Everything to Know About Filing a Mechanic’s Lien In North Carolina

A lien, sometimes referred to as a security interest, is an interest in real or personal property that secures the payment of a debt or the performance of an obligation. The most common examples of liens are mortgages (deeds of trust) on a home or a purchase money security interest in an automobile. In the typical case, the lender reserves a lien on the property being financed (whether a home, a car, or some other property), which allows the lender to foreclose its lien if the borrower defaults on the loan. If the borrower fails to pay, the lender can take actions to enforce its lien, sell the property subject to the lien, and use the proceeds to pay the debt owed to it by the borrower.[1]

In North Carolina, general contractors, subcontractors, and other suppliers may have lien rights available for construction projects. There are primarily two (2) types of mechanic’s liens available, both governed by Chapter 44A of the North Carolina General Statutes: liens upon real property, and liens upon funds. While both types of liens are designed to protect a supplier’s ability to get paid for work it performs on a construction project, the availability of each type of lien varies depending on the status of the party asserting the lien and certain facts and circumstances which may vary from project to project.

Eligibility for Filing a Lien

A mechanics’ lien in North Carolina is available to any person “who performs or furnishes labor or professional design or surveying services or furnishes materials or furnishes rental equipment pursuant to a contract, either express or implied, with the owner of real property for the making of an improvement thereon . . . .”[2]   This definition covers not only subcontractors who perform labor directly on the jobsite, but also design professionals like engineers and architects, material suppliers, and companies who rent equipment, many of whom might never actually visit the jobsite.

Understanding North Carolina’s Lien Laws

North Carolina provides two types of liens to an unpaid contractor on a construction project: a lien on real property and a lien on funds.  A lien on real property is available to the general contractor who contracts with the owner of the property for the project.[3]  Subcontractors of the general contractor may assert a lien through subrogation of the rights of the general contractor to the extent of the subcontractor’s claim.[4]  However, only first, second, and third-tier subcontractors may claim a lien on real property through subrogation—any more distant tier subcontractors are out of luck.[5]  Timing is critical when claiming a lien on real property—the claim of lien must be filed with the clerk within one hundred twenty (120) days of the last date the party asserting the lien furnished labor or materials to the jobsite.[6]  The lien secures the full amount owed to the contractor for the project, and can be enforced by having a court order the sale of the real property in order to satisfy the debt.[7]

A claim of lien upon funds is available to a first-tier subcontractor, and provides the first-tier subcontractor with a lien upon any funds owed by the owner of the project to the general contractor with whom the first-tier subcontractor contracted.[8]  A claim of lien upon funds is also available to second and third-tier subcontractors, who gain a lien against funds owed to the subcontractor with whom they contracted, as well as a lien on all funds owed to any senior subcontractors by way of subrogation.[9]  Fourth-tier and more remote subcontractors may only claim a lien upon funds owed to them by the party with whom they contracted–they are not entitled to a subrogation lien in funds owed to more senior subcontractors.[10]  The lien on funds is limited to the amount owed by the party against whom the lien is claimed.  For example, if a first-tier subcontractor is owed $20,000 by the general contractor for work performed, but the general contractor is only owed $5,000 more by the owner, the first-tier subcontractor’s lien on funds is limited to this $5,000 amount. However, if the owner, after having received notice of a claim of lien upon funds by a subcontractor, thereafter makes a payment to the general contractor, the owner can be held personally liable by the subcontractor for the full amount of any such wrongful payments.[11]

Steps to File A Lien in North Carolina

The steps required for filing a lien will vary based on the circumstances and the identity of the lien claimant.  For example, if the lien claimant is the general contractor, it will be concerned only with asserting a claim of lien on real property, and not a lien upon funds.  However, these are the generally-required steps in order to successfully assert and enforce a lien on real property:

First, the lien claimant must complete a notice of claim of lien on real property.  The information required to be provided in this form is set forth in N.C. Gen. Stat. § 44A-12(c).  Generally, the notice must include the name of the lien claimant, the name of the owner, the name of the general contractor, the names of any intervening subcontractors, the first and last date of furnishing, the amount owed, and a description of the real property on which the lien is claimed.

Second, the notice must be served on the owner.[12]  If the lien claimant is anyone other than the general contractor, the notice must also be served on each contractor through which subrogation is being asserted (for example, a third-tier subcontractor asserting a lien on real property would be required to serve the notice of claim of lien on real property on the owner, the general contractor, the first-tier subcontractor, and the second-tier subcontractor).[13]  Service of the notice may be made by personal delivery, delivery via first-class U.S. Mail, or delivery through an authorized delivery service such as Federal Express.[14]  Additionally, if the lien claimant is a second or third-tier subcontractor, it must ensure that the job is not subject to a filed notice of contract.[15]  If the job is subject to a filed notice of contract, the subcontractor must complete and submit a notice of subcontract form[16] to the owner or general contractor, otherwise it will be unable to claim a lien on real property via subrogation.[17]

Third, the notice must be filed with the clerk of court.[18]  The lien is not deemed perfected until it has been both served on all required parties and filed with the appropriate clerk of court.[19]  The lien is filed with the clerk of court for the county in which the real property at issue lies.[20]

