This blog is part two in a series on Tennessee lien laws where we will give the basics of what the lien law structure looks like in Tennessee, understand it a little bit, understand some of the pitfalls, and some of the things that you need to be aware of.
Part 2: Preserving a Lien – Timing and Filing Requirements in TN
Part 5: Bonding a Lien in TN
Part 8: Can You Lien for Tenant Work in TN?
Part 11: Other Rights – The TN Prompt Payment Act – Notice and Remedies
We will first go through a little bit of a recap of the basics from Part 1 of this series, Lien Law Basics – Who, What, and How Much?
Recap: Tennessee Lien Law Basics
a. Who has lien rights in Tennessee?
Prime contractors and remote contractors have lien rights. There is a very broad net under the Tennessee lien laws and it does not limit suppliers to suppliers or second-tier subcontractors like you may see in certain other states or under the Miller Act.
b. For what work are lien rights valid?
c. On what property are lien rights valid?
Again, this is also pretty broad in Tennessee. It is real property or an interest in real property excluding public projects and properties owned by the government. Now, it is also excluding projects where a payment bond has been recorded.
d. For how much are lien rights valid?
A lien secures the ‘contract price.’ This means the amount agreed upon by the contracting parties to be paid for performing work or labor or for furnishing materials, machinery, equipment, services, overhead and profit, included in the contract, increased or diminished by the price of extras..
The lien has to be backed by a contract in Tennesse but that contract cannot be oral. The absent express agreement on price you are going to get is the reasonable value of the items in the definition above. The limitations are no interest and no attorney’s fees.
Prime Contractors vs. Remote Contractors
Now we will talk about how the lien law differentiates between prime contractors and remote contractors. These two terms are a little funny but that is what is used in the Tennessee lien law.
Essentially, a prime contractor is anyone who has a contract with the owner. What you will see in the above image is a typical setup where the owner has hired a general contractor that is doing 99 percent of the work but has also hired a landscaper to come in and do all the landscaping in the end directly.
Under that scenario, the landscaper is going to be a prime contractor just like the general contractor. Anyone contracting with the general contractor, or the landscaper are all going to be remote contractors. Anyone contracting with the remote contractor is going to be a remote contractor.
In Tennessee there are two prime contractors and they fall into one of those two buckets. In this blog, we will just be focusing on the main prime contractor. So, what do prime contractors have to do in Tennessee to preserve their lien rights?
What Are the Prime Contractor Pre-Work Notice Requirements?
You will need to start with the question ‘are there any pre-work notice requirements?’ A lot of states require notices to go out to preserve lien rights in various forms. Tennessee is not exactly there. In fact, the state’s lien law does not require anything at all.
There is a separate section of the Code and Construction Act which is a sister to the Prompt Payment Act. It used to require pre-work notice for any non-residential project. That changed mid-2021, and it is now the exact opposite.
a. Residential projects
With the 2020 amendments to the Tennessee lien statutes, the pre-work notices now required for residential projects are different.
§ 66-11-146 Residential real property
(a)(1) As used in this subsection (a), ‘residential real property’ means a building consisting of one (1) dwelling unit in which the owner of the real property intends to reside or resides as the owner’s principal place of residence, including improvements to or on the parcel of property where the residential building is located, and also means a building consisting of two (2), three (3), or four (4) dwelling units where the owner of the real property intends to reside or resides in one (1) of the units as the owner’s principal place of residence, including improvements to or on the parcel of property where the residential building is located.
Now it is really based on how many units there are, and it has to be less than four to qualify. It also has to be known whether an owner is going to reside in one or more of the units. If you have neither of those aspects, you do not have a residential project that is going to fall under the rest of the requirements. So, a lot of the investment-type projects like townhouses are not going to be considered a residential project in Tennessee.
Now, the notice that is required again after the 2020 amendment is required only for residential projects. There is a statutory approved form that is also available with SunRay that you can use as well to get your notice out.
What you should know is that if you did not send a pre-work notice and you think you do not have lien rights, you have to remember that under Tennessee law, the notice requirement is again, not under the lien section. So, while not providing the pre-work notice is technically a criminal offense in Tennessee, it does not affect your lien rights and should not.
So, even if you do not remember and are working on a residential project, to send this pre-work notice, do not fret. Good practice is to do it, but even if you have not, all is not lost.
That is for residential projects. What about for other projects?
Pre-Work Notice Requirements
There are no notice requirements at all for pre-work to preserve lien rights. The pre-work notice was discussed during the 2020 amendments, and it was left where it was.
A prime may record the contract
Now the other thing you should note in case of pre-work, is that Tennessee lien statutes do allow you to record the contract. This means that a prime contract or any contract with the owner can be recorded in the chain of title. But this is very rarely done. From a protection standpoint it can simplify things in the sense that you do not have some other notice requirements down the road.
