Most states have some form of prompt payment requirements. These laws are meant to ensure that property owners and contractors pay for construction services in a timely fashion. Kansas has its own set of prompt pay laws, which outline the deadline for a property owner to pay a contractor – and the penalties if they don’t pay on time. But what does “owner” mean, exactly? What happens if a contractor finishes a construction project for a tenant, but doesn’t get paid on time?
A 2019 Kansas court ruled on the question: Is a tenant is considered an “owner” when it comes to prompt payment?
Prompt payment laws in Kansas
The prompt payment provisions in Kansas are found in the Fairness in Private Construction Contract Act. To ensure timely payment, the statutes impose interest penalties and attorney fees. The relevant portions are under §16-1803(e) and §16-806, which state:
- If the owner fails to pay a contractor within 30 days following the receipt of a timely, properly completed, undisputed request for payment, the owner shall pay interest to the contractor… computed at the rate of 18% per annum on the undisputed amount; &
- In any action to enforce…the court or arbitrator shall award costs and reasonable attorney fees to the prevailing party.
This provision basically says that the owner must pay within 30 days after they receive an invoice. If they don’t, they have to pay an interest penalty and, potentially, court costs and attorney fees. That seems pretty straightforward.
But what if the person who commissioned the work is actually a tenant?
Tenant hires drywall contractor
The case in question is Drywall Systems, Inc. v. A. Arnold of Kansas City, LLC.
- Owner: BMJ Building Management, LLC (BMJ)
- Tenant: A. Arnold of Kansas City, LLC (Arnold)
- Contractor: Drywall Systems, Inc. (Drywall)
Arnold, a moving and storage company, entered into a 5-year lease for part of a building owned by BMJ. At the time, there were already other tenants occupying the building. Because of that, Arnold hired Drywall to install a partition wall so it could store the property it was moving. Once Drywall finished their work, Arnold never paid them. So Drywall initiated an action in court for breach of contract, among other claims.
District Court: Breach of contract, but no penalties
The District Court ruled in Drywall’s favor, agreeing with the breach of contract claim. However, they refused to award interest penalties and attorney fees under the prompt pay act.
The court’s reasoning was that Drywall had a construction contract with the tenant (Arnold), not the property owner (BMJ). They focused on the lease itself, which stated that Arnold was specifically prohibited from making any alterations, modifications, or changes to the property without BMJ’s consent. Furthermore, Arnold was not an owner, as the “Act contemplated.”
Drywall appealed, claiming that they were entitled to the prejudgment interest and attorney fees.
Court of Appeals: A tenant is not an owner
Drywall argued that Arnold was an owner, for two reasons. First of all, leaseholders have previously been treated as owners (of a leasehold estate) under Kansas mechanics lien laws. Secondly, Arnold should be considered an owner because the lease included an option to buy the building.
The court rejected both of these arguments. Analyzing the difference with mechanics lien laws, the court looked at the definition of the term “owner” in Kansas’ prompt pay law. Under §16-1802, an owner is a “person who holds an ownership interest in the real property.” The state’s mechanics lien laws, in contrast, do not define “owner” specifically. As a result, the courts could “read into the language of the lien statutes” when considering whether a leaseholder was treated as an owner for the purpose of a lien claim.
In this prompt payment case, the language is plain and unambiguous. As for the lease with a purchase option, this didn’t satisfy the definition of an owner, either. The lease was only for 5 years and was unable to be assigned, sublet, or otherwise conveyed. Arnold did not have enough “rights” in the property to be deemed an owner.
In conclusion, the court denied the award of interest and attorney’s fees. In the eyes of the prompt payment law, Arnold was a tenant, not an owner. Therefore, the prompt payment requirements and penalties did not apply to them.
Be careful when doing construction for tenants
This is just another example of how strictly courts interpret the law. Even though the prompt pay provisions are meant to help contractors, they won’t always operate as intended. Given the strict interpretation of the statutory language, the court refused to declare that tenants are owners for prompt payment penalties.
If you’re doing construction work for a tenant in Kansas, request a copy of their lease to confirm their legal right to make property modifications. If possible, get the property owner involved.
In addition, you may want to include some extra protections within the contract terms themselves. Contractors won’t be able to rely on prompt payment laws to collect interest or attorney fees if they don’t get paid.