This blog was taken from a webinar that was presented by SunRay Construction Solutions and Alex Barthet. Alex is a board-certified construction lawyer who serves clients in Florida. In this blog, we will discuss what you are liening when you lien a tenant or lease, and how you can get paid.
The following points will also be discussed:
Can I Lien a Leased Property?
Generally, the answer is yes. There is a misconception that if you are doing work on leased property that you do not have any lien rights. That is not true. Here are some other things that you should remember:
1. Who is the party contracting with the general contractor?
The first question you have to ask is, who is contracting with the prime contractor or general contractor on the project? If you are the general contractor on the job, are you signing a construction contract with the landlord or with the tenant? If you are a subcontractor, a supplier, or a sub-subcontractor, this may be even harder to find out, because you may not necessarily know. But it is an important question for you to try to get the answer to.
First you have to understand that Florida statute allows you to get a lien on whatever the interest is, that the party that contracts with the general contractor has. So, if the landlord or person who owns the property contracts with the general contractor to do the work and that general contract is not paid for, then your lien rights are for the dirt (the property as a whole).
However, if the contract is with the tenant, for example, let us say you are a subcontractor and you have a contract with the general contractor. The general contractor has a contract with the owner of a shoe store that is being built out for a hair salon or restaurant. If you have lien rights, those lien rights only typically attach to the interest of the party that contracts with the general contractor. In the example above, that would be the restaurant owner who has a lease.
2. Lien attaches to the interest of the party contracted with the general contractor
You are not going to be able to sell the property as a whole. Your lien is only going to attach to the lease. so, generally whatever the interest is of the party that signs the contract with the general contractor, that is the interest that you are going to be attaching if you record a lien.
3. Check public records in the county where the property is located
How do you figure out the interest of the party that signs the contract? The best thing to do is to conduct a search in the public records to determine who the owner of the property is. The way you do this is by going to the property appraiser's website in the county where the property is being worked on. You just need to Google “property appraiser ___ county” and it will take you to the property appraiser's website.
Typically, you can enter in the address, the folio number, or the owner’s name. It will tell you whether or not they own any property in that county. Technically what that is showing you, is who the taxpayer is. But 99 times out of 100, the taxpayer is the owner. So that is how you will figure out what entity is the party that owns the property.
If you are the general contractor, then you want to compare that to who you have a contract with. And you have to check whether that is the party that signed the contract with you. There is a mistake that some clients make, and that is them relying on the Notice of Commencement. So, they will look at the Notice of Commencement and it will say that the owner of the property is ABC Corp.
Now ABC Corp may in fact be the party that owns the dirt (the landlord). But just because they are listed in the notice, by itself, does not mean that you have lien rights. So, do not be fooled into thinking that because you pulled the Notice of Commencement from the public records and the owner is listed as the party that owns the dirt, that you are okay.
Does the Lease Have “No-Lien Language?
The crux of the question that you have to get an answer to is whether or not the lease that exists between the landlord and the tenant prohibits liens from being placed on the property. All things being equal, most sophisticated owners or landlords of property have gone through the process of making sure that their lease has a provision in it that prohibits liens from being placed on the property.
1. A landlord can protect their real property with a “no-lien” provision
So, if you are doing work at a big strip mall, a large commercial building, or even not that big of a commercial building, the owner has probably already been counselled to include a no-lien provision in their lease. If the landlord puts this provision in their lease that says under no circumstances can the tenant do anything to encumber the property, then that is already one strike against you.
Because now you will not be able to record a lien as a contractor or subcontractor that attaches to the real property. Again, remember that the goal is to be able to sell the property at a public auction at foreclosure if you have not been paid.
2. If your lien is successful, you will only be able to take over the lease
If the lease has this no-lien provision though, then if you have a lien and you are successful in your lien, you will only be permitted to take over the lease, not sell the real estate.
Coming back to the example of the restaurant given above, if you do the work, the tenant is the party that contracts for the work, but the landlord has a no-lien provision in the lease, and you are not paid, you can lien the property. But you are going to lien the leasehold interest. That means the restauranteur’s interest in the property. And then you can sell that lease.
Now someone has to be interested in buying the potentially partially completed restaurant. It is not a very attractive proposition. You can either go forward with the foreclosure of your lien on the leasehold interest which means that if you win, you get to move in to run the interest and pay rent. That is clearly not a very attractive proposition.
