Before you start work, always check if it is a tenant improvement job. Know how to use the Notice of Commencement to find out who the owner is, and what pre-lien documents you need to file to protect your lien rights.
This blog comes from a webinar that was presented by SunRay Construction Solutions and Alex Barthet. Alex is a board-certified construction lawyer serving clients in Florida. In this blog we are going to discuss how to get paid and what steps you need to follow when you do work for the tenant on a piece of property. So let’s get started.
Why Does It Matter?
This discussion about working for a tenant is happening for the following reasons:
1. You expect that your lien is secured by the property
The main reason is because there is a general expectation that if you do work on a property, that if you don’t get paid and you follow the Florida lien law, you can sell that property and recover the amount that you are owed.
2. If you are not paid, you expect to sell the property and collect
If you are not paid, you expect to have a foreclosure sale and at that foreclosure sale, you hope to be able to recover your money. Now you are hopeful here because it is still subject to the equity in the property.
For example, someone is owed $100,000 on a piece of property, but unfortunately there is no equity in the property. There is a first mortgage and a second mortgage, and the second mortgage holder is foreclosing on the property. It is worth about $700,000 and there is about $800,000 of mortgages alone, plus the $100,000 that is owed. So don’t think that having lien rights means you automatically get paid.
It definitely is a strong right that you need to enforce because it does help you get paid. But you expect to be able to have that foreclosure sale, sell the property itself, and hopefully recover.
3. If you work for the tenant, your lien may only attach to the lease
The problem we have is that if you do work for the tenant, and it doesn’t mean just you, it means whoever the tenant hires. You may be a rental company, a supply house, a subcontractor that has an agreement with a subcontractor or a contractor.
The key question is, is the owner the “tenant” or the actual owner? Because if it is the tenant, then your lien only attaches to the lease that the tenant has to rent the property. It is not attached to the dirt or the property itself. So if you are unpaid, and you don’t have rights to the dirt, you may only have rights to the lease.
4. The value of the lease may be very low or $0
That creates a big problem because that lease may be very low or have no value at all. At the foreclosure sale, you can follow the same process as you would normally expect. File all your documents and proceed with the foreclosure. But when that foreclosure sale happens, the court is not selling the dirt, but the lease.
5. When the tenant is not paying for improvements, they are typically not paying rent
Typically what is also seen, is that when the tenant is not paying for improvements, they are also not paying rent. You may decide to pursue your foreclosure on the lease, but that lease may be of no value because the tenant was evicted. And if they are evicted when you sell the lease, it has zero value.
Now those are all the reasons why this matters. Because what you are anticipating is securitizing your credit which is the property lien. You may have an expectation that it has one value when in fact it has a very different value or no value.
How to Check If It Is a Tenant Improvement Job
Here are some things you need to check to figure out if it is in fact a tenant improvement job:
1. Where is the work? Is it typically tenant work?
Start off by asking yourself where the work is and what you are doing. You should also ask yourself if it is typically tenant work. This should be the first line of defense. Are you doing work in a mall, office building or restaurant? If you are doing work at places that are usually related to a landlord-tenant relationship, that should already put your antenna up that something here needs further investigation.
2. Who hired the contractor? The tenant or the landlord?
You need to know who hired the contractor. Now if you are the contractor, it is a little easier. If you are the general contractor and you have been hired to build out a restaurant, maybe the person who hired you is the tenant and not the landlord. So you need to investigate that.
3. If the landlord hired the contractor, your lien rights are likely okay
For example, not all the work that happens at a mall is subject to this problem. If the landlord at a strip mall hires and underground contractor to do all the underground work and the parking lot, that work is not subject to this problem. Because the landlord who owns the dirt is contracting with the contractor who may contract with you as a subcontractor or a rental company. So your lien rights in this situation will likely be just fine.
4. If the tenant hired the contractor, your lien rights may be in jeopardy
Your rights under your lien flow from the party that hired the contractor and his or her rights in the property. So if you are the tenant and you hire a contractor, the only right that you have in the property, is our lease. So if you don’t pay and there is a foreclosure, typically the only right that the contractor has in the property, is your lease. This is where the problem emanates from.
5. Even if hired by the tenant, are the improvements required by the lease?
You may not know if the improvements are required by the lease, even as the contractor because you don’t have the lease. And it becomes even more of a problem as you move further away from the tenant. So if I am the rental company to a subcontractor, how do I know what is in the lease? We are going to talk about that later.
If in fact the tenant is required by the lease to do the work that they are doing – legally called the “pith” of the lease, which is the heart of the lease, requires that the tenant do this work, then your lien rights will likely still be fine. They may be impaired, but more likely than not, they are okay.
