A nonsensical system for mechanics lien filing currently exists in North Carolina: the State does not permit (absent certain circumstances) the filing of a mechanics lien by anyone without a direct contract with the owner. However, the State does permit mechanics liens by subcontractors, suppliers, etc., but only requires that the construction lien be served, not filed! These “hidden” liens are provided priority over any subsequent purchasers and lenders. It’s extraordinary. The North Carolina mechanics lien law appears to be in need of some revision.One of the industries hit hard by these secret North Carolina mechanics lien filings is the title insurance industry. Generally, before a closing, the buyer hires a title company to make sure they are getting the property free and clear of any claims to it. Well, the title company has a problem managing its risk if North Carolina doesn’t require people with a claim to the property to record their claim of lien. As a result, title companies are refusing to issue title that covers North Carolina mechanics liens. This law only hurts owners, potential buyers, and could hurt the economy of North Carolina until it changes its law to require all lienors to file North Carolina mechanics liens with a county recorder.
A copy of one title company’s open letter is below:
An Open Letter to Approved Attorneys of Chicago Title, Commonwealth Land Title, and Fidelity National Title
May 10, 2012
Dear Approved Attorney:
Chicago Title, Commonwealth Land Title, and Fidelity National Title announce that we will be curtailing mechanics’ and materialmen’s lien coverage in situations posing a significant risk of broken priority under applicable NC law at the time of their closing, effective for commitments issued after Friday, June 15, 2012.
Historically, North Carolinians could be assured they had some of the lowest rates, the lowest closing costs and the lowest claims losses in the Country, — but no longer. Unfortunately, in recent years, we have paid increasing and significant losses from mechanics’ lien coverage in North Carolina, creating a significantly higher claims ratio than the national average. The claims submissions continue unabated in the current market.
To address this problem, for the past several years, our companies and others have made extensive efforts, negotiating in good faith on a multitude of proposals and investing substantial amounts of time in attempts to create a legislative framework whereby innocent purchasers and lenders could be protected by law. Our goal was to provide protection for buyers purchasing and lenders extending loans on properties with recent or contemplated construction.
Unfortunately, thus far, our attempts have been thwarted or ignored. Unless and until this priority protection for these innocent parties under the law is provided, the risk is uncontrollable and unacceptable.
Situations affected will include commercial and residential properties with recent construction or construction loans or both, i.e. those for which potential lien claimants may have the ability to file timely lien claims under N.C.G.S. Chapter 44A, Article 2, and for which the proposed purchaser and/or lender cannot obtain legal priority of record over those potential liens not yet filed at time of closing. These are typically referred to as “broken priority” situations because priority cannot be assured at law and of record.
We recognize that, due to current law, this will have a significant impact on:
- Owners who are not protected by the current law and who may be unable to obtain this protection on new construction, residential or commercial
- Lenders who are similarly unprotected by the current law and may be unwilling to provide loans for construction on or purchase of these properties without this coverage
- Owner-builders who may be unable to provide assurance of the coverage to construction lenders, purchasers or their lenders
- Contractors and suppliers who may no longer be able to assume title insurance policy coverage is available if they are not paid by the appropriate party with whom they contracted
Attorneys representing all of the above, whether in closing transactions or mechanics’ lien litigation
We have negotiated in good faith for a reasonable solution to this “broken priority” or “hidden lien” problem in North Carolina in the hopes of avoiding this eventuality. We continue to stand ready to participate in any constructive meaningful negotiations to that end. However, because no such solution has been reached and there appears to be no prospect of a solution in the near future, we are no longer in a position to provide this coverage with no means of effectively and reliably assessing and managing the risk, for ourselves or our insureds. We would be remiss in our fiscal responsibilities to all of our insureds to continue to provide this coverage in these high risk situations.
We have negotiated in good faith for a reasonable solution to this “broken priority” or “hidden lien” problem in North Carolina in the hopes of avoiding this eventuality. We continue to stand ready to participate in any constructive meaningful negotiations to that end. However, because no such solution has been reached and there appears to be no prospect of a solution in the near future, we are no longer in a position to provide this coverage with no means of effectively and reliably assessing and managing the risk, for ourselves or our insureds. We would be remiss in our fiscal responsibilities to all of our insureds to continue to provide this coverage in these high risk situations.
Please feel free to contact your local Chicago Title, Commonwealth Land Title, or Fidelity National Title counsel to discuss any questions.