Mechanics Liens on Tenant Improvements

Mechanics liens are statutory security instruments granted to parties who perform labor and/or furnish materials to a construction project. Generally, the security provided is very strong because it the improved property itself is the collateral for payment. This ability to force a sale of the underlying property is the final step in the mechanics lien lifecycle, and represents the lien claimant’s biggest hammer in a battle for payment.

Sometimes, however, the lien’s attachment to the improved property can be modified, or even blocked, based on the who originally contracted for the improvement, and that party’s relation to the actual property owner. If the party originally requesting the work has an interest in the property less than that of “fee simple” ownership – that is, if the contracting party is a tenant, or some other “not full-owner” of the property in question, the mechanics lien may not attach to the property itself.

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If a Mechanics Lien Doesn’t Attach to The Property, To What Does It Attach?

One possibility for mechanics liens that arise pursuant to an improvement originally contracted for by a party with less than a fee simple interest in the improved property is that the lien may attach to the interest of the originally contracting party. This means that when the project is a tenant improvement, the mechanics lien may attach to the interest of the tenant. Some state specifically allow for mechanics liens to attach to a leasehold interest in a property when the project at issue was a tenant improvement.

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, some attorneys call leasehold-liens “illusory”, even when specifically authorized by statute. This claim is made for two general reasons: 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.

It’s not all bad news on this front, however. In many cases, a lien on a leasehold is not worthless. It is not uncommon for the pressure of potentially losing a lease due to the lien is enough to prompt payment by the tenant. This is especially true in commercial rental situations. While some states allow mechanics liens to attach to leasehold interests, that is not the only solution. In some states, a mechanics lien that arose pursuant to a tenant improvement can attach to the fee simple interest of the property owner.

This can be accomplished through many different means, the owner’s awareness of the improvement, the owner benefiting from the improvement, the owner’s acceptance of/agreement to the improvement project, or the tenant being the agent of and acting on behalf of the owner, just to name a few.

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Claimant Must Be Careful, However

Matt Bouchard recently described a North Carolina case that seems to caution mechanics lien claimants from to vigorously pursuing the property owner in a tenant improvement situation.

In that case, Century Fire Protection, LLC v. Heirs the court dismissed the claimant’s lien and 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. The claimants case was so poor, that the court’s award of attorney’s fees to the owner was based on a statute allowing the award of attorney’s fees in a mechanics lien action when the “losing” party unreasonably fails to resolve the suit.

The Takeaway

Mechanics liens on tenant improvements can cause a headache, and like many aspects of mechanics lien law can be (and are) treated differently from state to state and case to case. However, in all cases, and all states, it pays to know to what the mechanics lien can attach, and the requirements for such attachment. In enforcement action for tenant improvements, discretion and knowledge play a crucial role. Not only may a lien claim be dismissed, in certain states the losing party might be forced to foot the whole attorney bill.

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Mechanics Liens on Tenant Improvements Can Be A Headache
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Mechanics Liens on Tenant Improvements Can Be A Headache
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Mechanics liens arising from tenant improvements can be difficult. It's important for claimants to be prudent in the enforcement of them.
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