Fourth, the lien claimant must file a lawsuit to enforce the lien.[21]  The suit must be filed within one hundred eighty (180) days of the last date the lien claimant furnished labor or materials to the jobsite.[22]  The suit may be filed in the county where the real property is located, but can be filed anywhere that venue is otherwise proper.[23]  In the event the suit to enforce the lien is filed in a county other than where the real property is located, the lien claimant must file a notice of lis pendens in the county in which the real property is located before the 180-day deadline in order to be entitled to sell the real property pursuant to its lien.[24]  The lien being prosecuted in the lawsuit will relate back to the first date the lien claimant furnished labor or materials to the site—thus, if the owner granted a mortgage on the property to a bank after the first date of furnishing but before the lien claimant files suit, the lien claimant’s lien will be senior to the bank’s mortgage.

Asserting a claim of lien upon funds is slightly different, since the notice of claim of lien upon funds is not filed with the court.[25]

First, the lien claimant must prepare the Notice of Claim of Lien Upon Funds.  There are two versions of this form set forth in N.C. Gen. Stat. § 44A-19(b) & (c)—one for first, second, and third-tier subcontractors, and another for fourth-tier or more remote subcontractors. 

Second, the lien claimant must serve the Notice of Claim of Lien Upon Funds upon the obligor.[26]  The notice may be served in any manner permitted by Rule 4 of the North Carolina Rules of Civil Procedure.[27] 

Third, the lien claimant should file suit against the counterparty who breached its contract, as well as the owner, general contractor, and any intervening subcontractors between the lien claimant and the general contractor.  Although there is no specific deadline for filing suit to enforce a claim of lien upon funds, in cases where a claim of lien upon funds is being asserted in tandem with a claim of lien on real property, the 180-day filing deadline for enforcing the claim of lien on real property will dictate the filing deadline for the suit.  In cases where there is no accompanying claim of lien on real property, the deadline is the ordinary statute of limitations applicable to breach of contract claims—three years for most contracts,[28] and four years for contracts for the sale of goods.[29]

Tips for a Successful Lien Filing

The most important aspect of successfully asserting and enforcing a claim of lien on real property is timing. The deadlines for serving and filing the notice (120 days from the date of last furnishing) and filing the lawsuit to enforce the lien (180 days from the date of last furnishing) are unyielding and inflexible, and important rights can be inadvertently lost if these deadlines are missed. 

Another important issue is documentation.  At the end of the day, a lawsuit to enforce a claim of lien on real property is a breach of contract dispute, and the burden is on the plaintiff (the lien claimant) to prove not only that its contract was breached, but also the amount of damages it is entitled to recover. Accordingly, good record keeping is critical to ensure that the lien claimant has ample documentary evidence to support its damages claim at trial.

Another commonly litigated issue is also reliant on good documentation—timing.  Consider, for example, an equipment rental company that rents a bulldozer, a telehandler, and other equipment to a subcontractor to work on a construction project. The subcontractor fails to pay and the rental company wants to assert a lien on the project to secure the unpaid bill.  Can the rental company prove that the equipment it rented to the subcontractor was actually used on the jobsite? How do we know the subcontractor didn’t just store the equipment in a garage or use it on a totally unrelated project?  One good practice in these scenarios is to require the subcontractor to identify the jobsite in the rental contract, and to require (as most contracts do) that the equipment be used only at that location unless otherwise approved in writing by the rental company.  Another solution is GPS tracking on leased equipment, which could enable the rental company to use technology to affirmatively prove where its equipment was located on each day at issue.  Finally, particularly for a longer lease, it is a good practice to have an agent of the rental company stop by the jobsite to check on the equipment, and to take pictures of the jobsite and equipment with time and date stamps, so that there can be no dispute that the equipment was in fact used on the jobsite at issue.

Common Mistakes to Avoid

As mentioned above, one common mistake to avoid is filing a notice of claim of lien upon funds. Unless the lien on funds is being asserted contemporaneously with a claim of lien on real property, it is not required to be filed with the court.

Another common mistake is missing a party required to be served with the notice of claim of lien on real property, which can jeopardize the lien claimant’s enforcement lawsuit since the lien is not perfected unless and until it has been properly served on all parties required to be served.  This is most often an issue with a lower-tier subcontractor who may have no idea who the general contractor was for the job.  It can also become an issue when general contractors or subcontractors are replaced midway through a job.  Prior to accepting any subcontract, the potential lien claimant should ensure that it understands not only the relative position of the company with whom it is contracting, but also the identify of the owner of the project, the general contractor, and any subcontractor between the potential lien claimant and general contractor.

Enforcing the Lien

As discussed above, the lien claimant must file a lawsuit to enforce its claim of lien on real property.  If the lien claimant successfully prosecutes its case (i.e., proves not only that it properly perfected its claim of lien, but also that it performed the work it claims and has not been paid the money it claims is owed), the Court can enter an order directing that the real property be sold to pay the lien claimant’s judgment.[30]  However, in reality this is rarely the outcome, because the owner or general contractor will typically “bond off” the lien long before the lawsuit is concluded (and often before the suit is even filed).

