Tag Archives: leasehold liens

NCSA Legislative Committee Annual Report

The following is the Legislative Committee Annual Report as presented by Association Counsel Edward McNaughton at the NCSA Annual Business Meeting on June 18, 2014:

Legislative Committee 2013-2014 Summary Report

The NCSA Legislative Committee has been very busy over the last year, both in keeping the membership current with the recent changes to NC law, and in actively advocating for subcontractor rights with the state legislature in Raleigh.

The Legislative Committee monitored changes in statutes and case law for issues that would affect subcontractors and the construction industry, and kept the NCSA board and the membership up to date through regular presentations and Q&As at the monthly meeting. The changes discussed included:

1. Legislative:
a. Changes to the lien agent requirements for single-family residential property;
b. Expanded workers’ compensation liability for a subcontractor’s employees;
c. New e-verify requirements;
d. New underground utility damage prevention law.
2. Case Law:
a. Allowing the 6 year statute of repose overriding longer express warranty periods;
b. Elimination of the “open and obvious” defense to unsafe site conditions;
c. Allowing subsequent behavior to modify a construction contract, despite a written clause in the contract requiring all changes to be in writing;
d. Holding the director of a GC liable to a subcontractor for non-payment under a fiduciary duty to creditors, where “circumstances amounting to a winding up or dissolution” of the GC.

The biggest victory was NCSA’s advocating for subcontractors during the latest legislative changes to NC’s mechanics’ lien laws. Under current application of NC law, contractors do not have a lien on the actual real property when their contract was with a tenant. Two years ago, however, NC Court of Appeals Judge Sanford L. Steelman wrote in an case dismissing a subcontractor’s lien for work done for a terminated Section 8 housing developer that: “the present state of our law does not provide adequate protection to suppliers of labor and materials as envisioned by Article X, section 3 of the North Carolina Constitution” and that “the increasingly complex real estate arrangements now being used make it virtually impossible for a supplier of labor or materials to protect themselves under our lien laws.”

Fearing that this judicial observation could set a legal precedent for liens attaching to rental property, the NC Land Title Association lobbied the legislature to “clarify” the state’s mechanics lien laws to expressly exempt rental property from liens for work performed under a contract with a tenant.

NCSA became aware of the NCLTA’s proposed changes through its legal counsel and immediately reacted to protect subcontractors’ rights. NCSA published a detailed position paper on February 19, 2104, dubbing the issue the “Hidden Owner” and calling on the legislature to formally extend mechanics liens to rental property to satisfy contractors’ constitutional right to an “adequate lien.” This position paper was formally submitted to the assigned Legislative Research Commission, and copies were sent to various trade organizations and individuals. The “Hidden Owner” name was picked up by numerous blogs and by the NC Construction News editors.

Two delegations of NCSA members went to Raleigh, one in February and one in March, to participate in the Legislative Research Commission hearings on the proposed changes. NCSA’s attorney was one of the speakers the March meeting. While NCSA was ultimately unable to get the legislature to agree to formally extend contractor’s lien rights to rental property, it was instrumental in defeating both the NCLTA’s proposal, along with a second “compromise” proposal, that would have required contractors and subcontractors to give written notice to a landlord of any work being performed for a tenant, while still allow the landlord to avoid liability.

Moving forward, the Legislative Committee plans to continue monitoring legislative changes and case law, and to mobilize advocacy efforts as needed. Issues being considered as the membership continues to grow are establishing a PAC to actively advocate for subcontractor sights and interests, and hiring a Raleigh based lobbyist.

Leasehold Liens – A Coming Crisis to Subcontractors?

In North Carolina, in a tenant situation, common law limits the lien rights to the value of the leasehold, unless a connection to the landowner can be established. The NC Land Title Association (NCLTA) has proposed legislation in the current General Assembly short session to codify the common law. That, in itself, is not a bad thing. It’s the language in the changes that can cause the problem.

In effect, if you work for a tenant, you only have rights to lien the leasehold, that is the lease itself and the property of the tenant. In an ongoing business, there is value there. But, most commercial leases in NC have a clause that if the landlord cancels the lease for cause, such as non-payment of rent, all of the improvements become the property of the landlord. Some leases even contain a clause that a lien filed on the leasehold can trigger cancellation. In those cases there is no value remaining on the leasehold to collect against.

