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Mechanic's liens are creatures of state law, allowing mechanics, materialmen, contractors, and others such as laborers or architects ('contractors') to place a lien for payment against real property after they have provided work or materials that constitute an improvement to real estate. Mechanic's liens are commonly placed on property when an owner contracts for work to be performed but fails to pay for the work, or when a general contractor fails to pay its subcontractors for work the subcontractors performed on the job, even if the failure to pay is the result of a dispute between the owner and the contractor over the work that was done. It is easy to see why, as an equitable matter, a contractor or supplier might be entitled to a lien, given the presumption that the property has become more valuable as a result of his work, but in practical terms, no owner wants his or her property subject to such a lien.
This is especially true when the owner is neither the party who contracted for the work nor is responsible for paying for it, i.e., when a tenant contracts for work to be performed on leased premises. In these cases, an owner might not even be aware that such work is taking place, and the question of 'fairness' necessarily becomes far more complex when a lien being placed on the owner's property is for improvements for which the tenant has contracted but not paid. Similarly, questions of fairness arise when a contractor seeks to enforce a lien for improvements made solely for the benefit of the tenant ' as is often the case with tenant-specific fit outs ' against an owner who has received little if any value for the improvements, but from whom payment for the improvements is being demanded in the form of a lien on his or her real estate.
Because mechanic's lien laws vary from state to state and because the court holdings are fact-specific even within a given state, there is no single answer as to when a mechanic's lien can be enforced against an owner's real property when the tenant has contracted for but failed to pay for improvements to the property, or what an owner should do to protect its interests. Indeed, states have taken widely varying positions on the enforceability of such liens, with some states favoring the contractor and others using a more 'bright-line' approach, such as requiring evidence of the owner's express consent to the lien for improvements. Of the states that adopt the former approach, mechanic's liens may or may not be allowed based on whether or not the owner had knowledge or control over the improvement process, the extent to which the owner received a benefit from the improvements, and the terms of the lease agreement between the owner and tenant.
Unjust Enrichment and Quasi Contract Principles
Many states apply unjust enrichment and quasi contract principals to determine owner liability. Many states with large sectors of commercial real estate, such as Illinois and New York, do not provide a bright-line approach, but consider equitable principles when determining the lien claims of tenant's contractors. These states allow an owner's interest in property to be subject to a mechanic's lien by the tenant's contractor if the owner has 'authorized' the tenant to contract for the improvements, see Stafford-Smith, Inc. v. Intercontinental River East, LLC, 2007 Ill. App. LEXIS 1300 (Dec. 19, 2007), or the owner has taken an 'affirmative action' demonstrating that the work is being performed 'with the consent or at the request of the owner. See e.g., Tri-North Builders Inc. v. Di Donna, 217 A.D.2d 886, 629 N.Y.S.2d 850 (1995).
Similarly, California appears to be embracing equitable considerations as well and allowing the imposition of liens where they previously would have been precluded. Prior to Howard S. Wright Construction Co. v. Superior Court of Alameda County, 106 Cal. App.4th 314 (2003), owners in California were able to avoid mechanic's lien claims for improvements that were contracted for by their tenants by filing a 'Notice of Non-Responsibility.' In Howard Wright, however, the California Court of Appeals allowed the contractor to assert a claim directly against the owner's property, despite having filed a Notice of Non-Responsibility, because the court held that the owner was a 'participating owner.' The court considered the fact that the lease (as a practical matter) required the improvements to be made by the tenant and the owner's approval of the plans and specifications for the improvements, the owner received a monthly administrative fee for supervising the improvements, and the owner was able to collect a higher rent because of the improvements. These factors led the court to conclude that the owner was a 'participating owner' and that the tenant acted as an agent of the owner in contracting for the work to be performed, because the owner received the benefits of the improvements and maintained a certain degree of control over the improvements themselves.
Although the equitable approach may appear to balance the owner's rights with those of the contractor and be the most fair approach, an unavoidable consequence of this approach is uncertainty for both the owners and contractors as to whether, given their particular set of facts, a lien will be allowed or disallowed.
