Beware of the Risks! No Ownership, No Lien

A recent North Carolina Court of Appeals decision reiterates the importance of knowing who you are dealing with when undertaking work or selling materials in connection with any construction or development project in our state. In Davis & Taft,¹ the Court of Appeals found that the design firm that performed design services for a prospective property purchaser could not properly assert a lien on the property, given the design services were never actually used to improve the property. While this case involved a design firm, the lesson of this case extends to any party providing labor or materials on any type of construction or development project in the state.

N.C. Gen. Stat. § 44A-7(6) defines the owner of real property as a “person who has an interest in the real property improved and for whom an improvement is made and who ordered the improvement to be made.” N.C. Gen. Stat. § 44A-7(3) defines an improvement as, among other things, an “improvement upon, connected with, or on or beneath the surface of any real property, . . . .” In Davis & Taft, the Court noted that the terms “labor” and “improve” contemplate actual work upon the subject property performed by the person claiming the lien. 

The design firm in the Davis & Taft case contracted with a company interested in buying the subject property. The sale fell through, but before it did, the design firm performed $230,000 in design work, $80,000 of which remained unpaid. The design firm filed a lien on real property and sued to enforce the lien. The trial court dismissed the lien claim at summary judgment, and the Court of Appeals affirmed this decision.

The Court reasoned that since the design services were under contract to a prospective buyer and not an “owner” of the property at issue, and because the design was never actually used to “improve” the property as required by the statute, that no lien on the property was permissible.

A key takeaway for construction and design industry professionals is to ensure the entity that hires you or your company actually owns the subject property. If they don’t, then you may not be able to rely on lien rights as a basis for recovery. Concerned parties can also protect their interests by confirming whether the project is protected by payment and performance bonds.  

This case highlights the risks parties take with respect to contracting with potential future owners and with respect to performing design or construction related activities in connection with a project that never materializes.

¹ Davis & Taft Architecture, P.A. v. DDR-Shadowline, LLC, 835 S.E.2d 473, 475 (N.C. Ct. App. 2019).