Condominium Defects in the Carolinas

Condominium Defects in the Carolinas800px-Block_65_on_Hashima_Island

 

By: Gregory L. Shelton
Horack, Talley, Pharr & Lowndes, P.A.

 

Water Will Find A Way

Condominium owners associations (COAs) are usually responsible for maintaining and repairing roofs, exterior walls, and other building envelope components. If the building envelope has not been designed or constructed properly, water will find its way into the building and attack the structure itself. The resulting decay, hidden between the exterior and interior walls, may go undetected for years.

Modern condominium buildings are particularly susceptible to water intrusion. Condominiums have become more complicated to satisfy the aesthetic demands of the market. More corners, terminations, railings, and roof lines mean more potential entry points for water. If the construction workers who install the sheathing, building wrap, windows, flashing, and masonry are not properly trained, or fail to follow the manufacturer’s instructions to the letter, water may become trapped inside the building envelope with nowhere to go. And if the developer is singularly focused on selling units, and views construction as an opportunity to reduce costs, then the fox truly is watching the hen-house. The fox knows he won’t be hanging around for long.

Tick Tock, Part I: The Statute of Limitations

COAs should not automatically assume that the architect, developer, contractor, or subcontractors will be held accountable for their acts of negligence. Under South Carolina law, the statute of limitations for construction defects is either two or three years, depending on the nature of the claim. The clock starts running when the COA discovered or reasonably should have discovered the defect. In North Carolina, the limitations period is three years, but the clock cannot start to run until the developer turns over control of the COA to the unit owners.

When the statute of limitations starts to run is often disputed in court. I once litigated a case where the COA discovered water intrusion in the clubhouse after a resident tripped and fell through the drywall. A gust of warm moldy air filled the room. Upon further inspection, the COA discovered damage to the structure itself and took immediate action.

Tick Tock, Part II: The Statute of Repose

Unlike the statute of limitations, the statute of repose starts to run at project completion. In North Carolina, the statute of repose is six years from completion. In South Carolina, the statute of repose is either eight or thirteen years from completion. The statute of repose runs without regard to the COA’s discovery of the defect. If the plaintiff proves that the damage results from willful or wanton conduct, the statute of repose will not apply to bar the claim.

Out of Sight + Out of Mind = Out of Money

COAs ignore construction defects at their own peril. The costs to repair structural damage, replace the building envelope, and remove mold can easily run into the millions of dollars. If the COA fails to recover costs from the negligent parties, the unit owners will ultimately bear the costs. COAs should consider hiring a consultant to inspect the building envelope and other components of the building. If negligence is found, the COA should immediately consult a lawyer to decide the next step.

Photo courtesy of Wikicommons (Attrib. Jordy Meow)

 

NC Law, SC Law , , , , , , ,

The Lien Agent: What the Subcontractor Needs to Know

Labyrinth, Boulogne-sur-mer

Labyrinth, Boulogne-sur-mer


The Lien Agent: What the Subcontractor Needs to Know

 

 

By: Gregory L. Shelton
Horack, Talley, Pharr & Lowndes, P.A.

North Carolina’s new lien agent law takes effect on April 1, 2013. Having already covered what the owner needs to know, we now turn to the subcontractors and suppliers who will be present on the project site. (Suppliers not present on the project site will be covered in a later post.)

The lien agent provisions constitute a new layer of procedures under chapter 44A. Thus, the existing procedural steps and methods (notice of contract, notice of subcontract, notice of claim of lien upon funds, and claim of lien upon real property) should continue to be observed by everyone.

Step One:  Obtain contact information of lien agent

Beginning April 1, owners must designate a lien agent for most residential and commercial construction projects where the cost of the improvements equals or exceeds $30,000. If the owner follows the law, the identity and contact information of the lien agent will be located within the body of the building permit or on a sign posted conspicuously and continuously on the project.

If the owner has not posted contact information of the lien agent at the project site as required, you should send the owner a written request for the lien agent’s contact information. The owner is required to provide you with the lien agent’s contact information within seven (7) days of receiving your written request. The owner must provide you with the contact information using the same method that you used in making the request. For example, if you fax a request to the owner, the owner must fax the lien agent contact information to you.

