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Subordination of lien

We have begun work on a project in NC. We gave notice and immediately received a Subordination of lien form. Is there any reason to not sign the form, any wording we should strike first?

3 replies

Sep 17, 2018

North Carolina is one of the many states that have prohibited "advance" lien waivers. Specifically, North Carolina prohibits lien waivers required “in consideration for the awarding of” the contract.

Since these preemptive lien waivers are not allowed, parties can turn to other methods to protect themselves from potential lien exposure. One of these methods is through subordination of lien document, which is specifically allowed by North Carolina law. Subordination of a mechanics lien relates to lien priority. Lien priority is what may ultimately determine who gets paid first (or at all) in the event of a foreclosure on the property. While lien enforcement or foreclosure proceedings are not frequent, they do occur, and being at the end of the line can mean that a party doesn’t get paid – even if they have a valid filed lien. For example, if the construction lender's claim is given priority over the mechanics liens, and the sale of the property only results in enough money to pay the construction lender's claim the mechanics lien holders are out of luck.

Subordination of a mechanics lien, then, moves a lien from its place of higher priority, and moves it behind another interest in the property that originally would have been lower on the priority ladder. Often times, these subordination clauses are contained within lending agreements, so that the lenders can claim priority for their deed of trust over mechanics lien claims that may have otherwise had priority.

It behooves construction parties to examine contracts for lien subordination clauses, because even if a “no-lien” clause may not be enforceable, a lien subordination clause may be – and it can have the same ultimate result in the event that there is not enough money in the property to satisfy all claimants.

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