Liening Tenant Improvement

When doing work for a tenant, what rights do you have regarding placing a lien on tenant improvements?  Not many, especially if the landlord/owner has incorporated lien prohibitions within the lease document.

As any construction expert will tell you, a lien is a legal claim of one person upon the property of another to secure the payment of a debt.  If you’re doing work for a tenant, you are aware the tenant doesn’t own the property, and therefore your lien doesn’t attach to the real property.

Let’s make it concrete. Say you are building out a restaurant in a strip mall or an office in a high-rise building. If the tenant contracts for the work, then whether you are a supplier to the electrician or the electrician, your lien most likely attaches only to the tenant’s interest. That interest isn’t ownership – just the right to possess that space in exchange for rent. And that can do little to satisfy your need to get paid.

So how should you handle safeguarding yourself when doing work or providing materials to a tenant? First off, follow the following 5 rules precisely to secure your lien rights.

• Send any notice no later than 45 days from your first work or delivery to the project.
• Record your claim of lien no later than 90 days from your last work or delivery to the project.
• Ensure all interested parties are served within 15 days of the recording of the lien.
• Serve a contractor’s final affidavit no later than five days before you foreclose on the lien.
• File a civil action to foreclose on the lien no later than a year from the recording date of the lien.

Calculating these dates correctly can be less of a burden with Calc-U-Lien. It’s an app downloadable on your IOS or Android device that does the counting and remembering for you.

If your work in a project would be such that you have to secure lien rights in the landlord’s ownership interest in the property, the same five points listed above apply. But there’s more to do as well.

The terms of the tenant’s lease impact you as a contractor, subcontractor or supplier. Your lien will only attach to a landlord’s interest in the property if the work being performed is at “the pith of the lease.” Here’s what that means. Often when a landlord contracts with a tenant, it’s basically “You pay me rent, and in exchange you can use this space.”

If a tenant decides to build out space, and doesn’t pay contractors, liens won’t attach because there was no lease provision that required the tenant to build out the space. That wasn’t at the heart of the lease.

However, sometimes a lease spells out that, in addition to paying rent, the tenant is required to, say, build out a Class A office space. Maybe the owner gives improvement allowances to the tenant, maybe not. But if this is in a lease governing your project, your lien is attached to tenant’s interest, and the landlord’s.

Don’t take anyone’s word for what’s in the lease; ask for a copy. A landlord can keep his property free of liens, but that provision – a lien prohibition – must be attached to the lease and be in the public records. Safeguard your hard work by knowing what you are getting into if it comes down to lien recovery!

You can have your construction lawyer search public records for a lease under the legal name of the property owner. Once you have that name, which can be found on the appropriate county’s property appraiser website, search for the memorandum of lease in the county where property is located. If there is a provision preventing liens, it should be attached. If a build out is at the pith of the lease agreement, it will be there.

Remember, if you aren’t getting paid by a tenant, there’s a good chance the landlord isn’t either. If the tenant gets evicted, that would make your contract with the tenant void. Time is precious in your line of work. Taking the time to secure this information before you begin a project is far better than finding out the hard way that you have no lien to stand on beyond the tenant’s interest.

In one real-life example, a tenant built out his restaurant space. There was a dispute with a contractor, and he didn’t pay. The restaurant continued operation, but then failed a year later. The tenant defaulted on the lease, and because the landlord had included lien prohibitions, the contractor has nothing to pursue.

You can file suit against that tenant, but if they own nothing now and have disappeared; it’s an uphill battle at best. So get that lease.

Under Florida Statutes you have a right to demand a copy of the lease. The lienzone.com provides this form you can copy or download to request that lease and know for sure whether it contains a no-lien provision.

If you send this request and don’t receive a verified copy within 30 days, you can terminate your contract. Be aware of other red flags as well. Avoid pay-when-paid and pay-if-paid provisions. If a contractor isn’t paid by the tenant, and tenant defaults on the lease, you have no one to go after. You can’t sue the contractor, as they aren’t in breach. You can’t sue the tenant, because the lease is now void.

As a supplier, if you have no other security than the tenant’s lease, this may a create risk you can’t afford to take. One other option is to obtain a project-specific personal guarantee, if you can get the tenant to sign off.

Whatever decision you make on taking a job with a tenant, make it with your eyes wide open, understanding your rights and potential pitfalls after discussing your options with your construction lawyer. Your work is worth it.

Can You Lien a Leased Property?

There’s a popular misconception that doing work on a leased property for a tenant means you can’t protect yourself when it comes to getting paid. Not true! But doing work for a tenant does mean you need to take specific steps to have rights and recourse.

Generally, you can lien a leased property. The first step is determining who is contracting with whom on the project. If you are the general contractor, are you signing a construction contract with the landlord or with the tenant? If you are the subcontractor or a supplier, with whom is your general contractor’s contract?

Here’s why it matters. Florida Statutes allow you to lien the interest of the party contracting with the general contractor. If the landlord is the one contracting with the general contractor for the work, and that contract is not paid, your lien rights would be on the contractor’s interest – the actual property as a whole.

But say your contract, or your GC’s contract, is with a tenant, perhaps the owner of the restaurant that’s being built out. If you have lien rights, those rights would only attach to the restaurant owner’s lease. You wouldn’t be able to sell the property as a whole if you needed to get paid.