Step Two: Serve your “Notice to Lien Agent” on the project’s lien agent

To fully protect your lien rights, you must send your “Notice to Lien Agent” to the lien agent chosen by the owner within 15 days of your first furnishing of labor or materals. If you forget or otherwise fail to send your “Notice to Lien Agent” within 15 days, don’t panic. Your lien rights will remain intact as long as you send your “Notice to Lien Agent” before the property is sold or refinanced. Think of the 15 day window as a safe harbor where your lien rights are protected even if the project is sold or refinanced before you give your Notice to Lien Agent. The 15 day safe harbor will be particularly helpful to trades who begin work at the tail end of the project.

A.   For projects where lien agent is designated through www.LiensNC.Com

In most cases, the owner will make things easy on itself and select the lien agent through www.LiensNC.com, a website established by members of title insurance industry. This website is an efficient and relatively easy way for everyone to abide by the lien agent requirements.

If the owner has designated the lien agent through the lien agent website www.LiensNC.Com (site will go online on April 1, 2013), navigate to the “Notice to Lien Agent Link” and fill in the information requested. If your cell phone has a QR app, you can navigate directly to the project using the QR code on the lien agent information posted by the owner. If no QR code is posted, write down or take a photograph of the lien agent information, log on to www.LiensNC.com, and provide your information.

You will want proof that you provided your “Notice to Lien Agent” information on the website. Print out and save the receipt provided by the website.

B.   For projects where lien agent is not designated through the website

1. Preparation of Notice to Lien Agent form

If the owner has not obtained a lien agent through www.LiensNC.com, you must send the ”Notice to Lien Agent” to the lien agent by must include:

1.     Name, mailing address, telephone number, fax number  (if available), email address (if available), and website address (if available).

2.     Name of party with whom contracted.

3.    Description of the real property improved; and

4.     Notice of rights’ statement.

A form “Notice to Lien Agent” is available at my firm’s website by clicking here. (Users of this form are responsible for the accuracy and completeness of filings in accordance with article 2 of chapter 44A of the North Carolina General Statutes. Seek legal advice from a licensed attorney.)

2. Proper service (delivery) of Notice to Lien Agent form

Once you’ve prepared and signed the Notice to Lien Agent form, you must serve it on lien agent by one of the following methods of service:

  • Certified mail, return receipt requested
  • Signature confirmation as provided by US Postal Service
  • Physical delivery and obtaining a delivery receipt from the lien agent
  • Fax with fax confirmation page
  • Depositing with a designated delivery service such as FedEx, UPS, DHL
  • Electronic mail (email), with a delivery receipt

Each of these statutory methods of service contemplate that the subcontractor will obtain some form of proof of delivery, thus eliminating situations where the lien agent claims that it never received the “Notice to Lien Agent.”

Finally, if you submitted your information through www.LiensNC.com, service on the lien agent is automatic. Thus, subcontractors using www.LiensNC.com don’t have to type up and send a “Notice to Lien Agent” by the other methods listed above (mail, fax, UPS, etc.).

Step Three: Provide off-site lower tier subcontractor or supplier with lien agent contact information

General contractors and subcontractors often enter agreements with entities that will furnish labor or materials (usually materials) to the project but who will never step foot on the project site to see the building permit or lien agent contact information. To solve this conundrum, the new lien agent law requires the on-site contractor or subcontractor to provide its off-site lower tier suppliers written notice of the lien contact information within three business days of contracting with that lower tier. When possible or economically feasible, prudent suppliers should request the lien agent information when the purchase order is issued.

wikicommons photo attribution: Marianna

 

 

 

NC Law , , , , , , , , ,

The Lien Agent: What the Owner Needs to Know

 

Hedge Maze in Giverny

Hedge Maze in Giverny

The Lien Agent: What the Owner Needs to Know

 

By: Gregory L. Shelton
Horack, Talley, Pharr & Lowndes, P.A.

The new lien agent law takes effect on April 1, 2013.  This is the first of a series of posts designed to give construction industry participants in North Carolina a succinct step-by-step guide to the lien agent provisions.

The text, purpose, and history of the lien agent provisions have been discussed in great detail in Construction Law Carolinas and in other publications and blogs, so I won’t repeat that information here.

