With the passing of the new Lien Law in North Carolina in 2012 and 2013, new issues continue to spring up. This is to be expected anytime a new law is passed. We are constantly fielding questions from clients regarding how the law is to be applied.
One question which has been more prevalent than others regards the “Subordination of Liens” form from the North Carolina Land Title Association and is dated March 2013. (It is referred to as Form No. 7, Potential Lien Claimant- Subordination of Lien Claims). Most typically, this form is being circulated to anyone who files a Notice to Lien Agent before the construction loan is finalized. Or, if there is some issue with lending on the real property, this form is being circulated to anyone who has provided labor and/or materials and/or provided Notice to the Lien Agent.
A request for subordination by the bank or title insurance company is common in many circumstances. However, there should be a valid reason for the request for subordination. Subordination is the process whereby one party is allowed to have a higher priority in potentially competing claims. Thus, the title insurance company and/or bank want to be ahead of any other potential claimant who has provided labor and/or materials.
The form which we have identified in this article in and of itself is not a problem. However, there is an indemnification clause in the form which could create an issue for a potential lien claimant. Likewise, we have not seen a fact pattern yet which makes sense for a potential lien claimant to agree to indemnify anyone in relationship to the subordination agreement. We have advised quite a few potential lien claimants to strike out this paragraph when signing the subordination agreement. Each situation can differ on the facts but we encourage suppliers of building products to carefully review the form and ask questions before signing it.
If you have any questions about this form or process, please feel free to contact us.