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Liens on Funds in Construction Law

Contractors and property owners, understanding lien rights is pivotal to handling disputes on construction work from additions to your home to larger commercial builds. We’ve discussed liens on property in previous posts, but have not discussed liens on funds. Liens on funds essentially allow subcontractors to keep property owners from paying general contractors who fail to pay their subcontractors. These liens on funds are an important consideration for sub-contractors not being paid in a timely fashion by the general contractor, as well as for the property owners who are having work done.

A claim of lien on funds also allows the sub-contractor to “perfect” their lien – meaning that the lien is enforceable against other parties – by simply giving notice in writing to the property owner. Contrastingly, liens on property require the filing of a lawsuit within 180 days of the last furnishing of materials or work. This would mean having to retain a Raleigh construction attorney and potentially incur legal fees that could be avoided.

Once the owner receives notice of the lien on funds, the owner is under a duty to retain any funds subject to the lien. The requirement of retaining funds is very important for property owners to be aware of. The home owner can face personal liability if subsequent payment is made to the general contractor after the lien on funds has been issued. This would also allow the subcontractor to obtain a lien on the real property being worked on as well as expose the property owner to civil liability even if the general contractor has breached the construction contract.

Now, if the property owner makes a payment to the general contractor and then faces personal liability for doing so, the property owner would have a claim against the general contractor for “indemnification,” meaning that the general contractor would owe the property owner any funds that had to be paid to the subcontractor. However, this claim against the general contractor might not be worth the paper it’s written on. What if the contractor hasn’t paid his subcontractors because … he doesn’t have any funds to pay them with? Well then the contractor also doesn’t have funds to pay the property owner their owed indemnification. It makes more sense to cease paying anyone until the lien on funds issue is resolved or, alternatively, to post a bond or cash payment with the Court.

Now, liens on funds do not mean the owner will always be on the hook for funds that the general contractor has failed to pay. Where the owner spent all funds otherwise due under the contract to complete the project, no subcontractor recovery was possible. The amount owed to the subcontractor can be offset against amounts paid by the owner to finish the construction following a breach by the contractor. So property owners, if you receive a notice of claim of lien upon funds, you will not owe money to the subcontractor that you would not owe to the general contractor. It often makes sense to consult with a breach of contract attorney to assist in determining what funds, if any, are owed to the general contractor if there have been problems with the work.

If you are a property owner, general contractor, or subcontractor involved in a construction project where the quality of work or the amount of payments has become an issue, contact a civil attorney at Maginnis Law, PLLC to discuss your options. Maginnis Law, PLLC is a Raleigh civil litigation firm which also handles cases in Cary, Apex, Clayton, Zebulon, Wake Forest and other parts of Wake County and Johnston County. Along with construction law cases, the firm also handles other business litigation and breach of contract disputes. Contact the firm at 919.526.0450 for a consultation with a Raleigh civil lawyer or visit our website at for more information.