BEWARE THAT THE RECENT LIEN LAW CHANGES RELATING TO A DESIGNATION OF LIEN AGENT DOES NOT AFFECT THE NOTICE OF CONTRACT/SUBCONTRACT REQUIREMENTS

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Many contractors are under the false impression that the recent changes in North Carolina’s lien law have the same effect as filing and posting a Notice of Contract, which is to say that they believe that they are reducing the ability of a lower tiered subcontractor or supplier from successfully filing liens on a project.  This is simply not the case. Under the statutory scheme, N.C.G.S. §44A-23, a Notice of Contract is filed and posted by a General Contractor to protect against possible double payment arising out of payment to a First Tier Subcontractor, then payment to a lower tier Subcontractor for additional lien liability. This protection was adopted by the North Carolina General Assembly in response to Electric Supply Co. of Durham, Inc. v. Swain Elec. Co., Inc., 328 N.C. 651, 403 S.E.2d 291 (1991). In that case the Court found that a General Contractor could be required to pay twice for the same labor and materials furnished by a Second Tier Subcontractor under a previously paid First Tier Subcontractor.  The reasoning  was that a Second Tier Subcontractor could enforce the a subrogation claim of the General Contractor against the improved real property, even after the General Contractor previously paid the First Tier Subcontractor for the same labor and materials. The lien is limited up to the amount the Owner owes the General Contractor. In response to this harsh result the North Carolina General Assembly amended N.C.G.S. §44A-23 to provide a means to avoid double payment liability.

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Under the Notice of Contract provision, if the Contractor files a Notice of Contract within 30 days of obtaining the building permit, and posts the Notice adjacent to the building permit then the subrogated lien rights are terminated. However, the terminated lower tier lien right can be revived by the lower tier Subcontractor sending a “Notice of Subcontract” to the General Contractor. This doesn’t necessarily end the exercise, however. Once the Notice of Subcontract is received, the General Contractor can again terminate the Second Tiered Subcontractor’s lien rights by sending out notice of any payment made to the first tier Subcontractor to the lower tier Subcontractor who furnished a Notice of Subcontract. This notice of payment must be sent within five days of the payment, must include the amount of the payment, the date the payment was made, and the period for which the payment was made.

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