This article is taken from a webinar that was presented by SunRay Construction Solutions and Alex Barthet. Alex is a board-certified construction attorney, who serves clients in the state of Florida. In this article we will discuss why your lien is worthless when you do tenant buildout work, or is it? Some ways that you can make your lien enforceable when you do tenant buildout work will also be discussed.
Why Is My Lien on Tenant Buildout Work Worthless?
Why is your lien worthless when you do tenant buildout work. The reason for this is pretty simple. The statute that governs liens says that so long as there is a contractual relationship written or unwritten that exists between the owner of the property, all the way down to a material supplier, to a sub-subcontractor, then you have lien rights.
a. Who is the party contracting with the general contractor?
But your lien rights only exist, and to the extent that the owner has an interest in the property, meaning if the property owner who contracted the work with the general contractor who hired you, the plumber, is the tenant. This means that the tenant is the party that hired the contractor. Then you can only encumber the interest that that tenant has, which is elites.
i. Fee simple owner/landlor
If you do work for someone who owns the property, then to the extent that you do not get paid, and record a lien, you can encumber that owner’s ‘fee simple ownership’ interest in the property.
The crux of the question that we need to answer is, what interest does the party that is contracting with the general contractor have in the property? Because more likely than not, you are not going to have a better interest in the property than that person or company does. So that is really what you need to focus on.
b. Generally, lien attaches to interest of party that contracts with general contractor
Is the party that contracted with the general contractor the owner, the landlord or the tenant? How can you figure this out? What you need to do is determine what interest the contracting ‘owner’ has.
c. Check public records in county where property is located
The easiest way to do that is to look in the public records. Assume that you are doing work in Miami-Dade County. In Miami-Dade County, you want to determine who owns the property that you are about to do work on. One of the things you can do is you can Google search ‘property appraiser Miami-Dade County.’
You just switch that search around for any county that you want, and it will pull up the property appraiser's website. In that property appraiser's website, it will allow you to run a search typically by owner name or property address.
So if you type in the property address, it is going to tell you who the homeowner is. Say it is ABC Corp as the owner of this piece of property. But you know that the party that hired the contractor is not ABC Corp, it is someone else. Now you should be very concerned that your construction lien is not going to attach to the owner’s interest, because the owner is not a contracting party to this chain of contracts.
There are obviously some other ways to determine whether you are doing tenant build-out work. Obviously, if you are doing work in a strip mall or in an office building, those are situations in which more likely than not, you are doing work for the tenant and not the landlord.
It is possible that the landlord contracted for the work but if you are doing the buildout work inside of a yogurt shop, then more likely than not, you are doing the work for the tenant, and you should be very suspect of the lien rights that you may have.
d. Do not rely on the Notice of Commencement
One of the things that you have to be very careful about is not to rely on the Notice of Commencement. The reason is because the Notice of Commencement form that is put out by pretty much every municipality has a little spot where the owner puts their name. Now if the tenant is filling out the Notice of Commencement, the tenant may fill out their name in that section.
So you look at the Notice of Commencement and it says owner. It says this person’s name, so they must be the owner. That is not always the case. Again, the only way you will know for sure is to look in the public records with the property appraiser to determine who the owner of the property is.
Does the Lease Have No-Lien Language?
Now we will discuss another issue that impacts your rights to have a lien on tenant buildout work, and that is, what is the language that exists in the lease between the landlord and the tenant?
a. Landlord can protect real property by including ‘no-lien provision’ in lease agreement
A landlord has the option to put in a provision in their lease that prohibits liens by the tenant. This is a ‘no-lien provision.’ Almost every lease that you look at will have a no-lien provision. It is pretty common and in essence says something along the lines of ‘We, the landlord, agree with you tenant, that you will not do anything to allow this piece of property to be encumbered by a lien.’
b. Lien will only permit you to take over the lease, not sell the real estate
If the construction lien is not permitted to exist pursuant to the lease, then your lien will only attach to the leasehold interest. Again, this means you will not be able to sell the real estate, or the property.
Going back to the above example, you are doing work at the buildout for the yogurt shop in a strip mall. The tenant is the one who hires the contractor who hires you, the plumber. Now you put a lien on the property. If you are not paid and you want to foreclose on your lien, what you want to foreclose on is the lease.
You will be able to potentially take ownership of the lease, move in and run the yogurt shop. But that is not really what you want to do. What you want to do is be able to sell the property, not just that yogurt shop, but all of it to get paid.
c. If you win, you can move in and pay rent
The other problem you will see is that most often when a tenant is unable to pay the contractor, or its subcontractor, they are probably also not paying the rent.
d. Usually when the tenant is not paying for construction, they are not paying rent and may be evicted
If the tenant is not paying the rent, what is going to happen? They are going to get evicted.
The landlord is going to terminate the lease and take over the space. This means that your potential lien on that tenant buildout work is worthless. You will recover nothing because the lease will be terminated.
What Does the Florida Statute Say?
We will now take a look at the Florida statutes and talk about the process that has to be followed to perfect all of these things.
a. What Florida Statute 713.10 says
It is a specific statute 713.10 and it says that if this lease has this prohibition mentioned above, and a copy of it has been recorded in the public records. What does it have to say? It has to have the name of the lessor, a legal description of the parcel, the specific no-lien language per the lease, and a statement that all or a majority of the leases in the parcel prohibit such liability.