Rejection of Unjust Enrichment, Quasi Contract Theories
Several states reject theories of unjust enrichment or quasi contract. Quite the opposite from California's use of equitable principals to protect contractors, Georgia takes a stringent approach to contractor's claims. Georgia courts limit an owner's liability to a tenant's contractor to the amount that the owner contracted with the tenant to be liable (such as allowances for improvements or rent concessions). For example, in F.S. Associates, Ltd. v. McMichael's Construction Company, Inc., 197 Ga. App. 705 (1990), the court of appeals refused to allow a contractor's lien against an owner for improvements beyond the improvement allowance stated in the lease. Id. at 706. In doing so, the court flatly rejected the idea that the landlord's equitable interest in the property could serve as a basis for enforcing the lien or that by providing 'mere consent' to improvements made on the property, the owner had entered into a quasi contract with the contractor. More importantly, the court in F.S. Associates then granted summary judgment in favor of the owner as to the claim of lien, finding that the owner's payment of the construction allowance to the tenant constituted accord and satisfaction and relieved it of any further obligation for the contractor's claims.
New Jersey also rejects any theories of unjust enrichment or quasi contract. Under New Jersey law, if a tenant contracts for improvements of real property and the contract for improvement has not been authorized in writing by the owner of the property, then any contractor's liens can only attach to the leasehold interest of the property. See N.J.S.A. ' 2A:44A-3. Texas also rejects any liability for owners of property for work done by contractors at the request of the tenant, unless the contractor can establish that the tenant was in fact acting as the owner's agent, trustee, receiver, contractor or subcontractor. See Triad Home Renovators, Inc. v. Dickey, 15 S.W.3d 142, 145 (Tex. App. ' Houston [14th Dist.] 2000).
Protection from Mechanic's Lien Claims
One way owners can avoid an unanticipated mechanic's lien for tenant improvements would be to contract directly for the improvements themselves, thereby permitting the owner to retain control of the work. There may, however, be situations in which the economic, business, or practical concerns make it preferable to have the tenant be responsible for and perform the repairs or improvements. In these situations, owners can protect their interests by requiring performance or other bonds from the tenant or the contractor or requiring additional contractual rights, such as a right of indemnification from the tenant if a contractor does file a lien, or the right to terminate any contracts entered into on behalf of the tenant. In addition, some states (but not all) permit contractors to waive their lien rights in advance.
To further protect themselves, owners should consult an experienced real estate attorney in their state who can advise them as to whether their state offers procedural protections like those available to owners in Florida. In Florida, owners can protect themselves against mechanic's liens arising out of tenant improvements by including as a term of the lease an express prohibition for any liability for improvements made by the lessee and recording the lease terms, thus putting all potential contractors on notice of their limited rights to pursue a mechanic's lien against the owner of that property. See Fla. Stat. '713.10 (2007). Similarly, owners in Minnesota may require the contractor to sign an acknowledgement limiting any liens to the tenant's leasehold interest, which has been upheld as an effective way to prevent any liability for a subsequently filed mechanic's lien. See e.g., Marksman Constr. Co. v. Mall of Amer. Co., 1997 Minn. App. LEXIS 1329 (Minn. Ct. App. Dec. 9, 1997).
Conclusion
Commercial landlords need to be aware of the specific mechanic's lien laws in the states in which they own property and take all appropriate steps to ensure that their property does not become subject to a lien as a result of their tenant's improvements.
Suzanne Ilene Schiller, a member of this newsletter's Board of Editors, is a member of Spector Gadon & Rosen, P.C. in Philadelphia. Monica Mathews Reynolds is an associate with High Swartz LLP in Norristown, PA. Both attorneys concentrate their practice in the areas of commercial and real estate litigation.
Mechanic's liens are creatures of state law, allowing mechanics, materialmen, contractors, and others such as laborers or architects ('contractors') to place a lien for payment against real property after they have provided work or materials that constitute an improvement to real estate. Mechanic's liens are commonly placed on property when an owner contracts for work to be performed but fails to pay for the work, or when a general contractor fails to pay its subcontractors for work the subcontractors performed on the job, even if the failure to pay is the result of a dispute between the owner and the contractor over the work that was done. It is easy to see why, as an equitable matter, a contractor or supplier might be entitled to a lien, given the presumption that the property has become more valuable as a result of his work, but in practical terms, no owner wants his or her property subject to such a lien.
