Commercial landlords are put in a tough position when their tenants’ contract for improvements to the property. In Florida, the law provides certain steps that a landlord can take to protect their property from the threat of a mechanics lien. However, these steps must be strictly adhered to in order to properly shield their property from lien liability. This strict compliance requirement was highlighted in a recent Florida Court of Appeals case, that allowed a subcontractor’s lien to attach to the owner’s property, as opposed to just the leasehold interest.
Florida liens and tenant improvements
Florida lien laws specifically provide property owners with a way to shield their property from lien claims when a tenant commissions construction work on their property. The required steps can be found under Fla. Stat. §713.10(2):
“(a) When the lease expressly provides that the interest of the lessor shall not be subject to liens for improvements made by the lessee, the lessee shall notify the contractor making any such improvements of such provision or provisions in the lease, and the knowing or willful failure of the lessee to provide such notice to the contractor shall render the contract between the lessee and the contractor voidable at the option of the contractor.
(b) The interest of the lessor is not subject to liens for improvements made by the lessee when:
The lease, or a short form or a memorandum of the lease that contains the specific language in the lease prohibiting such liability, is recorded in the official records of the county where the premises are located before the recording of a notice of commencement for improvements to the premises and the terms of the lease expressly prohibit such liability; or
The terms of the lease expressly prohibit such liability, and a notice advising that leases for the rental of premises on a parcel of land prohibit such liability has been recorded in the official records of the county in which the parcel of land is located before the recording of a notice of commencement for improvements to the premises.”
So why does this matter for subcontractors? Well, to put it bluntly, a leasehold interest doesn’t really have that much value, if any. Contrast that with a security interest in the property itself, which has a well-defined, concrete value.
Learn more: Construction Lien Rights When a Project is a Tenant Improvement
This is why most commercial landlords will take advantage of §713.10. However, a word of caution to such owners. Strict compliance is crucial to benefit from these protections. And owner involvement is a determining factor in all this, as you will see in the following case.
FL Appeals Court allows lien to attach to the property instead of the leasehold interest
The case in question is K.D. Construction of Florida Inc. v. MDM Retail, Ltd.
Project Snapshot
- Owner: MDM Retail, Ltd. (MDM)
- Represented by: Matthew W. Buttrick and Joseph J. Onorati of Stearns Weaver Miller Weissler Alhadeff & Sitterson, P.A.
- Lessee: Metasquare Cinema, LLC (Metasquare)
- General Contractor: Gates Butz Institutional Construction, LLC (GBI)
- Subcontractor: K.D. Construction of Florida, Inc. (KD)
- Represented by: Nestor Bustamante, Alan C. Brandt, Jr., and Robert E. Ferencik, Jr. of Ferencik Libanoff Brandt Bustamante & Goldstein, P.A.
MDM, the owner of commercial property in downtown Miami, had entered into a lease agreement with Metasquare for use as a movie theater in 2013. The lease agreement, which presumably prohibited liability for liens, was subsequently recorded in the Dade County public records.
Then, in 2017, MDM and Metasquare hired GBI as the general contractor to make improvements to the theater. GBI, in turn, hired KD as a subcontractor to install metal studs and drywall installation work under a subcontract valued at over $700K. After KD had completed their work under the subcontract, there was a remaining balance of $394,132; which resulted in a construction lien being filed.
When the foreclosure action was initiated, MDM responded by claiming that pursuant to §713.10, the lien couldn’t be enforced against their property. KD countered by stating that those provisions didn’t apply because MDM personally contracted for the improvements, recorded the notices of commencement, and was contractually obligated to pay for the improvements. Thus, the lien should extend to the MDM’s property and not just Metasquare’s leasehold interest. The trial court ruled in favor of MDM, so KD appealed.
On appeal, the Court sided with KD, stating:
“[We] agree with K.D. Construction that the exception to lien liability for property owners who record a lease which prohibits such liability does not apply under the circumstances presented here.”
Some of the more relevant circumstances included that MDM was one of the expressly named signatories of the contract, both MDM and Metasquare were designated as “owners,” and even included an allocation of payment obligations categorized as “separate scopes of work.”
Accordingly, the trial court’s decision to limit the claim to Metasquare’s leasehold interest was reversed.
Strong protections require strict compliance
MDM followed all the statutory procedures to shield their property from liability for lien claims. However, the simple fact remains that they were still a party to the agreement! It all came down to MDM’s involvement with the construction contract.
From a landlord’s position, they should have either stayed out of the contract entirely or executed a separate contract for that specific scope of work. At least that way, they’d only be liable to the extent of the work performed under their direction, instead of the entirety of the work performed.
From a subcontractor’s perspective, caution should always be taken when working on tenant improvements. Even though lien rights are available, how valuable those rights are can be questionable. However, as was the case here, even when a property owner does take steps to shield their property from liability, this isn’t always a guarantee. Any misstep in the process or active involvement in the agreement can defeat any protections they may have had.