For several years, the title insurance industry unsuccessfully led the charge to overhaul North Carolina mechanics’ lien law to eliminate or substantially reduce the number of ‘hidden liens’ – liens that are filed post-conveyance but retain a pre-transfer priority position. Such efforts intensified in 2008, when the housing market collapse left many builders and developers unable to pay their suppliers and contractors. They, in turn, filed an unprecedented number of mechanics’ liens. After suffering multi-million dollar losses, title insurers directly or impliedly threatened to stop covering mechanics’ liens. If followed through, this would have made the traditional financing of newly completed construction projects all but impossible. After intense debate and lobbying efforts, NC Session Law 2012-158 was signed into law, substantially modifying Chapter 44A of the North Carolina General Statutes and creating the Mechanics’ Lien Agent.
The most dramatic aspects of SL 2012-158, including the requirement of an appointed Mechanics’ Lien Agent, become effective April 1, 2013. Only licensed title insurance underwriters and agencies are eligible to be mechanics’ lien agents and are paid a relatively nominal fee to serve this administrative function. All of the major underwriters in North Carolina have worked cooperatively to create the LiensNC.com website application system and to have a common contact point for the paper and facsimile submission of liens. As of the date of this alert, the website is currently under construction, but we have received multiple assurances from the title insurance industry that it will be fully operational April 1, 2013. Promoters of the LiensNC.com website promise that it will be user-friendly and will be compatible with all browsers and major mobile devices.
SL 2012-158 is the most substantial change to mechanics’ lien law in decades, and the technical corrections bill passed only a few days prior to its implementation. Lawyers Mutual has been anxiously following the developments and studying the potential impact on our insureds, particularly the construction bar and real estate closing attorneys. Title insurers and industry advocacy groups have canvassed the state offering half-day seminars on the new law. All real property attorneys should attend at least one of these sessions prior to certifying title to any real property that has been recently improved. The format of this alert makes it impossible to cover all of the code changes to Chapter 44A or to fully discuss the expected logistics and systems that are being developed to implement the legislation. We would like to share a few concerns and suggest a few procedures that we recommend to reduce the likelihood of a malpractice claim.
For transactional attorneys, two additional steps are now added to the title search process. The LiensNC.com website will need to be searched prior to the submission of a preliminary opinion and then updated prior to recording. Every step in the closing process creates the possibility of oversight or error, and we are encouraging our insureds to become familiar with the website once it goes live to reduce the risk. Insureds are also encouraged to make sure their office procedures and checklists are modified to include searching and updating from the new website and all paralegals, support staff, title searchers and outside vendors are aware of the new system. We strongly recommend searchers capture a screen shot of the search results to provide evidence should the website later experience technical problems.
While all the major title insurers in North Carolina have cooperated in creation of the website application system, we understand that each underwriter will have different requirements in its title commitments which must be specifically followed to prevent the insertion of exceptions eliminating or diminishing mechanics’ lien coverage. It is also possible underwriters working through multiple agencies will have varying requirements depending upon the title agency issuing the paper. The need to read and follow the commitment requirements in detail cannot be overemphasized. Practitioners may recall the summer of 2008 when all title insurers in North Carolina started requiring long form lien waivers for all new construction transactions. Many experienced attorneys failed to follow the new commitment requirements, which resulted in Lawyers Mutual paying out several claims when mechanics’ liens were filed and the title policy excepted coverage.
For members of the construction bar, we strongly encourage attorneys to discuss with their clients the changes in the law and determine whether the Notice to the Mechanics’ Lien Agent is to be filed by the attorney or will be handled by the contractor/materialman in-house.
It is possible that additional Mechanics’ Lien Agents will enter the market that will not use the LiensNC.com website. Should new agents come forward, systems will need further review and special care will need to be used to make sure the correct database is searched. Lawyers Mutual will continue to monitor the implementation of SL 2012-158 and provide feedback to our insureds as necessary.