideration” include trustees under deeds of trust and mortgagees under mortgages which secure indebtedness, whose interest has been registered in the office of the register of deeds of the county or counties in which the real property is located after the time of the first furnishing of labor or materials to the site of the improvement but prior in time to the filing of the claim of lien as provided for in N.C.G.S. § 44A-12. The proposed changes also include changing the punishment level for providing a false lien wavier to a felony, rather than a misdemeanor.

If the proposed changes become law, a materialman’s lien will only be enforceable against subsequent purchasers for value or lenders if the lien is filed prior to the closing date. This means that contractors would have to file liens very early, perhaps in some cases, prior to the time their invoices became due. The owner developer would also be forced to pay out more funds early in the project to minimize the risk of the early lien filings.

The economic downturn has forced the issues surrounding the lien statutes to a head, as title insurance companies, lenders, and contractors jockey for position. As a result, what were formerly regarded as disputes with the project developer are now affecting subsequent purchasers and their title insurance companies. Because the lien statutes affect the rights of so many, this proposed modification has already become a hot topic, with members of the construction industry lobbying against the modification. Regardless of your position, it is important to stay apprised of this proposed legislation, as various industries and groups seek changes to help them during this time.