The ability to use the mechanics lien instrument to secure extensions of labor and/or materials on credit is instrumental to the success of construction finance managers (CFMs). These statutory security instruments are granted to parties who perform labor and/or furnish materials to a construction project, provided the rules and requirements associated therewith are met, and provide strong security by encumbering the improved property itself. In some cases, however, the lien’s attachment to the improved property can be modified, or even blocked entirely, as a factor of which party originally contracted for the improvement. If the party that originally requested the work has less than full ownership interest in the property, the mechanics lien may not attach to the property itself.
Can a Mechanics Lien Attach to Something Other than the Property?
When a mechanics lien arises pursuant to a tenant improvement, the lien may attach to the interest of the originally contracting party (the tenant). This means that the mechanics lien may attach to the “leasehold” interest. However, while this is specifically allowed in some states, this ability is not universal. And, further, if the lien attaches to something less than the underlying property, is the protection worthwhile?
A mechanics lien attached to a leasehold interest can still provide protection, but without attachment to the underlying property, the protection is necessarily less than that of a lien attached to the property itself. In fact, some attorneys have even call leasehold-liens “illusory”, (even when specifically authorized by statute. This is likely hyperbole, but because 1) most leases have no-lien clauses allowing the lease (and therefore and lien attached to it) to be extinguished in the event a lien is filed; and 2) if the lien on a leasehold interest is successfully ‘foreclosed’ it requires the acceptance of both the lease benefits and obligations by the foreclosing party, i.e. the requirement to pay rent., the protection afforded by liens on leaseholds does not reach the level of those on the property itself.
This is not to say that such liens are worthless, however. In many cases, especially in the case of a large commercial lease, the pressure of potentially losing a lease due to a mechanics lien is enough to prompt payment by the tenant. In an even better situation for a potential lien claimant, some states, allow a mechanics lien that arose pursuant to a tenant improvement to attach to the fee simple interest of the property owner if certain conditions are met.
In many states, if the property owner had knowledge of the improvement (whether this knowledge is required to be actual or merely constructive varies from state-to-state), and consented to the improvement (whether this consent must be explicit or not is also a state-by-state determination), the lien may attach to the owner’s interest. Further, in a some situations, the lien may attach to the owner’s interest based solely on a determination of whether the owner received some benefit from the work performed. Additional questions that may be examined in order to determine to what the lien attaches may include whether the tenant was acting as an agent of the owner, or whether there was some set of facts that would lead the claimant to believe that was the case.
Claimant Must Exercise Caution
Clearly, then, a mechanics lien doesn’t always give the claimant free-reign to pursue the property owner for payment, however. In fact, some recent cases have urged caution in just that respect. In one such situation, a court not only dismissed the claimant’s lien, but also awarded attorney’s fees to the owner. The court determined that the tenant had not acted as the agent of the owner for purposes of the improvements, and in fact, that the claimant could not even show that the owner consented to the improvements. A prudent CFM would be wise to heed this possibility and exercise caution in situations in which the security for a project is a mechanics lien that arose pursuant to a tenant contracted improvement.
Mechanics liens on tenant improvements can cause a headache, and like many aspects of mechanics lien law they are treated differently from state-to-state, and even case-to-case. In every situation it pays to know to what property interest your mechanics lien may attach, and to know the requirements for such attachment. And, in the enforcement of a lien for tenant improvements, this knowledge can be vitally important.