Practically, it is pretty infeasible for anyone doing any sort of volume of work to record their prime contracts to take advantage of this section of the lien statute. It is there, it is an option for you, and it provides some protection particularly on the priority side if you do not end up recording a Notice of Lien on time.
But it is not something that is required, it is optional. So, with that said, when do you have to do things under Tennessee law?
Lien Recording for Priority – 90 Days
There is a two-part process for prime contractors. One is recording a Notice of Lien and the other is filing a lawsuit. And there are a number of things associated with that to perfect the construction lien.
We will now first talk about recording a Notice of Lien.
a. Recording a Notice of Lien within 90 days
This is where you go record in the chain of title, a document that most people would consider the lien. This is what people will see if they do title searches on the property and such.
i. Irrelevant if prime contractor recorded the contract
If a prime contractor takes the prime contract and records it in the chain of title, it is to put everyone on notice. There is no need to actually record a Notice of Lien. But now things get a little bit tricky. The 90-day requirement is a requirement to preserve priority via good-faith purchases.
ii. Not required to preserve lien rights against the owner
If you do not do it as a prime contractor, it does not mean that you have lost all your lien rights. It means that you have lost potential priority against somebody who purchases the property. That brings us to the second step in the one year.
iii. Priority requirement
But we will first stay on the notice to record the construction lien, and this is the 90-day requirement. A lot of prime contractors do not follow this 90-day requirement. Instead, they just leave it up in the air. And the reason they do this is because there is also a requirement under Tennessee lien law that the owner give a prime contractor and any certain remote contractors notice.
If the owner is going to sell the property, in theory it works great. The prime contractor can sit back and wait for an owner to send them a notice, then they can record their lien and move forward. But what we would tell you is that life is not always that simple. Best practice is still to go ahead and record a Notice of Lien within 90 days and you will get 90 days of completion or abandonment.
iv. A Notice of Lien can be recorded after 90 days
Rather than wait on the one-year deadline, and the biggest reason for that is really a priority issue and for a prime contractor, if you react in those first 90 days, you are going to get to go all the way back to visible commencement.
If you record outside those 90 days, you are only going to get priority as of the date you file that construction lien. So, keep that in mind when you think about the 90 days. If you realize 120 days later that the owner has not paid, and you ask what to do, you should go ahead and record a lien.
There is no reason not to go ahead and do it outside the 90-day period.
b. Notice to Owner/Lenders of Notice of Lien
Another thing heard a lot is when it comes to the recording of the Notice of Lien, is people ask if they have to notify the owner or the lenders. Now, this is a tricky and hairy issue. In Tennessee lien law, the answer is no. At the time you record a Notice of Lien, which is the 90-day notice, you do not have to notify the owner or lenders.
That being said, best practice is to do so. You are also going to have to do so when you get to the perfection stage. Because the definition of owner is written so broadly in Tennessee, that it is going to include lenders.
What is suggested is that if you are to the point of filing a Notice of Lien, communication and notice to those involved is (particularly with the Prompt Payment Act which is a little separate from the lien) to go ahead and provide the notice to any owner which is going to include any lender as they have an interest in the property.
Lien Recording Details
The question now is what do you file? What you file and these statutory base forms are available in the SunRay System.
a. Statutorily Approved Forms like the Sworn Statement of Account
You are going to have to file a Sworn Statement of Account. Whatever you file is going to have to be put under oath with a verification page by somebody who has knowledge. It is going to have to be the amount of work in a reasonable description of the real property. Now those elements, being the amount of and reasonably certain description of the real property, are what is required in the statute.
The statute form also goes on to require you to put a little bit of a description of what work was there and when the date of last work was. There is a little bit of a gray area in question between the Tennessee bar or construction bar whether you have to include a description of the work and the last date.
Again, good practice is to go ahead and do so, so you do not have to have that discussion or debate. And if you are using the statutorily approved forms like the ones that SunRay has, you are going to be okay.
The reason you have to watch all these as a prime contractor, particularly the date of last work, is because of the 90-day requirement and the one-year requirement. These are typically going to be what triggers those two requirements.
b. Presumption of Correctness and Sufficiency
Now, one thing that is nice in Tennessee lien law is there is a presumption that whatever is in a building permit, is accurate. If you can get a copy of the building permit, you are going to have a good enough description of the property which a judge is likely going to hold up as well as the name of the respective parties.
So, if you get your hands on a building permit, the way the lien laws are written, grab it and make sure your lien matches.
c. Street address
Certain states go different ways on this. Some states require a legal description and some states do not. We have some case law that actually says the street address is enough. That is pretty consistent with what you see in the building permits because they are almost always going to have a street address rather than a legal description.