The lien agent provisions constitute a new layer of procedures under chapter 44A. Thus, the existing procedural steps and methods (notice of contract, notice of subcontract, notice of claim of lien upon funds, and claim of lien upon real property) should continue to be observed by everyone.

We start this series from the owner’s standpoint, because the owner is responsible for kicking off the lien agent process.

Step One: Determine whether you need a lien agent.

You are not required to appoint a lien agent if:

1.     The cost of the undertaking (project) is less than thirty thousand dollars        ($30,000) at the time the original building permit is issued;  or

2.     The owner is making improvements to an existing single-family residential dwelling unit that is used by the owner as a residence.

To reiterate, if either of these circumstances applies, you need not appoint a lien agent.

Step Two: Appoint a lien agent before contracting for the work.

If the exceptions set forth in Step One above do not apply, you are required to appoint a lien agent “no later than the time the owner first contracts with any person to improve the real property.” The lien agent requirement applies to residential and commercial construction projects. To appoint a lien agent, follow these simple steps:

1.     Visit www.LiensNC.com and follow the prompts to log your project information.

2.     Select a lien agent from the list provided on the website. You are welcome to select any lien agent you want. If you aren’t sure which lien agent to select, keep in mind that all notices go to the same office in Raleigh and will be handled by the same staff.

3.     Post the building permit at the project site conspicuously (easy to find) and continuously during construction.

4.     If no building permit is required for the project, print the “Appointment of Lien Agent” form and post a copy of this document, which contains the contact information for the lien agent, on a sign conspicuously and continuously on the property from the beginning to the end of construction.

A preview of this process is available by visiting www.liensncllc.com. The www.LiensNC.com site goes online on April 1, 2013.

In lieu of the straightforward and efficient website, you may appoint your lien agent using the time-consuming and tedious process of drafting a formal appointment of lien agent, visiting the North Carolina Department of Insurance website and identifying a lien agent, and transmitting the formal notice by certified mail, return receipt requested, signature confirmation through the US Postal Service, physical delivery with a delivery receipt from the lien agent, facsimile with facsimile confirmation, overnight courier such as UPS, FedEx, or DHL, or email with electronic delivery receipt.

Step Three: Respond to written requests for lien agent information

If you receive a written request by a potential lien claimant (contractor, subcontractor, supplier, design professional, etc.), you must:

1.     Provide notice to the potential lien claimant within seven (7) days of receipt.

2.     Written notice must contain the contact information for the lien agent, including:

  • name of lien agent;
  • physical and mailing address;
  • telephone number;
  • facsimile number; and
  • electronic mail address (website if applicable).

3.     Written notice must be sent to the potential lien claimant by the same delivery method used by the potential lien claimant in making the request. For example, if the potential lien claimant makes the request by personal delivery, you must personally deliver the lien agent information to the potential lien claimant.

Again, these lien agent provisions apply to residential and commercial projects alike. Talk of a carve out for commercial projects appears to have withered on the vine, at least for now. Finally, a bill (House Bill 180) containing technical amendments continues to work its way through the legislative process.

Step Four: Special Requirement Where Residential Contract with Contractor Contains Lien Agent Contact Information

When the lien agent is identified in a contract for a single-family residence, the owner is required to provide written notice to the lien agent containing the information that would be required in the contractor’s Notice to Lien Agent. The contractor will be deemed to have met its obligation to serve its Notice to Lien Agent. (In essence, the owner is required to serve the contractor’s Notice to Lien Agent by proxy.)

It bears repeating: This requirement only applies if the project consists of a single-family residence and the contract between the owner and contractor contains the lien agent contact information.

NC Law , , , ,

On the Campaign Trail for Best Construction Blog

VOTE HERE

VOTE HERE

 

 

 

 

 

By: Gregory L. Shelton
Horack, Talley, Pharr & Lowndes, P.A.

In nominating Construction Law Carolinas for best construction blog, the folks at Construction Marketing Ideas posted this nice write up about my blog and, in particular, my article on one-sided construction contracts. Construction Marketing Ideas is a blog affiliated with the construction newspaper of record, North Carolina Construction News. I appreciate the nomination, and the support Construction Marketing Ideas and North Carolina Construction News (particularly Bob Kruhm) have given to my blog by nominating it.

Please vote on your favorite construction blog by clicking this link.

