The Green Building Industry, Alternative Energy Projects and Mechanics Lien and Bond Claim Rights

A rapidly expanding segment of the construction industry is centered around “green” building projects, including the construction of green energy installations such as solar arrays or wind farms. While this segment of the industry is experiencing rapid growth, mechanics lien and bond claim law has not necessarily kept pace, for many reasons. While the policy behind mechanics lien protection hasn’t changed, but the availability of the mechanics lien remedy may be slipping away for some of these types of projects. This article will briefly examine the reasons for this.

Public Private Partnerships and Green Energy Projects

The construction of solar arrays, or the installation of solar panels is an especially troublesome type of project for a potential mechanics lien claimant. And the troublesome nature is increased when the project is a public private partnership (or P3) project. I recently posted about the potential pitfalls for lien claimants on P3 projects, and all will apply to a public private partnership for the installation and operation of solar installations. In many cases, the land on which the solar arrays are to be installed is publicly owned. Because of this, a mechanics lien would only be allowed to attach to a leasehold or other private property interest of the developer/operator – and this is not allowed in every state.
The troublesome nature is increased when the project is a public private partnership (or P3) project. However, even if the project was entirely private, the potential lien claimant could run into problems. In the past, if a building wanted an energy system, it would simply buy and install the chosen system. Today, however, solar panels and complete solar systems, oftentimes with the ability to dump excess generated power back onto the grid, are being installed at least partially at the installer’s expense. 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. At the end of the lease term, the equipment installed on the structure, and which may be nearing the end of its useful life, is usually purchased by the building owner for a nominal, or significantly reduced sum.
This type of agreement, and the not-necessarily-permanent nature of this particular project type can create problems for some mechanics lien claimants, even when it would seem like a no-brainer that a potential lien claimant should be able to recover for the work performed. In determining whether a potential lien claimant has the right to file a valid mechanics lien, there are certain key questions that must first be answered, including whether labor or materials were furnished to improve real property, and whether that labor and/or those materials were incorporated into or attached to the structure (or an original structure itself was built).
In the installation of a system like a solar energy system, which by its sales/lease agreement specifically contemplates it s future removal, extra layers are added to the determination of potential lien rights. Many states require the improvements giving rise to the lien to be “permanently attached” to the property at issue. If the solar panels may by removed, and the agreement specifically contemplates their removal, can their installation constitute a permanent improvement?

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New York Comes Down Against Mechanics Liens for the Installation of Solar Panels

Solar panels did not constitute a permanent improvement to the property. In a fairly recent New York case, the answer to the above question was a resounding “no”. That decision directly hinged on the New York statutory language requiring 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”. Because the solar panels were able to be removed, and their removal was contemplated by the contract for installation, they did not constitute a permanent improvement to the property.

P3 Projects Create Complex Issues

These determinations are not the end of the line in assessing the potential protection for solar energy projects, however. Even before determining whether or not a party would have 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 municipalities are installing large solar arrays, or having solar panels installed on public buildings to help defray rising energy costs. In this situation, the project type must be determined before the claimant knows whether a mechanics lien or a bond claim is the appropriate remedy for non-payment. As I recently noted, though, there are certain situations where neither a mechanics lien nor a bond claim may be applicable. The complex nature of public private partnerships sometimes results in projects falling into the no-man’s land of construction payment protection.
For now, it appears that parties who are unpaid on green energy projects, especially the installation of solar energy systems, 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.