Securing and enforcing your lien rights can be tricky. There are numerous notice, timing, and other requirements that must be met. However, one of the most fundamental aspects of mechanics liens is determining whether you even have the right to file a lien in the first place. Is the work subject to lien rights? Did you provide services to the owner of the property? These seemingly simple questions aren’t always easily answered. In a case out of North Carolina, an architect’s lien claim was denied because they contracted with a prospective owner…whose purchase never went through.
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North Carolina mechanics lien rights
“Any person who performs or furnishes labor or professional design… services… pursuant to a contract, either express or implied, with the owner of real property for the making of an improvement thereon shall… have a right to file a claim of lien on the real property to secure payment of all debts owing for labor done or professional design or surveying services or material furnished or equipment rented pursuant to the contract.”
In short, under NC mechanics lien laws, parties who improve the property with the authorization of the owner of the property generally have the right to file a mechanics lien. A North Carolina Court of Appeals decision helped to clarify the bounds of this protection for those contracting with prospective purchasers of real estate.
Prospective buyer hires architect for design work
The case in question is Davis & Taft Architecture, P.A. v. DDR-Shadowline, LLC
- Owner: Shadowline Partners, LLC (Shadowline)
- Potential purchasers: DDR-Shadowline, LLC (DDR)
- Architect: Davis & Taft Architecture, P.A. (Davis)
Shadowline owned property that it planned to sell for development as a student housing complex. They had two potential buyers interested in purchasing and developing the property, one of which was DDR. In anticipation of closing the deal, DDR hired Davis to do architectural design work on the planned complex. Davis began work on designs and schematics. At the end of the first month of work, DDR paid the first installment.
Sale of the property falls through
In a slightly convoluted story, the property was eventually sold to other interested company. The purchasing company then transferred their interest to DDR, but then DDR failed to close on the deal. At this point, Davis had performed around $230K worth of design services, $80K of which was still unpaid by DDR.
In response to this, Davis filed a mechanics lien against the property. At the time of the lien filing, Shadowline – the original owner – still owned the property. Davis filed an enforcement action, but the mechanics lien claim was dismissed by the Court. Davis appealed.
Appeals court upholds the lien dismissal
Shadowline argued that Davis didn’t contract with the “owner” of the property under the mechanics lien statute cited above. Therefore, they didn’t have a valid mechanics lien claim. Davis argued that they furnished professional services in accordance with the agreement for the purchase and sale of the real property. To determine the validity of these arguments, the court focused on the definitions of the terms “owner” and “improve.”
These terms are defined under N.C. Gen Stat. §44A. These provisions define an “owner” as a person who has an interest in the real property improved and for whom an improvement to be made. While the statute defines “improve” as work to “build, effect, alter, repair, or demolish any improvement.” This definition entails some actual work on the property.
Under these definitions, the Court determined that the services provided were in fact, not covered by mechanics lien protections.
Davis’ contract for design services was with a prospective buyer, and not the actual “owner” of the property at issue. Furthermore, the designs were never actually used to “improve” the property. Without work that directly impacts the property in question, there has been no improvement that would make the real estate the proper subject of a lien claim.
The challenge of working for a prospective owner
This is a lesson for those that provide a design or any other pre-construction services. There are certain inherent risks of contracting with potential future property owners. For the purposes of mechanics lien rights, you’ll need to be sure that whoever hires you actually owns the property. If they are a prospective purchaser, and the project under the contract never actually occurs, there won’t be any grounds for a mechanics lien claim.
In this case, architectural design for a prospective buyer didn’t count as improvements to the owner’s property. Under these circumstances, the recovery of non-payment will need to be based on other claims, such as a breach of contract or unjust enrichment.