 

 

NC Law

Construction Law Blogger Located

 

Celestion Council Interrogates an Architect

Celestion Council Interrogates an Architect

Construction Law Blogger Released after Being Held by Space Aliens

 

From the OP Wire

Chauncey Gardner, Salbris, France

After nearly four months of captivity, we have learned that Greg Shelton has been released in a wheat field just outside of Salbris, France. Shelton, author of the Construction Law Carolinas blog, has not been heard from since his One Sided Contracts and their Limitations article was posted on November 16, 2012.

The U.S. government was quick to cover-up the incident:

Mr. Shelton has been busy editing the Sixth Edition of the Construction Law Deskbook for the North Carolina Bar Association’s Construction Law Section. This is a time consuming task requiring coordination with authors, editors, and representatives of the Bar Association. The introduction of a new chapter dealing with employment, labor, and immigration issues has added to the already substantial Deskbook. We are pleased to announce that Mr. Shelton intends to resume work on his blog very soon.

 The French government, which is currently on strike, announced that its cover-up would be ready for release to the public “sometime after August.”

image {{PD-US-Not Renewed}}

Government Contracts, NC Law, SC Law

One-Sided Construction Contracts and their Limitations

 

 

“Fools! They gave us everything we wanted!”

One-Sided Construction Contracts and their Limitations

By:  Gregory L. Shelton

Horack, Talley, Pharr & Lowndes, P.A.
(704) 377-2500

 

 

I. Introduction

We attorneys often hammer home the importance of reviewing and negotiating solid construction contracts. Standard industry contracts offered by ConsensusDOCS, the American Institute of Architects, the Design Build Institute of America, and others, provide a good foundation for negotiations because they are reasonably fair and generally do a good job allocating risk to the party in the best position to reduce or eliminate the risk. Allocating risk in this manner comports with our innate view of fairness and is consistent with how we view the parties’ respective roles. Regard this as the natural state of contractual equilibrium.

II.  One-Sided Construction Contracts . . .

Some companies, particularly large owners and contractors, prefer to use their own customized agreements. In some cases, the temptation is too great, and the customized agreement becomes so one-sided that seemingly advantageous terms become counterproductive.

Before discussing the practical limits of these Darth Vader agreements, it is both wise and prudent to assume that contract terms are enforceable, even if they are so over-the-top as to induce involuntary laughter. Judges consistently tell us in their written opinions that it is not the role of the court to rewrite contracts. The North Carolina Court of Appeals put it this way: “People should be entitled to contract on their own terms without the indulgence of paternalism by courts in the alleviation of one side or another from the effects of a bad bargain.”

In other words, courts will not save you from yourself. You may have desperately needed the work. You may have been told that the written contract was just a formality for the lawyers. You may have been told “nawww, we just put that in the file cabinet and never look at it again.” But once a problem arises, the first thing we lawyers do is ask for a copy of the written contract. Words do matter; thus my entreats to clients to read the contract, or let me read the contract, before signing it or starting work.

III.  . . . and their Limitations

Now that I have given you fair warning about the dangers of written contracts, I am now comfortable stating my thesis:

There are practical limits to unbalanced contracts because there are legal, business, and human forces pulling the relationship toward a state of equilibrium. Further, as contracts become increasingly one-sided, so too they become increasingly unstable and unpredictable.

 

Stable Equilibrium

 

       1.  Legal Constraints

Some contract terms are simply dead on arrival. The legislatures in North Carolina and South Carolina have enacted statutes rendering some common contract terms unenforceable. For example, both states have enacted prompt payment acts and have enacted statutes rendering pay-if-paid clauses unenforceable. The legislatures have also enacted “anti-indemnity” statutes limiting the scope of indemnity clauses in the construction realm.

Courts have created their own rules limiting the enforceability of contract terms. A liquidated damages clause which does not reasonably estimate actual damages suffered as a result of delay will be construed by the court as an unenforceable penalty. Also, courts will disregard strict notice provisions or written change order requirements under certain circumstances. Courts can also refuse to enforce contracts that it deems illusory or unconscionable.

An unfair or unenforceable provision may threaten the entire contract. A particularly striking example of this occurred in Jackson v. Associated Scaffolders and Equipment Company, Inc., 152 N.C. App. 687 (2002), where the North Carolina Court of Appeals ruled that an unenforceable indemnity provision was not severable from the contract, and proceeded to strike the contract in its entirety.