So how do you learn what the contract signer’s interest is? Search public records to determine the owner of the property. Go to the property appraiser’s website for the county where the property is being worked on. (Google “property appraiser [Your County] County.”) On the site, enter the property address, the folio number, or the name you have. The taxpayer on the property is what will come up, and most of the time, that’s the owner. If you are a general contractor, you’ll want to compare that to who signed the contract with you. If it’s not the owner, it’s likely the lessee or tenant.

Don’t make the mistake of relying on the notice of commencement for this information. Just because a corporation is listed in the notice of commencement doesn’t mean you will have lien rights on the property. Stick to the taxpayer records.

Once you determine whether you have lien rights on the property or the lease, there’s another crucial and important question to answer. Does the lease between landlord and tenant prohibit liens from being placed on the property? Most sophisticated owners have gone through a process that allows them to do just that. If your job is in a significant commercial building, chances are the owner has been counseled to include such a no-lien provision in its leases. The language would read something like this: “under no circumstances can the tenant do anything to encumber the property.” This would of course frustrate your goal of being able to sell the property at a public auction if you haven’t been paid.

Florida Statute 713.10 addresses recording a lien on a leased property. The landlord’s property is exempt from liens if: the lease expressly prohibits liens; notice of this prohibition was recorded in the official record of the county in which the parcel of land is located and before the recording of a notice of commencement for the work; and the notice includes the lessor’s name, a legal description of the parcel, the specific no-lien language contained in the lease, and a statement that all or a majority of the leases on the property prohibit such liability.

Sound confusing? You’re not alone. Most folks seek out legal representation when confronted with these scenarios so as to better protect their interests.

If you aren’t paid and have a lien on the leaseholder’s interest, you still have a shot at recouping payment. Your lien would permit you to take over the lease, which you could then sell. Of course, someone would have to be interested in buying what could be a partially completed restaurant. It’s not an attractive proposition, though not an impossibility.

You could also foreclose your lien on the leaseholder’s interest. If you succeed, you get to move in, pay rent, and run a restaurant.  Again, not a very attractive proposition. Quite often when the tenant isn’t paying for construction, they aren’t paying rent either. You may have a lien on a lease that’s in the process of being terminated, with the tenant being evicted.

So, in light of savvy property owners and tenants with uncertain lease equity, can you protect yourself and your work? Take these steps each time you consider work and you’ll be on the right track:

• Before you sign a contract, know what party hired the contractor, and who the owner is, by searching public records.
• Determine whether there’s a no-lien provision. Google the public records of the appropriate county, and then search by corporate name of the landlord or the tenant. See if they have properly recorded no-lien documentation. Know that most owners have taken steps to keep their property free and clear of liens.
• Avoid pay-when-paid or pay-if-paid clauses generally but especially when doing work on leased improvements. When your lien attaches to the lease and not the property, these clauses increase your credit risk if something goes wrong. If you are owed money, but the party paying you hasn’t been paid, a pay-when-paid clause means he doesn’t have to pay you.
• If you decide to go ahead with this type of work, send your notice-to-owner and record your lien in a timely manner. Make sure you can record your lien on something, even if there is not a lot of value in the lease. A tenant, especially a national or regional chain, will likely pay the bill rather than be evicted from the space due to a contractor dispute.
• When you sign a contract, send a demand for a copy of the lease which includes the language prohibiting liens. This is to be sent separate and apart from your notice to owner. Send by certified mail to the landlord, reference the lessee by name and address with the legal address and description of property, and include this warning: Refusal to serve the requested verified copy within 30 days, or service of a false copy, may result in your property being subject to the claim of lien by the person requesting the information. Check TheLienZone.com/Forms for assistance with this step.

Securing your work for a tenant does present some potential challenges. However, being thorough and timely with your paperwork and doing the appropriate research can go a long way toward ensuring you get paid.

Landlord’s lien prohibition no longer a sure thing

Contractors have long accepted the idea that they have little chance of enforcing a lien filed against a landlord for contracted tenant improvements.  Landlords have had the upper hand for years on this issue.  As long as they recorded a copy or an abbreviated version of the applicable lease, or as most landlords do, filed a statement that its leases prohibit any encumbrance or lien for improvements initiated by their tenants, landlords have been able to limit their liability for tenant improvement liens.

However, all that changed when the Florida Legislature revised §713.10. Now contractors are allowed to lien, even if there is a recorded  document attempting to bar such filings.  The amended law allows a contractor to request written verification of the landlord’s lien prohibition and requires the landlord to deliver the verification within 30 days.  If the landlord fails to do so, or responds incorrectly, then its property interests can be subject to a lien.

Of course the contractor still has to comply with the requirements of Florida lien law, providing timely and proper notice to owner.  And landlords also have to be more careful in their filings.  The blanket filing requirement applicable to landlords has been amended  such that a specific notice is now required to advise that the landlord’s leases prohibit liens and all recorded statements by the landlord must include language that all or a majority of its leases entered into on a subject property specifically forbid the liens.  A landlords’ filings must precede the recording of a notice of commencement if they are to be legally effective.