Green construction never fails at creating new and interesting issues in construction and lien law. Though we were recently asking where all the litigation was in green construction, it seems like this field is really heating up. Just last week we discussed changes to the California PACE program due to recent legal battles, and now, with a new face moving into the Oval Office, we’ve contemplated how electing Donald Trump may affect the industry.
While these topics were certainly important, the most important recent development in green construction (at least to us here at Levelset) comes from a recent Illinois case. In AUI Construction Group v. Louis J. Vaessen, an Illinois appellate court determined that a landowner grants an easement for a structure on their property, and when the landowner does not receive a benefit from the structure, a lien may not be placed on the underlying land for unpaid work on the structure. Because the structure is purely for the benefit of the party to whom the easement was granted (who has no interest in the property on which the structure sits), a lien may not be enforced against the landowner. Those last two sentences will make more sense by the end, I promise. This decision may have a huge impact on wind turbine construction nationwide, and it could also affect how other green construction projects are treated.
Vaessen granted GSG 7 an easement on the property, providing that GSG 7 would have the exclusive right “to erect, install, construct, replace, maintain, repair and operate wind energy conversion systems on the property as developer determined in its sole discretion.” This agreement was recorded in the county record. In return for the easement, Vaessen would receive annual payments of $7,500. Effectively, Vaessen was not a part of the project. The explicit agreement to keep the ownership of the land and the turbine separate is incredibly important.
One of the subcontractors on the project was AUI, who was responsible for the construction of the foundation and the tower. In AUI’s subcontractor’s agreement, GSG 7 was listed as the owner for the wind turbine. At the end of the project, AUI claimed it was owed $5.9M from another subcontractor higher on the payment chain. AUI received partial payment, but was owed a remaining balance of $3.18M. AUI filed an arbitration demand to settle the dispute. When they won an arbitration award, the higher tiered subcontractor filed bankruptcy. The final award granted was for $3.5M.
AUI eventually attempted to foreclose a mechanics lien on the Vaessens’ property in attempt to receive payment. In doing so, AUI claimed that the turbine served as a valuable, permanent improvement to the property. As such, the subcontractor attempted to foreclose a lien against the land. In defense, the Vaessens claimed that the turbine was actually the personal property of GSG 7, not the Vaessens. The property owners argued that the turbine served as a nonlienable trade fixture rather than an improvement to the property.
The trial court found in favor of the property owners. The court relied on a three factor test to determine the structure’s type: “(1) the nature of the equipment’s attachment to the realty, (2) the equipment’s adaptation to and necessity for the purposes to which the premises are devoted, and (3) whether it was intended that the equipment should be considered part of the real estate.” Applying said test, the court found that the contractor, GSG 7, retained ownership of the wind turbine. The court reasoned that to do otherwise would result in unintended, absurd consequences injuring the property owners.
The appellate court agreed, noting that intent is the most important factor. The court also noted that the ability to remove a structure is not determinative of whether or not an improvement is lienable. Rather, where an improvement is removable AND the parties have contracted in a way to evidence that the ownership between the improvement and underlying land should be considered separate, the improvement may be considered an unalienable trade fixture. While the first two factors of the test leaned (pun very much intentional) toward a lienable improvement, the most important factor, the intent, quite clearly pointed toward an nonlienable trade fixture. That the ownership of the land and structure would remain divided between the Vaessens and GSG 7 was explicitly included in the contracts for the project, including AUI’s subcontract.
The decision essentially relies on the theory that GSG 7, the owner of the structure, was the only party benefitting from the construction of the turbine. The Vaessens’ sole interest in the development was the rent they received from GSG 7. Because the Vaessens received no benefit from the construction of the wind turbine, allowing a lien on their property would be improper. We’ve actually seen similar issues before, which we discussed in our post “Cellular Towers Can Present Unique Situations Regarding Mechanics Liens.” Unfortunately, it looks like none of the options outlined in that post would have resulted in a successful claim. New legislation may be in order to protect against situations like this one.
This decision could have a serious impact on wind turbine construction as well as green building on the whole. As such, the Associated General Contractors of America, the Builders Association, and the Central Illinois Builders of AGC, along with a few other groups, filed briefs in support of AUI before the final ruling. While these groups raised additional arguments, the court ultimately sided with the landowners. One of the points these groups raised was regarding the lien rights of subcontractors working on similar projects- where is the protection when the owner of the property is not the party benefitting from the work being completed? While liens are possible against leasehold interests, the court here found that this was not true of an easement. The court also found that the structure was not subject to a lien pursuant to the Uniform Commercial Code.
This should trouble those in the green building industry, particularly those installing equipment that is not permanent. For those involved in wind turbine construction and solar panel installation, as well as other nonpermanent installations, it may be harder to obtain security in the face of nonpayment. I guess it may be time to ask again: Does The Green Building Industry Have Fewer Mechanics Lien Rights?
For more on the state of Illinois, check out our Illinois Lien Law FAQs and our other Illinois posts’.