Utah Lien Amendments - Tenant Improvements

The Utah Legislature’s 2022 Regular Session recently adjourned, and one particular piece of legislation that was enacted — Senate Bill 119 — makes amendments to the Utah Preconstruction and Construction Lien statutes. Specifically, the law changes the definition of an “owner” on a construction project — and clarifies when a claim filed in relation to a tenant improvement attaches to the property itself, or just the leasehold interest.

Utah amends lien statutes regarding the scope of lien claims on tenant improvements

Bill Overview

Once this bill goes into effect, two significant changes will be made to lien rights in Utah. More specifically, what a lien claim will attach to when the project is a tenant improvement. The fee-simple interest of the property owner or the leasehold interest of the tenant.

The first makes changes to the definition of an “owner” on a construction project under Utah Code §38-1a-102:

“(26) ‘Owner’ means a person who possesses an interest in the project property and contracts with an original contractor for preconstruction service or construction work.”

Secondly, the amendments also add additional subsections under Utah Code §38-1a-301(4), which determines what a lien claim will attach to.

“(b) If an owner possesses an interest in the project property that is less than fee simple, a preconstruction or construction lien attaches only to the lesser interest of the owner and does not attach to the fee simple interest.

(c) Notwithstanding Subsection (4)(b), a preconstruction or construction lien may attach to the fee simple interest in the project property, if the person who provides preconstruction service or construction work can demonstrate that the preconstruction or construction work can demonstrate that the preconstruction services or construction work:

(i) was authorized by the person possessing the fee simple interest in the project property; and

(ii) provides a substantial benefit to the person who owns the fee simple interest beyond the time period of the lesser interest possessed by the owner.”

Lien amendments seem to be aimed at rectifying a harsh decision for a Utah landlord

This new law helps to clarify if and when a contractor working on a tenant improvement can file a claim against the property itself. The new legislation appears to be a direct response to a recent Utah Court of Appeals decision in Vineyard Props. of Utah v. RLS Construction.

In that case, the court declared that a contractor’s lien claim filed pursuant to a tenant improvement contract attached to the property owner’s fee simple interest, as opposed to the leasehold interest of contracting tenant.

In the opinion, the court noted that had this case arisen prior to the amendments in 2011 and 2012, the case would have had a different outcome. However, under the amended statutory language, the definitions of “owner” and “project property” were worded broadly enough to include a landlord’s fee-simple interest even though the landlord did not contract or authorize the work.

Despite the court’s holding under the strict interpretation of the statutes, they did note the policy concerns regarding the outcome:

“Landlords would become involuntary guarantors of their tenants’ debts and obligations,” would be “forced to shoulder the costs of ‘improvements’ they did not want [and] did not agree to pay for,” and “would have no choice but to pass the financial burden on to their tenants, likely through significant-increased security deposits, rent, and insurance requirements.”

In the same opinion, the court outlined why this distinction is so important:

“Construction liens against an owner’s fee interest in real property tend to be more valuable than construction liens against a tenant’s leasehold interest; indeed, a tenant possesses only a right to occult the property in return for making specific lease payments and, unless the lease payments are well below market rate, there is often little value to be gained by foreclosing upon and selling a tenant’s leasehold interest.”

What Utah contractors should expect under these new changes

Once this legislation goes into effect in May 2022, the courts will no longer be bound to the previous strict interpretation. Lien claims on tenant improvement projects will only attach to the owner’s fee-simple interest if the work was authorized by the owner, and the improvements provided a substantial benefit to the fee-simple owner beyond the duration of the lease. Thus, contractors hired by tenants should be aware of the limitations of their lien rights on such projects.

This brings Utah in line with most states regarding tenant improvements. As for what is needed to establish that the work was “authorized by the owner” will need to be hashed out by the court system. However, the general approach across the country points to some of the factors contractors should consider: Does the lease agreement specifically require and/or authorize improvements to the property? Was the landlord a party to the construction contract? Did the owner inform the contractor in writing that they are not responsible for the improvements, such as a Notice of Non-responsibility?

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