This is especially true when the owner is neither the party who contracted for the work nor is responsible for paying for it, i.e., when a tenant contracts for work to be performed on leased premises. In these cases, an owner might not even be aware that such work is taking place, and the question of 'fairness' necessarily becomes far more complex when a lien being placed on the owner's property is for improvements for which the tenant has contracted but not paid. Similarly, questions of fairness arise when a contractor seeks to enforce a lien for improvements made solely for the benefit of the tenant ' as is often the case with tenant-specific fit outs ' against an owner who has received little if any value for the improvements, but from whom payment for the improvements is being demanded in the form of a lien on his or her real estate.
Because mechanic's lien laws vary from state to state and because the court holdings are fact-specific even within a given state, there is no single answer as to when a mechanic's lien can be enforced against an owner's real property when the tenant has contracted for but failed to pay for improvements to the property, or what an owner should do to protect its interests. Indeed, states have taken widely varying positions on the enforceability of such liens, with some states favoring the contractor and others using a more 'bright-line' approach, such as requiring evidence of the owner's express consent to the lien for improvements. Of the states that adopt the former approach, mechanic's liens may or may not be allowed based on whether or not the owner had knowledge or control over the improvement process, the extent to which the owner received a benefit from the improvements, and the terms of the lease agreement between the owner and tenant.
Unjust Enrichment and Quasi Contract Principles
Many states apply unjust enrichment and quasi contract principals to determine owner liability. Many states with large sectors of commercial real estate, such as Illinois and
Similarly, California appears to be embracing equitable considerations as well and allowing the imposition of liens where they previously would have been precluded.
Although the equitable approach may appear to balance the owner's rights with those of the contractor and be the most fair approach, an unavoidable consequence of this approach is uncertainty for both the owners and contractors as to whether, given their particular set of facts, a lien will be allowed or disallowed.
Rejection of Unjust Enrichment, Quasi Contract Theories
Several states reject theories of unjust enrichment or quasi contract. Quite the opposite from California's use of equitable principals to protect contractors, Georgia takes a stringent approach to contractor's claims. Georgia courts limit an owner's liability to a tenant's contractor to the amount that the owner contracted with the tenant to be liable (such as allowances for improvements or rent concessions). For example, in
New Jersey also rejects any theories of unjust enrichment or quasi contract. Under New Jersey law, if a tenant contracts for improvements of real property and the contract for improvement has not been authorized in writing by the owner of the property, then any contractor's liens can only attach to the leasehold interest of the property. See N.J.S.A. ' 2A:44A-3. Texas also rejects any liability for owners of property for work done by contractors at the request of the tenant, unless the contractor can establish that the tenant was in fact acting as the owner's agent, trustee, receiver, contractor or subcontractor. See
Protection from Mechanic's Lien Claims
One way owners can avoid an unanticipated mechanic's lien for tenant improvements would be to contract directly for the improvements themselves, thereby permitting the owner to retain control of the work. There may, however, be situations in which the economic, business, or practical concerns make it preferable to have the tenant be responsible for and perform the repairs or improvements. In these situations, owners can protect their interests by requiring performance or other bonds from the tenant or the contractor or requiring additional contractual rights, such as a right of indemnification from the tenant if a contractor does file a lien, or the right to terminate any contracts entered into on behalf of the tenant. In addition, some states (but not all) permit contractors to waive their lien rights in advance.
To further protect themselves, owners should consult an experienced real estate attorney in their state who can advise them as to whether their state offers procedural protections like those available to owners in Florida. In Florida, owners can protect themselves against mechanic's liens arising out of tenant improvements by including as a term of the lease an express prohibition for any liability for improvements made by the lessee and recording the lease terms, thus putting all potential contractors on notice of their limited rights to pursue a mechanic's lien against the owner of that property. See Fla. Stat. '713.10 (2007). Similarly, owners in Minnesota may require the contractor to sign an acknowledgement limiting any liens to the tenant's leasehold interest, which has been upheld as an effective way to prevent any liability for a subsequently filed mechanic's lien. See e.g., Marksman Constr. Co. v. Mall of Amer. Co., 1997 Minn. App. LEXIS 1329 (Minn. Ct. App. Dec. 9, 1997).
Conclusion
Commercial landlords need to be aware of the specific mechanic's lien laws in the states in which they own property and take all appropriate steps to ensure that their property does not become subject to a lien as a result of their tenant's improvements.
Suzanne Ilene Schiller, a member of this newsletter's Board of Editors, is a member of
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