I attended a stakeholders meeting this past week at the Legislative Office Building in Raleigh. What I perceived is a lack of understanding as to the extent of leaseholds in commercial construction. The conversation would inevitably revert back to an extreme example of someone’s mother’s rental property where the tenant build a swimming pool and the contractor put a lien on his mother’s house. This is not the issue that subcontractors face. today.

When the facilitator posed the question, “How big a problem is this, really?” I spoke up and said that from the subcontractors’ point of view, this as a tremendous risk. I estimated that up to 90% of the work we do in commercial contracting involves a leasehold of some description. This can be as small as a retail tenant in a strip center to a multi-story office building being built by a developer for a single tenant. There are hidden owners like pension funds and real estate investment trusts that work through management companies. I argued for transparency up front so that the subcontractor can assess the risk before accepting the contract.

There were a couple of minor positives that came from the meeting. The study committee agreed to suggest to the legislative subcommittee that, in regards to leasehold liens, they add wording to separate commercial construction from single and two-family residential construction and to insert wording in the tenant code to make it against public policy and unenforceable for a landlord to cancel a lease because of a lien being filed.

Because a consensus of the stakeholders could not be reached, most of the NCLTA’s proposed changes were tabled until next year’s session to enable them to come up with a better way to explain the issue. I agree with the NCSA chapter attorney, Edward “Ned” McNaughton that we need to get ready and have our own legislative proposal prepared to present to next year’s session as an alternative to the NCLTA proposal.

There are even scarier things in the NCLTA’s proposed legislation, including the subcontractor’s right to a lien on real estate being subrogated (cut-off) by the general contractor’s lien waiver. As Ned has said on numerous occasions, “The title company gets paid to take risks, the subcontractor takes risks to get paid.” Much of what is contained in the proposed lien law revisions creates impediments to the subcontractors’ right to payment. It’s time for subcontractors to get involved.

The Case of the Hidden Owner

If you are a Contractor or Subcontractor, at some time or other you will be doing business with a tenant, or a Contractor working for a tenant. If something happens and you do not get paid, don’t think the NC Lien Laws are going to help you.

The idea of a mechanics lien is written into the Constitution of the State of North Carolina. The Constitution provides that state law provide adequate protection to suppliers of labor and materials. When Thomas Jefferson first envisioned the mechanics lien and wrote it into the Virginia Constitution, things were pretty simple. If a carpenter did work on a man’s house and did not get paid, he could claim a lien against the house to enforce payment. Things are more complicated now. Owners can be pretty nebulous. The owner may be a REIT or an insurance company or a pension fund. You may be dealing with an Agent or a Management Company and you may only know the Owner by an entity formed solely for a single project, something like ABC123, LP.

Under current NC Lien Law, as adjudicated in Pete Wall Plumbing Co. v Sandra Anderson Builders, Inc. (2011), the mechanics lien can only be enforced against the leasehold. Under the standard lease agreement used in North Carolina, if a tenant defaults on a lease or the owner terminates a lease for cause, all improvements and fixtures become the property of the owner. At that point, there is absolutely no value to the mechanics lien.

In his opinion in the Pete Wall case, judge Steelman wrote:  

“I am concerned that the present state of our law does not provide adequate protection to suppliers of labor and materials as envisioned by Article X, section 3 of the North Carolina Constitution. In addition, the increasingly complex real estate arrangements now being used make it virtually impossible for a supplier of labor or materials to protect themselves under our lien laws.”

The legislature re-wrote the statutes to protect the Title companies against “hidden liens.” Now is the time for the legislature to correct the problem that affects the very people lien laws are supposed to protect.

The North Carolina Subcontractors Alliance has produced a position paper that will be presented to the legislative study committee that will meet on March 3, 2014. Hopefully, the law can be corrected and brought into compliance with the NC Constitution. The position paper can be read or downloaded from the NCSA’s website, http://ncsubcontractors.com/wp-content/uploads/2014/02/NCSA-Position-Paper-Leasehold-Liens-2-19-14.pdf