Finally, contracts can be so unbalanced that they become susceptible to a form of legal Aikido, whereby overly aggressive provisions can be used against the drafter. With some imagination and disciplined analysis, the unbalanced contract can flipped on its back.

       2.  Business Constraints

I refuse to join any club that would have me as a member.
-Groucho Marx

For the owner hiring a contractor, or a contractor hiring a sub, the success of the project depends upon the competence, integrity, and skill of those actually performing the work. Do you really want to hire someone who will sign a contract appointing your own vice president of operations as arbitrator in the event of a dispute? Or agreeing to pay half the contract balance as liquidated damages upon asserting a defense to your claim in court? Or granting you sole and unfettered discretion to determine the price of change orders?

How strapped for cash must a party be to sign away such rights? One the other side of the equation, having the legal right to rake a desperate or unsophisticated subcontractor over the legal coals isn’t worth all that much when the project blows up.

All too often, decision makers at reputable and established companies tell me that they will not bid certain work because the other party’s contract is ridiculously one-sided and offered on a “take it or leave it” basis. Market forces at work.

         3.  Human Constraints

The party seeking rigid enforcement of a brutal contract must overcome the innate sense of fairness rooted in most decision makers. People like Hobbits, not Orcs. One need look no further than landmark decisions by the U.S. Supreme Court for evidence of judges finding a way to reach a desired result. Arbitrators have even more flexibility in deciding a winner.

Merely relying on sympathy or playing the victim is a double-edged sword. From Teddy Roosevelt’s Nobel lecture: “We despise and abhor the bully, the brawler, the oppressor, whether in private or public life, but we despise no less the coward and the voluptuary. No man is worth calling a man who will not fight rather than submit to infamy or see those that are dear to him suffer wrong.” Today, you’ll likely hear this sentiment expressed as: “Well, if he’s dumb enough to sign it, its his problem.”

 IV. Conclusion

Negotiating within a few standard deviations of the fairness bell curve is good business practice. At some point, however, the drafter will encounter diminishing returns due to the opposing forces identified above. Finally, an overly onerous or one-sided contract can actually work against or turn on its creator.

 

Photos courtesy of WikiCommons. Photo attribution: Barry Loigman, M.D. Diagram attribution: Georg Wiora (Dr. Schorsch).

Government Contracts, NC Law, SC Law , , , , , , , , , , ,

A Chat with Jeff Humbert, Outgoing Chairman of ABC of the Carolinas

 

Jeff Humbert, Project Executive, Edifice, Inc.

Jeff Humbert Reflects on His Tenure as Chairman of ABC of the Carolinas

By: Gregory L. Shelton

Horack, Talley, Pharr & Lowndes, PA
gshelton@horacktalley.com

Associated Builders and Contractors of the Carolinas’ annual conference took place in Wilmington earlier this month. During a break in the events, I sat down with Jeff Humbert, outgoing Chairman of ABC Carolinas, to talk about his tenure at the helm of the organization.

While Jeff is among the most committed, hardest working members of ABC Carolinas, he also has a day job. Jeff is Project Executive for Charlotte-based general contractor Edifice, Inc., bringing 26 years of construction experience to Edifice with a focus on the industrial market. Jeff leads project teams and serves as the owner’s single point of contact from pre-construction through close-out. Jeff also oversees project managers and superintendents, and monitors customer satisfaction, schedules, quality, and budgets.

Jeff holds a Bachelor of Science degree in Construction Management & Finance from East Carolina University. He also maintains a General Contractor’s License from the State of North Carolina and is a LEED Accredited Professional. In addition to his association and leadership in ABC-Carolinas, Jeff is also actively involved in the Tilt up Concrete Association, the National Association of Industrial Office Properties, and the Charlotte Region Commercial Board of Realtors.

Shelton: You’ve taken the helm of ABC Carolinas in a particularly political year. How has ABC Carolinas engaged in the political process to represent the interests of its members?

Humbert: Governmental affairs has always been a cornerstone of ABC, both nationally and locally. The motto ‘Get into Politics or Get out of Business’ rings loud and clear in Columbia, Raleigh, and Washington D.C.