3. Usually when the tenant is not paying for work, they are not paying rent
Usually, when the tenant is not paying for construction, they are also not paying rent. This means that the landlord may evict them, which will lead to you having a lien on a lease that is in the course of being terminated because it has not been paid for. So again, you have to be very careful if you are doing work on leased property and your lien only attaches to the leasehold interest.
What Does the Florida Statute Say About this Process?
Now we will take a look at what the Florida Statute says about this process. The specific Florida statute is 713.10, and it says the following:
If the lease expressly prohibits liens and a notice of same has been recorded in the official records of the county in which the parcel of land is located before the recording of the Notice of Commencement and the notice includes the following:
- The name of the lessor,
- The 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 expressly prohibit such liability. If that happens, then the landlord is exempt from liens.
The landlord has to sign up with the tenant, the lease should have no lien language and then the landlord records a copy of either the whole lease or typically a memorandum of the lease with this information in the public records.
How Can I Protect Myself?
Before you sign the contract to do any work, you need to check to see what party hired the contractor to the extent you can. So, if you are a subcontractor, you would like to know who the owner is that signed the contract. The ways to do this are as follows:
1. Check to see what party hired the general contractor
You can ask the general contractor as a sub-subcontractor. Ask the subcontractor to find that information after. This is very important to know.
2. Search the public records to confirm the true owner
You want to search the public records to see who the true owner is to compare the information you have of who signed the contract with the person who is the true owner of the property.
3. Search the public records for a “no-lien” in the lease
You also want to search the public records for that no-lien memorandum or affidavit that may have been found in the lease. The way you are going to do that is you go to the public records in the county where the property is located. So, you can Google “___ county public records” and it will take you to the public records section of their website.
Then you typically do a search either by the corporate name of the landlord or the corporate name of the tenant. After that, it should pull up a copy of the document for you to look at and make sure that the landlord has properly recorded the document.
4. As a subcontractor, avoid pay-when-paid clauses on tenant improvement work
As a subcontractor, sub-subcontractor, or supplier, you want to avoid pay-when-paid clauses when you are doing work for tenant improvements. Now, you typically want to avoid pay-when-paid generally, but it is especially problematic on leased improvements. The reason why is because if you know that you don’t get paid, your lien is only going to attach to the lease and not to the dirt if that significantly increases your credit risk if something goes wrong.
On top of that, if the contractor does not owe you any money because he or she has not been paid by the tenant, now you can’t even go back to the contractor and say that your lien didn’t work and that they at least still owe you the money. The contractor would say that you have a pay-when-paid clause in your contract, and that he was not paid, so he does not have to pay you.
So, be very careful when you are doing work on leased property and you are presented with a contract that has a pay clause in it. That significantly increases the credit risk to you of non-payment.
5. Send your Notice to Owner” and record your lien timely
You always want to make sure that you send your Notice to Owner and record your lien timely. Even if your lien only attaches to the leasehold and you decide knowingly that you are going to move forward with this engagement, you want to make sure that you can record your lien on something.
For example, if a person has a lien on a lease and the lien does not attach to the dirt, it is a built out-store or a built-out restaurant, maybe it is from a national chain, and as a result, the owner is not going to allow their lease to be foreclosed. Because of that, even though you may not have a lot in the form of value in the lease, at the end of the day, the tenant is going to pay the bill. Because you could potentially kick them out of their space.
Again, this is especially true when you deal with national or regional tenants who may have a dispute with a contractor. But your lien is going to allow you to get paid.
6. Send a “Demand for Copy of Lease Prohibiting Liens
The other thing that you should be doing if you know that you are doing work on leased property, is to send what is called a Demand for Copy of Lease Prohibiting Liens. It is a specific letter that has to be separate and apart from your Notice to Owner.
This is what it looks like:
How to Use the SunRay System to Send Out Your Notice to Owner
If you currently use SunRay for your Notice to Owner, you can request this specific document through the SunRay system. This is to the extent that you are doing work on property that you believe to be owned by or leased by a tenant. It is very important that this notice go out at the time you start working on the job, or even before when you sign your contract.
Now, if this notice goes out, the landlord has an obligation to respond with the copy of the lease within 30 days. And if they do not provide the copy or they provide an incorrect document, then to the extent that you have complied with the law otherwise, and you do not have actual notice that the interest of the lessor was not subject to a lien. Then you can lien the property, which is the landlord’s property and called the gold standard.
Then you can sell not just the restaurant that you built out in the strip mall, but potentially the entire strip mall, so that you get paid as a lienor.