Most construction projects are undertaken with the consent and under the direction of the property owner. After all, people are less likely to spend the time and effort required by construction projects if they don’t own the property being improved. This fact is one of the reasons that mechanics liens were created to secure payment for the parties that performed the work. Since the owner gets the benefit of the improved property (and its increased value) they are “on-the-hook” to make sure the parties who actually improved it get paid what they deserve.
However, what happens when the party contracting for the improvement is not the property owner? Like so many other things regarding construction payment, the answer is, “it depends.”
In some cases, the lien’s attachment to the improved property can be modified, or even blocked entirely, based on the party who 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. Or, the tenant (or other party with less than complete ownership) could be treated as the owner, or treated as the agent of the owner, such that the lien attaches to the fee-simple (underlying) owner of the property. Please read on as we dig into this topic a little further.
Tenant As Owner or Agent? Lien Attaches to Owner’s Interest in Property
In some cases, the tenant is defined as an “owner” in a state’s mechanics lien statute for the purpose of serving notices. In this situation, tenant improvements are assumed to be done with the owner’s consent, unless specifically disclaimed by the property owner.
In this scenario, a mechanics lien filed for the tenant improvement will generally attach to the owner’s interest in the property as if it was the owner him/herself contracting for the improvement. The owner is presumed to gain the benefit of the improvement (whether or not they are the party contracting to get the work done) and, accordingly, they bear the ultimate responsibility to make sure the parties get paid.
Unless a notice of non-responsibility has been filed, which can work to shield the owner’s interest in the property mechanics liens, the potential mechanics lien claimant in these states has the same protection on a tenant improvement as they would if the owner contracted for the improvement directly.
This is not always the case, however. In some states, the consent of the owner is not presumed, and mechanics liens can either be disallowed, or forced to attach to the interest of the party contracting for the improvement (something less than the total interest in the property).
The Lien Claimant Must Be Careful
Just because a mechanics lien pursuant to a tenant improvement may attach to the owner’s interest in the property, that doesn’t mean that a lien claimant can throw caution to the wind and vigorously pursue the property owner for payment, however. In fact some recent legal cases have urged caution in just that respect.
In a recent tenant lien rights case, a North Carolina 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. The court not only dismissed the claimant’s lien, but also awarded attorney’s fees to the owner.
A prudent mechanics lien claimant would be wise to heed this possibility and exercise caution in any situations where the tenant is somehow involved in a construction project.
Essential Reading from Levelset: Mechanics Liens on Tenant Improvements Can Be a Headache
Mechanics lien on a “leasehold interest”
If the owner is not presumed to consent to tenant work, or if the owner has specifically disclaimed responsibility for the improvement, one possibility is that the lien may attach to the tenant’s interest in the property. This means that the mechanics lien may attach to the leasehold interest of the tenant. That is, the lien encumbers the lease rather than the property.
While this is specifically allowed in some states, this ability is not universal, and if the lien can attach to something other than the underlying property itself, how good is the protection?
Liens attached to leasehold interests still provide protection, but without attachment to the underlying property, they do not have the same authority as a lien attached to the property itself.
In fact, leasehold-liens have even been called illusory liens because:
- 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
- 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.
In many cases, however, especially in the case of a large commercial lease, the pressure of potentially losing a lease due to the lien is enough to spur payment by the tenant.
Getting paid for tenant improvements can be a challenge
Mechanics liens on tenant improvements can cause a headache for contractors and property owners alike. As with many aspects of mechanics lien law they are treated differently from state-to-state, and even by specific 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, discretion and knowledge are vitally important.