6. Is there a timely recorded lien prohibition in the lease?
If there is a timely recorded lien prohibition in the lease, then you almost have no lien rights in the dirt. Now what is a lien prohibition? If you are the landlord, there is a certain law that we are going to talk about later, that says you can sign a lease with your tenant and in it, you can say that under no circumstances can they allow any lien or to put any lien on your property.
Then you take that section of your lease, you go to the clerk’s office and you record it. Once you do that, which is called the “timely recorded lien prohibition,” then in almost every situation, your property is going to be free and clear of any lien. You need to know whether or not this document has been prepared and recorded.
7. Pull the Notice of Commencement and compare it with the property records/deed
To analyze the situation, you need to pull a copy of the Notice of Commencement and compare it with the property records or the deed, as well as whoever is the owner. If you pull a copy of the Notice of Commencement, you are going to see who is listed as the owner. Sometimes it will even say lease improvements or instead of owner, it will say tenant. So these are automatically red flags that you have an issue.
But if it not obvious on the face of the Notice of Commencement, you can compare who is listed as the owner to the person that owns the property. So if ABC Corp is listed as the owner of the property in the Notice of Commencement you in search in the property records to see who the actual owner of the property, and it is ZYZ company, now you have an issue. Because you know that the person who recorded the Notice of Commencement is not the same person who owns the property. So clearly, there may be a landlord-tenant relationship.
Now when you use SunRay, we do a lot of this research for you, to make sure that the notice goes to the right place. But we are not going to confirm whether or not your lien could attach to the lease or the dirt. But we have all this information available. So you can ask us, and we will send you a copy of this Notice of Commencement so you can continue to do your due diligence.
It is not that you don’t have lien rights. Even if you do work for tenant, you still have lien rights. The problem is that that lien may only attach to the lease and not to the dirt. That is what is really being focused on here.
8. Search the public records for a recorded copy of the lease containing the lien prohibition
You want to search the public records for a copy of this lease containing the lien prohibition. That is the document mentioned before. The document is called a Notice of Lease or Memorandum of Lease. That is usually how it is indexed within the clerk’s office. And the way you are going to find it, is you are going to Google the clerk’s office or the official records of the county in which the project is located.
For example, if you are a rental company and you are about to do work a mall, and you want to see if the lease prohibition has been recorded. You are going to Google “Miami-Dade Count official records/public records.” That will take you to the public record section of Miami-Dade County. You need to know who the owner of the property is, so you may have to go to the Property Appraiser website in Miami-Dade County, do a search for the address, and it will say that ZYX Corp owns the property.
You need to take that name and put it in the official record search. It will show you all of the documents that have been recorded under that name. And one of them may be a Notice of Lease or Memorandum of Lease. You need to now look at that document because if it exists, then you know that your ability to lien and potentially foreclose on the dirt itself is probably not non-existent.
How to Check If It Is a Tenant Improvement Job?
Now there are some specific rules about this document.
The recorded document must:
- contain the specific language in the lease prohibiting such liability or a notice advising that leases on the parcel prohibit liens. This is because the parcel for a strip mall is typically one parcel and it has many units. So all of the parcels prohibit liens and that is in all of the leases;
- be recorded before the recording of a Notice of Commencement for Improvements. If it is recorded after, you should be concerned but you still may have lien rights in the dirt, and;
- The terms of the lease expressly prohibit such lien liability.
These three things have to be in play and again, the lien prohibition noticed by the landlord has to be recorded before the Notice of Commencement.
What Are the Differences In the Lien Rules?
Now we will briefly run through the rules and explain what the differences are in the lien rules:
The short answer is that there are no differences in the lien rules against tenants. The things that you need to do to secure your lien rights to sell the dirt, are effectively the same as the rules that you need to follow to sell the lease.
Now we will run through the documents you need to file and the deadlines for each, related to a lien:
- The Notice to Owner must be served no later than 45 days from your first work or delivery of materials on the project. The 45 days are the outside-most date, and you should file it much sooner than that.
- Record the Claim of Lien no later than 90 days from your last work or delivery of materials on the project. Remember that 90 days is not the same as three months, since some months have more than 30 days, and one has fewer than 30 days. The 90 days always includes weekends and holidays except the 90 day. So you have to count starting at the next day.
- This means that if your last delivery of materials was today, then day one of my count is tomorrow. You need to count every weekend and holiday in between, and then when you get to the 90th day, if that lands on a weekend or holiday, you are going to roll it to the next day that the court is open on, in your county.
