SUBCONTRACTOR LIENS: WHAT EVERY HOMEOWNER SHOULD KNOW

Subcontractor Liens: What Every Homeowner Should Know

By Lisa Godfrey

Anyone who has contracted to build a custom home or undertaken a major home renovation knows that the majority of the work is usually not performed by a general contractor or his employees. In fact, most general contractors operate with relatively few employees and, instead, subcontract out a large percentage of the work. These subcontractors do not deal directly with the property owner but, instead, look to the general contractor to be paid. However, if the general contractor is unable or unwilling to pay the subcontractors, the result can impact the homeowner.

Under North Carolina law, a subcontractor has lien rights both against the funds owed to the general contractor and against the homeowner if the homeowner has not paid the general contractor in full. In order to preserve these rights, the subcontractor must serve a document known as a Notice of Claim of Lien. A Notice of Claim of Lien is different from a Claim of Lien. The Notice is served on the owner, general contractor, and sometimes the holder of the mortgage on the property to assert the rights of a subcontractor who has not been paid. Once an owner receives a Notice of Claim of Lien, he or she is under a statutory obligation to withhold from the general contractor funds sufficient to pay the lien. If a property owner pays a general contractor after receiving a Notice of Claim of Lien, a subcontractor can obtain a lien directly on the owner's property, just as if the subcontractor had dealt directly with the owner.

Even if funds are withheld, a subcontractor has a second option of obtaining a lien directly on the owner's property by way of subrogation. Subrogation means that the subcontractor steps into the shoes of the general contractor and inherits the general contractor's rights to a Claim of Lien on the property to the extent that funds are owed by the owner to the general contractor.

In order to preserve a subcontractor's direct lien rights, the subcontractor will file a Claim of Lien at the Clerk of Court's office in the county where the property is located. This Claim of Lien is part of the public record and can affect the property owner's ability to sell or mortgage the property as long as the Claim of Lien remains unsatisfied. The end result is that a homeowner may have a lien on his or her property from work done by a subcontractor with whom the owner has no direct contractual relationship.

There are several ways homeowners can protect themselves from subcontractor liens. One should always deal with a reputable and financially responsible general contractor. In addition, upon making a payment to a general contractor, the homeowner should demand a partial lien waiver from the general contractor in which the general contractor states -- under oath -- that all of his subcontractors have been paid for the work to date. A homeowner can also require the general contractor to provide partial lien waivers from the subcontractors who have been involved in the work on the job. If there is any doubt about the solvency of the general contractor or his intent to pay outstanding subcontractors' bills, progress payments can be issued in joint checks payable both to the subcontractor and the general contractor. In this way, the subcontractor will have to participate in the negotiation of the checks and can demand payment at the time the checks are endorsed.

With subcontractor liens, the adage "an ounce of prevention is worth a pound of cure" certainly applies. By a little foresight and attention to detail, a homeowner can be assured that the progress payments that he or she makes to the general contractor are properly applied to subcontractor bills and that, at the end of the job, there are no unpaid subcontractors or subcontractor liens. If, however, during the course of a construction project on your property, you receive a Claim of Lien or Notice of Claim of Lien from a subcontractor, it is important to obtain competent legal advice to avoid placing yourself and your property in jeopardy -- twice -- for the same work.

Lisa Godfrey is an attorney with Knox Law Center. She can be reached at 704-315-2363 or 866-704-9059 (Toll free) or lgodfrey@knoxlawcenter.com. You are invited to our ribbon cutting ceremony for our new Denver office on July 31 at 11:00 a.m. We are across from Advance Auto and next to Avason Dental at Highways 16/73 intersection. We would like to meet you and say hello.