After being served with a notice of claim of lien on real property, the owner or general contractor may have the lien cancelled by filing a surety bond with the clerk of court in the court where the lien was filed.[31]  The surety bond must be in an amount equal to 1.25 times the amount of the lien claimant’s lien (so if the lien claimant alleges to be owed $100,000, the surety bond must be for at least $125,000).[32]  Once the clerk of court accepts the surety bond, the filed lien is cancelled, and can no longer be enforced against the real property.  Instead, the lien claimant may now look to the surety to recover its damages.

The Role of Legal Assistance

As this article makes clear, the mechanics’ lien process in North Carolina is somewhat complex, and can be complicated to navigate.  Moreover, this article provides only a very basic overview of mechanics’ liens in North Carolina, and does not address the additional complications that can be created by publicly-funded projects, lien agents, priority disputes between multiple competing lien claimants, and the typical counterclaims that owners or general contractors may assert against a lien claimant during the enforcement process.

This article provides some guidance and helpful steps for a prospective lien claimant.  However, the best step a lien claimant can take is to consult with experienced construction law attorneys as soon as a payment issue becomes apparent.  As explained above, many of the issues that arise with enforcing mechanics’ liens can be mitigated or avoided entirely by having experienced legal counsel guide the lien claimant through the lien enforcement process.

[1] Broadly speaking, there are three (3) issues that are relevant when dealing with liens: (1) Attachment (when is the lien created, how, and by whom?); (2) Perfection (which determines whether the lien has priority over other liens in the same property and whether it can be avoided under certain circumstances); and (3) Enforcement (which determines how the creditor must enforce its lien to get paid). While the mechanisms by which a lien attaches, is perfected, and is enforced vary widely based on the type of property serving as collateral and the type of loan or obligation it secures, this is a useful framework for organizing core concepts related to lien law generally, whether it be mortgages, security interests governed by Article 9 of the Uniform Commercial Code, pawns and other possessory liens, or mechanics’ liens (which are the subject of this article).

[2] N.C. Gen. Stat. § 44A-8.

[3] N.C. Gen. Stat. § 44A-8.

[4] N.C. Gen. Stat. § 44A-23(a) & (b).

[5] Assume Acme Corp. is hired as the general contractor, and it hires Beta Corp. to perform the rough sitework for the job.  Beta Corp. in turn hires Clearing Corp. to provide grading services, and Clearing Corp. hires Demolition, Inc. to provide dynamite and related supplies.  In this hypothetical, Acme Corp. is the general contractor, Beta is a first-tier subcontractor, Clearing Corp. is a second-tier subcontractor, and Demolition, Inc. is a third-tier subcontractor. If Demolition, Inc. contracted out some of its scope, that company would be a fourth-tier subcontractor and would not be entitled to claim a lien on real property through subrogation.

[6] N.C. Gen. Stat. § 44A-12(b).  Note however that a subcontractor making a claim of lien on real property through subrogation may use the last date of furnishing labor or materials by the general contractor if the general contractor’s last date of furnishing is after the subcontractor’s last date of furnishing.  See N.C. Gen. Stat. § 44A-23(d).

[7] N.C. Gen. Stat. § 44A-13(b).

[8] N.C. Gen. Stat. § 44A-18(a).

[9] N.C. Gen. Stat. § 44A-18(b) & (c).

[10] N.C. Gen. Stat. § 44A-18(d).

[11] N.C. Gen. Stat. § 44A-20(b).

[12] N.C. Gen. Stat. § 44A-11(a)(1).

[13] Id.

[14] N.C. Gen. Stat. § 44A-11(b).

[15] See N.C. Gen. Stat. § 44A-23(b)(2).

[16] The information required to be included in the notice of subcontract is found in N.C. Gen. Stat. § 44A-23(b)(2).

[17] N.C. Gen. Stat. § 44A-23(b)(1).

[18] N.C. Gen. Stat. § 44A-12(a).

[19] N.C. Gen. Stat. § 44A-11(a).

[20] N.C. Gen. Stat. § 44A-12(a).

[21]  N.C. Gen. Stat. § 44A-13.

[22] N.C. Gen. Stat. § 44A-13(a).

[23] N.C. Gen. Stat. § 44A-13(a).

[24] N.C. Gen. Stat. § 44A-13(c).

[25] N.C. Gen. Stat. § 44A-19(d).  However, an exception to this rule exists where the notice of claim of lien upon funds is being asserted contemporaneously with a notice of claim of lien on real property (which is required to be filed with the court), in which case both documents are filed. N.C. Gen. Stat. § 44A-19(e)(1).

[26] N.C. Gen. Stat. § 44A-19(d).  The “obligor” is the owner, contractor, or subcontractor who owes money to the lien claimant for the work performed.  N.C. Gen. Stat. § 44A-7(5).

[27] N.C. Gen. Stat. § 44A-19(d).

[28] N.C. Gen. Stat. § 1-52(1).

[29] N.C. Gen. Stat. § 25-2-725(1).

[30] N.C. Gen. Stat. § 44A-14(a).

[31] N.C. Gen. Stat. § 44A-16(a)(6).

[32] Id.