I visited the legislatures in Columbia and Raleigh with fellow ABC Carolinas members to meet with our local representatives and raise awareness about issues important to our members. We have been conducting these annual events, which we call “Hard Hat Day at the Capital,” for years.

We also foster relationships with leaders on a local level.  Pat McCrory, our keynote speaker at this conference, is a case in point. We are proud to have the next governor of North Carolina share time with our members.

While we have always been very active in representing our members’ interests, we stepped up to a whole new level in 2012. At last December’s planning meeting, I challenged ABC Carolinas’ members with what I called the B.H.A.G (Big Hairy Audacious Goal), which was to have a full time lobbyist representing ABC Carolinas in the North Carolina and South Carolina legislatures.

We accomplished this goal earlier this year. On April 9th, Doug Carlson, President of ABC Carolinas, announced to our membership that the ABC Board of Directors authorized moving forward to hire a Legislative Director for the Carolinas.  With input from membership at events hosted regionally by ABC members, the slogan ‘Seize the Opportunity’ took hold, resulting in our hiring Benton Albritton as Legislative Director. Benton was born in Raleigh and graduated from UNC-Wilmington. He worked on the re-election campaign of Elizabeth Dole in 2008. In early 2009 Benton started working for Senator Burr in Washington D.C. until June, when his true calling to ABC was recognized.

Filling the slot of Legislative Director will propel our organization in the years to come. The timing was right for us to take the next step and really increase our voice in government. I applaud our members for making this happen.

S: What principles have guided you as Chairman of ABC Carolinas?

H: I believe in basic business principles which include financial stewardship and a philosophy labeled as ‘The Value Proposition.” We are charged as individuals to lead and represent our beliefs; being a steward of member’s funds, investing in individuals, events, and programs to ensure our industry’s future is Job One.

Our members are our heartbeat. To have the record membership growth and retention as we do speaks volume to the efforts of our staff and membership as a whole. I am a big fan of watching individuals grow when they work with their peers striving for a common goal.

I’ve also been guided by the idea of efficiency and ownership. We’re making significant progress toward our goal of combining our corporate office space and our training center into a central location. Our goal of ownership is on the horizon, and we are closer to fulfilling our 3 and 5 year plan of having training centers and offices in our representative markets.

Finally, consistency. The leadership of our organization has been strong for a number of years, and my goal was to leave the organization as my predecessor, Bill Caldwell (President of Waldrop, Inc.), left it for me: uncluttered, transparent, and stable.

 S: Are there any new developments in ABC Carolinas’ efforts to train and educate the construction workforce?

H: A trained and ready workforce is key to our merit shop philosophy. We just completed our first full year at the new training center in Charlotte. We realized we had two options: One, grow by by offering existing services to more user groups; or Two, provide more services to existing users.

So we did both.

The staff at the training center reached out to our membership base and core group users to determine their needs. As a result, we offered excellent courses which were well attended.

Our training program continues to grow. In addition to our Charlotte training center, we are hosting classes and certification courses in Raleigh, Fayetteville, and on-site, to support the needs of our users.

S: Thanks for sitting down with me and answering these questions.

 H: Glad to help. See you on the boat.

 

Government Contracts, NC Law, SC Law , , , , , , , , , , , ,

Guest Post: A Basic Guide to Contractor Bonding

 

Danielle Rodabaugh

Continuing the tradition of  Guest Posts here at Construction Law Carolinas, I am pleased to welcome Danielle Rodabaugh, the chief editor at SuretyBonds.coma leading surety provider. As a part of the company’s educational outreach program, Danielle writes to help construction professionals better understand the legal intricacies of contractor bonding. Danielle has also written a number of articles about green building practices and how environmental regulations affect the construction industry. (Note: The link to Danielle’s employer is for biographical purposes only and is not an endorsement or referral of same.) 

 

A Basic Guide to Contractor Bonding

By: Danielle Rodabaugh

As a surety professional, I know that contractors often have a limited understanding of how contractor bonding works. Oftentimes this is through no fault of their own; the process is complicated, and rarely do underwriters take the time to explain the process in full. Even experienced contractors who have worked in the industry for decades have questions about surety bonds. Furthermore, a great deal of contractor bonding information available online is inaccurate, hard to find or just plain boring. As such, this guide will answer common questions contractors have about the bonding process.

