Liens Are Legal Landmines The law proscribes remedies when construction disputes arise.
by Denise E. Farris
Tenant space improvements are a common practice in the day-to-day life of small businesses. Small business owners may be the building owner and landlord, the tenant, or perhaps the construction contractor, subcontractor, supplier or design professional. In any case, when either performance or payment issues arise, the remedy can be a tenant lien. What is a mechanics lien? A mechanics lien is a statutory remedy that typically permits an unpaid contractor, subcontractor, supplier or design professional who has provided labor or material improving the property to assert a “lien” against the real estate to cover the unpaid debt. In certain instances, lien claimants (the party filing and asserting the lien for nonpayment) can force a judicial sale of the real estate to collect their money.
What is required to file a lien? In most instances, the owner of the property must receive some form of notice indicating the party’s ability or intent to file a lien. The timing on these notices varies from state to state, as does the status of the lien claimant (i.e., whether it is a general contractor or a subcontractor or supplier). The notice is mandatory and failure to technically comply with the form, time and content of the notice may be fatal to the lien. What effect does a lien filing have? The lien is recorded as an encumbrance, or “cloud,” on the title to the named property. A property typically cannot be sold or transferred without the lien first being addressed. In other situations, a judicial lien foreclosure can order sale of the property to satisfy the lien. However, foreclosure of the lien requires strict compliance with the statute, within a specific time. What happens if the work is done on leased property? Typically, a lien against real property (i.e., land and buildings on it) applies only where the general contractor is working directly with the property’s owner. Thus, contractors who work for tenants on leased property do not have lien rights under the general mechanics lien statute, but instead are subject to independent statutes that give lesser rights and rarely attach to the land and buildings. These tenant liens are generally limited to the removeable property of the tenant, including furniture, fixtures, equipment, construction materials and so forth. Since the definition of “removeable” can be a source of great debate, it is typically defined as something that can be removed in an economically feasible manner without significant structural impairment or alteration. In addition, a tenant lien may claim an interest in any unexpired term of the lease; that is, purchase the lease in the foreclosure sale and attempt to sell the remaining rights under the lease at a commercially higher value than that purchased.
What procedural requirements apply to claiming a tenant lien? The lien is limited to those who provide the work or materials under contract with a tenant or agent of the tenant. The tenant lien claimant must comply with all the procedural requirements that regular liens are subject to (i.e., notice to the owner of the property, filing and content deadlines, the submission of a just and true account, proper identification of property owners as well as the tenant space owner, and foreclosure compliance). Can a tenant lien ever be asserted against the real estate instead of just the tenant space and lease? Only if the lien claimant can establish that the tenant, in securing the contract for tenant space improvements, was acting as the “agent” of the property owner. The mere relationship of tenant and landlord does not create this agency. Instead, the tenant must show he or she was obligated to make the improvements at the demand of the landlord at the time the tenant executed the lease. Agency can also be proven if the premises are leased subject to a specific purpose and the premises can’t be used for that purpose without the necessary tenant improvements.
The two most important factors are: the property owner’s knowledge and involvement in the construction of the improvements and the value and benefit of the improvements to the owner. If these two elements are present, a court may find the necessary agency relationship. This in turn exposes the entire property, and not just the tenant space, to the lien.
The lien process is obviously quite complicated. For this reason, whether you are a potential lien claimant, a tenant or a landlord, you should seek experienced legal advice if you are involved in a tenant lien dispute. Denise Farris practices commercial construction, business and equine law. She has served as the past Chairperson of the Missouri Bar Construction Law Committee and the Kansas City Metropolitan Bar Committee, and is a current member of the national steering committee of the American Bar Association’s Forum on the Construction Industry. She can be reached at (913) 685-3192 or .
