Construction professionals at work

An interesting article I read recently at highlights a recent decision by the North Carolina Court of Appeals (“court of appeals”).   In  Ramey Kemp & Associates, Inc. v. Richmond Hills Residential Partners, LLC et al., the NC court took a look at the mechanic’s lien rights of design professionals.

The Case

The design professional at the center of the case was an engineer who contracted to perform traffic engineering work for a large development. The engineer began work on the project in 2005, but the project ground to a halt in 2009 due to lack of funds. In fact, permits that authorized the construction of access driveways at the site were voided by the North Carolina Department of Transportation due to the lack of activity.  In February 2010, the property owner requested the engineer to provide a status report detailing engineering issues that still needed to be addressed in order to market the development to a potential purchaser. The status report would be the last work performed on the project by the engineer. When the engineer remained unpaid for the status report and some previous project work, he filed a mechanic’s lien against the property in which he claimed the date of last work was February 24, 2010, the date of the status report.

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As a result of the property owner’s default on obligations to the lender, the lender foreclosed on the property, purchased the property at the foreclosure sale, and subsequently transferred the property to a third party.  The engineer sued to enforce his mechanic’s lien against the subsequent purchaser, arguing that the bank and the third party purchaser had purchased the property subject to the engineer’s valid mechanic’s lien. The bank and the subsequent third party purchaser disagreed.

The Outcome

While the bank and new owner argued that the date of the status report could not be used as the date of the engineer’s last performance, and therefore the mechanic’s lien should be extinguished as untimely, the trial court and the court of appeals sided with the engineer. The court of appeals based the decision, at least in part, on an affidavit filed by the engineer in the trial court.  In agreeing with the engineer’s position, the court of appeals determined that engineers’ contracts of this sort generally and routinely span months or years with large gaps between work, that work spread out in this manner (at least in this case) was work performed under a single contract (not multiple contracts), and the at the status report in February 2010 was the type of work to be performed under the contract between the parties.  Also, the court of appeals decided that the N.C. Gen. Stat. 44A-7 definition of “improve” for purposes of mechanic’s lien validity, included design or other professional services like those furnished by architects, engineers, and the like.

One of the judges on the court of appeals disagreed with the majority’s reliance on the “self-serving” affidavit of the engineer in their decision that the work performed by the engineer over the entire project period was performed under one contract, and felt that some evidence existed to support the defendants’ theory that the work was actually performed under two contracts, the result of which would be that the lien would be untimely for part of the amount claimed to be due. The dissenting opinion opens the door for the defendants’ to request an appeal to the North Carolina Supreme Court.

What Does It Mean?

The article I saw at pointed out a couple of important takeaways from this decision.  Namely, 1) design professionals, including architects design professionals, including architects and engineers have broad mechanic’s lien rights in North Carolina[/quote] and engineers have broad mechanic’s lien rights in North Carolina, (and even services like giving a status update report may be lienable), and 2) lien rights in such circumstances may be dependent upon whether the services were performed under one contract or multiple contracts.  Clearly, as an architect or engineer, one would want to make sure that the services are provided under one over-arching contract (with change orders as needed) to take full advantage of this and the “relation back” of the lien to the start of the project. It seems, then, that at least in North Carolina, there does not need to be any improvement in a piece of property for a design professional to have a valid mechanic’s lien against that property – there only needs to be the intention of improving the property.

It seems like this decision is fairly consistent with established mechanic’s lien rules with respect to the one contract and the relation back to the beginning of work.  While whether or not the work was performed under one contract can be a fact determination, but if it is clear that the work was indeed performed under one contract it makes no difference as to whether the work was spread out over many months or years.  The mechanic’s lien claimant is entitled to lien for the value of the work furnished to the property, and the time in which the lien must be filed does not start to count down until the last work under the contract is finished. This result is not unexpected.

What is somewhat unexpected, although very encouraging to “design professionals” in North Carolina, is the determination that the February status report constituted lienable work.  While design professionals are entitled to mechanic’s lien protection in North Carolina, and many other states, this interpretation of what constitutes an improvement for mechanic’s lien purposes is fairly broad.  The common rule in many states, is that design professionals are entitled to mechanic’s lien protection for their work, but only if it is actually incorporated into the improvement, i.e. an architect would be able to lien for the cost of his work designing a structure if the structure he designed was actually constructed, or in this case, if the engineering work left unfinished and outlined in the report was undertaken. This goes along with the general rule that there must be a permanent physical improvement to the site in order to claim a mechanic’s lien.

The ability to lien for merely providing a status report is at least partially contradictory to this notion. While in this case it is unclear whether the engineer would have been able to claim a mechanic’s lien if he had not done previous work on the project as well, it appears likely.  This is an interesting result.  It seems, then, that at least in North Carolina, there does not need to be any improvement in a piece of property for a design professional to have a valid mechanic’s lien against that property – there only needs to be the intention of improving the property. This is something that bears watching.