How do surety bonds work, anyway?

Before we get into the specifics of contractor bonding, you’re probably wondering what surety bonds are and how they work. A basic definition explains that a surety bond brings together three parties in a legally binding agreement. The agreement that’s made varies depending on the bond type. Generally speaking, though, bonds keep project owners from losing money on projects.

They do so by forming a contract that involves a contractor, a project owner and a surety provider. If the contractor breaks the bond’s terms, the project owner can make a claim on the bond to gain financial reparation. If the claim is proven to be valid, the surety will be required to either resolve the problem or pay retribution. The bond’s indemnification clause will then require the contractor to reimburse the surety for any claims paid out, which is the key difference between surety insurance and traditional insurance policies.

How do I know if I need a surety bond?

Most states require contractors to purchase a license and permit bond before they can apply for their contractors license. This is a basic surety bond type that’s required of contractors in almost every state. Depending on your county, city and subdivision’s laws for contractors, you might have to maintain additional license bonds as well. At the bare minimum you’ll have to comply with your state’s contractor license bond requirements.

When it comes to surety bonds that are issued for specific projects, however, the story is different. Dozens of individual contractor bond types exist; some of the most common ones are bid bonds, payment bonds, performance bonds, supply bonds and maintenance bonds. The federal Miller Act requires contractors to file payment and performance bonds before they can work on any publicly funded project that will cost $100,000 or more. However, the project owner will tell you if you need to get a contractor bond in other situations. For example, some cities even require bonds on public projects that cost $10,000 or less, and private project owners might also choose to require bonds.

How often do I need to get bonded?

The answer here primarily depends on how many projects you work on, the nature of those projects and the type of owners that fund them. Because public projects are funded by government agencies, they almost always require that construction professionals file surety bonds to ensure projects will be completed. This is why it’s important to build a relationship with a surety provider you can trust. You’ll want somebody on your side when you have to provide multiple bonds for the many projects you work on each year.

What if I’m a small contractor?

In theory, small contractors shouldn’t have any more trouble getting the bonds they need than do larger firms. In reality, however, this isn’t always the case. When it comes to license bonds, every contractor can be easily approved for the bond they need. The catch is that the rate the underwriter charges depends on the applicant’s credit score. If a small contractor has a poor credit score, the rate will be higher than typical bond rates. Small contractors generally have a limited cash flow, so paying for the bad credit bonds they need could be more difficult than it would be for large contractors in the same situation.

When it comes to surety bonds issued for specific contracts, however, the problem gets trickier. Because so much risk is involved with construction contracts, surety underwriters are much more thorough when reviewing applications. This means applicants with poor credit can be flat out denied for the bonds they need, especially when it comes to expensive projects. Surety providers intend to avoid losses at all costs, so they assume applicants with bad credit are riskier than others. As such, they might choose not to issue bonds to those with bad credit.

Fortunately the Small Business Administration operates a program that helps small contractors get the bonds they need. Contractors can qualify for the program only if they’ve been denied bonding by commercial surety providers. The SBA can guarantee projects up to $2 million.

Although contractor bonding might seem like a hassle to experienced and emerging contractors alike, a greater understanding of how it works will help contractors prepare themselves for the application process. Hopefully this guide helps you along your way.

Government Contracts, NC Law, SC Law , , , , , , , , ,

North Carolina’s Future Lien Law in Red, White, and Blue

Out with the Old, In With the New
A Look at North Carolina’s Future Lien Law in Red, White, and Blue

 

By: Gregory L. Shelton
GShelton@HorackTalley.com

 
S42 and H1052 were signed into law on July 2, 2012. Most revisions will not take effect for many months and, therefore, the official codification in the North Carolina General Statutes will not be available for some time. I prepared the following document as a “look forward” to what certain portions of Chapter 44A might look like on April 1, 2013. Existing statutory language deleted by S42 or H1052 will not appear in this document. Additions from H1052 are shown in RED TEXT. Additions from S42 are shown in BLUE TEXT.

The document is currently available at my firm’s website.

http://www.horacktalley.com/about/news/default.aspx?ID=240

Note:  The above link will send you to an updated version of the document which now contains technical amendments (S847).

