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Mechanics Lien Rights May Be Limited On Solar Projects

The portion of the construction industry centered around green energy installations such as solar arrays or wind farms is rapidly expanding. Despite the rapid growth of this segment of the industry, the protection afforded by mechanics liens and bond claims has not necessarily kept pace. The availability of the mechanics lien remedy may be eroding in some specific circumstances related to this growing field.
The ownership of the panels or systems stays with the installer/operator, and the panels or systems are leased back to the building owner in a complicated energy purchase program/equipment lease agreement. One specific area in which green energy projects and mechanics lien law converge in a way not entirely beneficial to the potential lien claimant is in the construction of solar arrays, or the installation of solar panels. These energy systems have an entirely different ownership structure and are constructed differently than previous energy systems, and this puts a strain on the slow-to-change mechanics lien laws. In the past, energy systems were simply bought and installed. Now, though, solar systems are routinely being installed wholly or partially at the installer’s expense in return for the installer/operator retaining ownership of the system and the energy it produces. In this type of situation, the ownership of the panels or systems stays with the installer/operator, and the panels or systems are leased back to the building owner in a complicated energy purchase program/equipment lease agreement. Then, at the end of the lease term, the equipment may be purchased by the building owner for a nominal or significantly reduced sum. Or, the panels may just be left where they are just because they are nearing the end of their useful life, and the cost of removing them is greatly outweighed by the convenience of just leaving them where they are.
The installation of a system like a solar energy system, which by its sales/lease agreement specifically contemplates its future removal, may not give rise to a valid mechanics lien claim in states which require the improvements giving rise to the lien to be “permanently attached” to the property at issue. This type of agreement, and the fact that solar panels may not be permanently attached to the property, can create problems for some mechanics lien claimants. Despite the fact that the potential lien claimant furnished labor and/or materials to improve real property, that labor and/or those materials were incorporated into or attached to the structure, and that the potential lien claimant remained unpaid that claimant still may not qualify for a valid mechanics lien.
The installation of a system like a solar energy system, which by its sales/lease agreement specifically contemplates its future removal, may not give rise to a valid mechanics lien claim in states which require the improvements giving rise to the lien to be “permanently attached” to the property at issue. If the removal of the solar panels is specifically contemplated by the installation and lease agreement can their installation constitute a permanent improvement?
In a New York case from last year, the answer to that question was a resounding “no”. In that case, the decision directly hinged on the New York statutory language that required only “permanent” improvements to give rise to a valid mechanics lien claim. In other states, which don’t have that specific language in their statutes, the result could be different. In fact, it would be surprising if the same result was reached in Louisiana, which allows a mechanics lien to attach pursuant to a “modification” to or “other physical change of an immovable or its component parts”.

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Determining Project Type Is Important

Prior to the determination of whether or not a potential lien claimant has the ability to file a valid mechanics lien, it must be determined whether a mechanics lien is even the correct instrument through which the claimant may be protected. These days, many public entities are installing large solar arrays, or having solar panels installed on public buildings to help keep up with rising energy costs. In a project contracted by a public entity, a bond claim is likely the appropriate remedy for non-payment, rather than a mechanics lien.
Making a claim pursuant to a public project is not devoid of stumbling blocks either, however. While the exact same questions may not apply, at least regarding the permanence of the improvement, other problems may arise. In a recent New Jersey case, a municipal lien was filed against a public project pursuant to the state’s municipal mechanics lien law, but was denied by the court. The court in that case determined that the municipal mechanics lien law was in direct conflict with the County Improvement Authorities law, which stated that the property of a county improvement authority is exempt from judicial process. Since a municipal mechanics lien is enforceable solely through judicial process, the lien was invalidated. Whether or not that is the correct, or fair, result – the fact remains that there are substantial issues facing contractors in green energy projects.

The Practical Problems Can Be Enormous

In this particular case, the lien claimant filed more than 150 different documents, and, at some point will likely be required to release them all. Even if a mechanics lien or bond claim is allowed on a project, the practical problems can be enormous. An Oklahoma case from 2012 provides an interesting glimpse into the practical problems that can face a potential green energy mechanics lien claimant even in the absence of legal problems. In the case, the lien claimant was unpaid for work performed in the construction of a wind farm in Oklahoma. The wind farm was large in scope, and as such, extended over many different parcels of land. The claimant was owed a single amount for it’s work (not separated by parcel in any manner, as it was only one project) but the project covered multiple parcels of land. In this particular case, the lien claimant filed more than 150 different documents, and, at some point will likely be required to release them all. This can be a large practical and financial hurdle for many lien claimants, and could work as effectively in eliminating liens on this type of project as would an outright ban.
For now, it appears that parties who are unpaid on green energy projects may face difficulties not generally faced by unpaid claimants. It remains to be seen how mechanics lien and bond claim will adapt to these newly blossoming projects, or if it will adapt at all.