There is also a requirement to lien the correct property. And the judges that have looked at this have required it to go down to the smallest level of real property. As you get into multi-family developments or condo units for instance, there is some case law that says you cannot lien the entire project, and you cannot even lien an entire building. You need to put your lien with respect to the individual condo within that building in which you did the work.
d. Do not forget about allocation requirements
There are a lot of specific allocation requirements in the lien law. But there are some exceptions that allow you to lien a bigger partial like the project, to lien a building, or how you go about allocating. You have to know what property you are liening and be aware that if you can get that building permit, you can feel pretty comfortable that the information you have is correct and you really only have to worry about the allocation requirements.
Now that is the 90-day Notice of Lien filed in the chain of title. Again, not required for a prime contractor to preserve their lien against the owner, but it is required to save priority against other parties. So that gets us to the one-year requirement.
Lawsuit Required to Perfect
The one-year requirement in Tennessee is to perfect the construction lien. This is a real requirement for a prime contractor. The 90-day notice is again optional with the exception of bona fide third parties purchasing the property. So, the one year is what you have to ensure that you comply with as a prime contractor.
The one year you do not actually have to record anything in the Chain of Title if we are talking about your rights vis-à-vis the owner. With that, the question always comes about the 90 days and one year, and what that means.
a. The 90 day and one year deadline run from ‘completion of abandonment’
Tennessee’s lien law is somewhat clear and somewhat vague on this. The answer is it is 90 days or one year from completion or abandonment. With respect to prime contractors, it is a whole lot easier to interpret than it is with remote contractors.
i. Do not rely on warranty/punch work
The abandonment means you need to find out if the project has been abandoned or if it has been completed. On the completion side, there are a number of cases out there that say if you are doing punch list work or warranty work, you have already completed.
The way the case law turns is, it looks more at what would typically be viewed as substantial completion, or if the property can be used for the improvement be used for its intended purpose. So that is kind of the demarcation when you are thinking of substantial completion.
ii. Be aware of ‘deemed abandonment'
The other thing you need to look out for is abandonment. As of today, we know what that date of abandonment is and it gets kind of tricky when you have an owner abandoning. But Tennessee lien law does have a clean-up requirement.
What they do as a 'deemed abandonment,' a situation or a set of facts which will be deemed abandoned for the purpose of 90 days in the one year is what you can read below:
(b) A building structure or improvement shall be deemed to have been abandoned for purpose of this chapter when there is a cessation of operation for a period of ninety (90) days and an intent on the part of the owner or prime contractor to cease operation permanently; or at least for an indefinite period.
Really, this turns on whether there is an expressed intent of an abandonment or a delay for at least a certain period of time. So, if it is decided to go in 30 days or even 100 days, it will not get you there. Hoping to go in 100 days but not having a plan now will probably put you back to the deemed abandoned section of the statute.
In the deemed abandonment, the 90-day period is not deemed abandoned as of the 90th day, it is deemed abandoned as of Day 1. So, if you are running into a situation where you are close to a deemed abandonment, then you need to be thinking about your lien rights in terms of Day 1 when that deemed abandonment would have started, not the 91st day.
Deadlines Can Be Shortened
While we discussed deadlines and timing for prime contractors, things get more complex. Two things that really do that under Tennessee lien law are the Notice of Completion and the Lien Enforcement Demand.
a. Notice of Completion
The Notice of Completion is what the owner can file at the end of the project to shorten the time in which you have your lien rights, or else your lien rights will be extinguished. Again, it turns on whether it is a residential project, a commercial, or other project.
i. Ten days
ii. Thirty days
On any other project, it is going to be 30 days after a Notice of Completion.
This is a statutory form again, that a lot of lenders want to see filed and will rely on. That is the sort of industry standard. Courts have been pretty receptive to that concept. That said, there has been some case law that is really driven by the facts of the cases where people were filing Notices of Abandonment before the projects were actually completed.
In most of those situations it was not really a lending or funding-based issue. And the courts have actually thrown those Notices of Completion out when the project was not 100% complete and allowed lienors to have their typical standard periods rather than the shortened periods.
So if you see a Notice of Completion, they should be served by the owner on any prime contractor. You have to react, do not sit on your hands. There are some arguments that can be made later, but generally you need to react.
b. Lien Enforcement Demand
Now there is also a lien enforcement demand. This is with respect to liens that are recorded in the chain of title. Again, this is the 90-day requirement. What an owner or a prime contractor can do is force anyone who has recorded a Notice of Lien to file suit to perfect that lien within a 60-day period.
For instance, for a prime contractor who records a construction lien within its 90 days, an owner may come back immediately with a lien enforcement demand. The prime contractor rather than having one year to file suit to perfect their lien, is now down to 60 days from the receipt of the lien enforcement demand, or 150 days at that point from abandonment or completion.