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NC Lien Law Update: The Rules Are About to Change

 

Legislative Seismography

North Carolina General Assembly Ratifies Senate Bill 42 (Hidden Liens) and House Bill 1052 (Lien Law Revisions)

 

By: Gregory L. Shelton
Horack Talley GShelton@HorackTalley.com

 

Every Thanksgiving, people line up for hours outside of stores waiting for Black Friday sales.  When the doors open, the once peaceful tent city descends into an every-man-for-himself tug-of-war. Welcome to the world of the General Assembly.

Three years ago, the Construction Law Section of the North Carolina Bar Association decided to take on the “hidden lien” issue. The effort proceeded in stages. First, there was an effort to build consensus among “stakeholders” (a biz-mod term referring in this case to GCs, owners, subs, title insurers, and other segments of the construction industry). Then, earlier this year, the “hidden lien” provisions were shelved so that non-controversial but necessary revisions could be enacted.

Enter Title Insurance Lobby, stage left. Title insurers, unwilling to wait around for another year, introduced the “lien agent” bill to keep track of subs and suppliers. So now we had two bills to track.

The stampede was on, and blogging about details became pointless because the details changed on an hourly basis. To appreciate how quickly things were changing in the last ten days, just look at the history of S42, paying particular attention to the events beginning on June 20. Same story for H1052, formerly known as H864.

But it is quiet now and the earth has stopped shaking. Both bills have been ratified and will likely be signed by Governor Perdue (if they haven’t been signed already). There is too much substantive content for a Friday afternoon blog post, but I’m going to give you the basics so you can ponder them while floating in the pool tomorrow:

Senate Bill 42 (Hidden Liens):

The summary:

  • Inserts new sections 44A-11.1 and .2 defining “lien agent” designated title insurance company or agency
  • Notice must be served on lien agent for projects where original permitted work exceeds $30,000
  • Owner must provide potential lien claimants with lien agent contact information
  • Lien agent contact information must be posted on site
  • To enforce a lien on real property, potential lien claimants must do one of the following:
    • serve formal notice upon lien agent using statutory form called “Notice to Lien Agent” within 15 days after first furnishing by potential lien claimant
    • serve Notice to Lien Agent before sale of real property to bona fide purchaser
    • file Claim of Lien on Real Property before sale of real property to bona fide purchaser
  • Contractor may not prejudice potential lien claimant’s rights once notice potential lien claimant has properly given notice to lien agent, has properly served a Notice of Claim of Lien Upon Funds upon the owner, and has delivered to the lien agent a copy of the Notice of Claim of Lien Upon Funds served on the owner

 

House Bill 1052 (Lien Law Revisions)

Formerly H864 (2012 short session) and H489 (2011 long session)

The summary:

  •  Requires service of Claim of Lien upon record owner of property (current statute requires service of Notice of Claim of Lien Upon Funds only)
  • Former owner of real property who owned property when lien arose is not a necessary party (settles years of heated telephone calls among construction lawyers, although “heart felt” positions were subject to change depending on who the client was).
  •  Lien attaches immediately upon first furnishing (technical clarification to address bankruptcy decisions holding otherwise)
  • Lien waiver executed by GC before sub/supplier files lien enforcement action on real property waives sub/supplier’s right to assert GC’s lien by subrogation, but does not cut off right to assert property lien where owner violates lien upon funds
  • Clarifies that subs/suppliers may use their own first and last dates, or GCs first and last dates (based on “subrogation” (standing in the shoes of the GC)), when filing out claim of lien forms
  • False lien waivers remain Class 1 misdemeanor (efforts to make this a felony and “unfair and deceptive trade practice” failed), but they now give rise to discipline by licensing boards
  • Requires that subs/suppliers furnish ”Notice of Public Subcontract” to protect payment bond rights under the Little Miller Act

I’m hearing doom and gloom from some subs and suppliers, who object to yet another procedural obstacle being placed between them and their constitutionally prescribed lien rights. I would caution against snap judgments. Contractors in other states have been living with pre-notice statutes for years, and have survived. And keep in mind that the easiest time to collect past due bills is right before a closing.

The lien agent provisions take effect next April, so there is some time to adopt new procedures to protect your company.

Special thanks to legislative staff attorney Bill Patterson.

Photograph courtesy Wikipedia Commons

 

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