- Always remember that you can record your lien before you finish the work. If you want to exert a little pressure on the owner or contractor to get paid. You should keep working, but lien the job today.
- The “last work” does not include punch list or warranty work. So you cannot count those days as your last day. For example, if you are a painter and you show up to do work, and then a month later you go back to finish painting some baseboard. When you touch up those baseboards, that would likely be considered punch list or warranty work. So your 90 days ran from the month before, when you last left the job. Not the day you did that warranty work.
- The “last work” does include approved change order work. For example, if you were off the job for a month and you get new change order to show up at the job and do some work, and it’s an approved change order, your 90 days is not from a month ago. It is from today when you actually did the work under the approved change order.
- Those in direct contract with the owner must serve a Contractor’s Final Affidavit at least five days before the lawsuit to foreclose on the Claim of Lien.
- File suit within one year of the recording date of the Claim of Lien. Do not wait one year from the recording date of your Claim of Lien to file your lawsuit unless you have a business reason to do so. It is recommended that you file the lawsuit between 30 to 60 days after you record your lien.
How Do I Best Protect My Lien Rights?
Some of the best practices to protect your lien rights are:
Step 1: Know what documents you need to file and the deadlines before you start work
All of the information mentioned above is what you need to know about before your start work. Finding out any of this information after you are owed thousands of dollars is really hard to come back from. You may have expected to have lien rights, but don’t actually have any.
Step 2: Check for the Notice of Lease
Check for the Notice of Lease or the Notice of the Memorandum. If this Notice exists, you will almost certainly not have lien rights on the property itself only as to the lease.
Step 3: Don’t agree to a pay-when-paid
If you are doing work on tenant improvement property, you should not agree to a pay-when-paid provision. For example, if you are a subcontractor, you sign a contract with the general contractor and it says that you only get paid when the owner pays the contractor, that owner may be the tenant. So now the tenant doesn’t pay the contractor, and the contractor doesn’t pay you under their valid and enforceable pay-when-paid provision.
You think that you probably still have your lien rights. But if the tenant isn’t paying the contractor, the tenant may not have any more money and be evicted. Now you are going to enforce your lien rights on a lease that may be worthless. So you may have entered this transaction assuming that you were secured at least in part by your lien rights, only to find out that you have no meaningful lien rights.
So if you are doing tenant work with limited or no rights, do not agree to pay-when-paid provisions.
Step 4: Serve a demand of a copy of lease
There is a document you can serve called a “demand for the copy of the lease.” So when you need to check if certain provisions exist in the lease and you need to check it, you may be wondering how to get a copy of the lease. You can get it by requesting it. It has to be separate and apart from your Notice to Owner. This form is statutory, and it has a special warning in it.
Examples of Liens Gone Badly
1. There was a contractor who was hired by who he thought was an agent for the owner, but the person who hired him was actually a houseguest for the owner. The contractor did about $50,000 of work in the house, he wasn’t paid, and the person who hired him and who he had a contract with left the country. The client put a lien on the property and the owner of the property said that he had never agreed to any of the work.
The client’s lien rights were then effectively no good. Because the party he contracted with had no authority to do the work that he did. So the case ultimately settled for a fraction of what the client was owed. But he had a very limited ability to recover any money because he didn’t have an actual contract with the actual owner. His lien rights didn’t truly extend to the owner who had no knowledge and granted no permission to do the work.
2. A tenant for a restaurant hired a contractor to do the buildout for a restaurant. Many millions of dollars were required for this. The restaurant went out of business shortly after it opened and the contractor with whom the restaurant had a dispute with, put a lien on the property. That lien only attached to the leasehold interest.
Once the restaurant went out of business and could no longer fund its operations, the contractor who had a lien for around $1,000,000 effectively got nothing. Because the lease was the only right that they had their lien interest in. the landlord then evicted the tenant - the owner of the restaurant.
So the contractor didn’t do any of this advance research to analyze whether or not their lien would be good. He just assumed that the restaurant would have spent so much money to do the work and wouldn’t go out of business. But when they did, they got nothing.
3. Someone was doing tenant buildout work with full knowledge that it was in fact tenant buildout work for a bar and restaurant on Miami beach. The tenant stopped paying and as the situation was analyzed, they determined that while there was a notice that was recorded by the landlord to prohibit liens, it was recorded after the Notice of Commencement for the work.
But the person doing the work was still able to get paid by foreclosing the lien because of that mistake that the landlord made by not recording the lien prohibition document in advance of the Notice of the Commencement.
This is an example of how a very small technicality can switch who recovers and who doesn’t.