So it is a two-part analysis. One is the lease between the landlord and the tenant that has this prohibition and two, is that the landlord has recorded a copy of this Memorandum of Lease in the public record putting the world on notice because it is now recorded in the public record that there are no liens permitted on this property.
You can find this Memorandum of Lease. It is usually recorded in the public records of the county where the property is located. You can find it by doing a search for the name of the landlord. You can go to the property appraiser’s website and there, you can type in the address. It will tell you who the owner is.
Let us say it is ZYX Corp. That is the name of the owner. So you go and look in the recorded documents section in the county where the property is located. You type in ‘XYZ Corp,’ that is the owner, and you will see all the documents that have been recorded that affect that owner name.
If there is one of these Memorandums of Leases, it will be listed in those recorded documents.
How Can I Protect Myself?
The question is, what is it that you have to do to protect yourself? How can you make sure that if you do work that (i) you know for sure that it is tenant buildout work, and (ii) even if it is, what can you do to protect yourself?
a. Check to see what party hired the general contractor
The first thing you need to do is be fully informed. Are you doing work at any stage whether you are a material supplier, a sub-subcontractor, subcontractor, or even a general contractor. Are you doing work for someone who has a contract with the owner of the property, or a tenant.
b. Search public records to confirm true owner
You need to do that search mentioned above. Search the public records to confirm who the true owner is. Determine if the true owner of the property is the party that hired that general contractor.
c. Search public records for a ‘no-lien’ affidavit
You also need to search in the public records for this ‘no-lien’ affidavit or the Memorandum of Lease. This is not a new construction law in the state of Florida. Almost every landlord has a no-lien provision in their lease. Almost every landlord is keen to the process of recording this Memorandum of Lease or lien affidavit in the public records.
It is highly unlikely that you are going to find a situation where you are doing work for a tenant, yet those things do not exist, which could potentially give you a right to lien. This is a 1,000 to one shot that those things will come together such that you will actually have a lien on the dirt or on the ground versus just on the lease.
d. As a subcontractor, avoid pay-when-paid clauses on tenant improvement work
As a subcontractor, you need to be extra vigilant about signing a contract with a pay-when-paid clause when you are doing tenant improvement work.
For example, going back to the yogurt shop, the tenant hires the general contractor who hires you the plumber. You have a pay-when-paid clause in your contract with the general contractor which says that if the contractor is not paid by the tenant, then the contractor does not have to pay you.
e. As a subcontractor, avoid pay-when-paid clauses on tenant improvement work
Well, we know that you are doing tenant buildout work, so as a result, you know that your lien is probably not that great. You may accidentally agree to sign contracts with pay-when-paid clauses because you are going to rely on your lien in order to enforce your right to get paid.
But if the tenant stops paying the contractor, and therefore, the pay-when-paid provision applies, meaning you have no rights against the contractor to get paid because the contractor was not paid by the tenant. So now you have no action on the contract with your customer, the contractor, and you do not have an action on the lien. Technically you do have an action, but it is only against the lease.
As a result, you really have no security when you do this work with respect to your payment. If the tenant does not pay the contractor, the contractor does not have to pay you. If the tenant cannot pay the contractor, then they will probably get evicted, and your lien rights are worthless. So what else can you do?
f. Send your Notice to Owner and record your lien timely
You can absolutely send your Notice to Owner and record your lien timely. Even though your rights based on a lease are much less valuable than a right with respect to the dirt, or the fee simple interest in the property. Having those rights will increase the likelihood of getting paid.
Significant local, most regional, and almost all national tenants are pretty solid outfits, and as a result, your lien on their lease is actually valuable.
For example, let us say you are doing work for the build-out of a Chic-Fil-A. Here you are doing the work, there is a dispute, and you are not getting paid. So you record a lien on the property. Chic-Fil-A is a national business. The other side is not more likely than not going to allow you to foreclose on their lease even though they do not own the property.
So that is a good example of where having a lien on the tenant’s interest is still very valuable. You want to make sure that you send your Notice to Owner, and you record your lien timely because you will not have lien rights even on the lease.
g. Send a ‘Demand for Copy of Lease Prohibiting Liens’ separate from the Notice to Owner
If you do not comply with the Notice to Owner and lien recording deadlines, the other thing you can do is send what is called the Demand for Copy of Lease Prohibiting Liens. This has to be a separate notice from the Notice to Owner.
i. Demand for Copy of the Lease
Below is what this looks like.
It is a pretty simple letter. It needs to go via certified mail and it should be mailed to the landlord. You need to include the name and address of the lessee, the name, address, and legal description of the property, and it has a warning.
So what is this request doing? This is a written request by you, the potential lienor to the landlord. A copy also goes to the tenant, and you tell them to send you a copy of the lease. Because you want to see for yourself the provision in the lease that precludes the liens from being recorded.
The reason you are sending this request is much less because you actually want to see the document, and it is much more because you are hoping that they do not respond. This is just as the warning says, their failure to respond within 30 days and to provide you with a copy means that now your lien is not potentially guaranteed, but it potentially may attach to the landlord’s interest of the property.
There are some individuals that typically provide materials for tenant buildout work. And this is part of their routine. They notice the job and when they know that it is work for a tenant buildout property, they automatically send this request.
Remember it has to be separate from the Notice to Owner. It cannot be sent with the Notice to Owner or attached as part of the Notice to Owner. The reason they do this is in the hopes that if they ever have to lien the property later, they can argue that they made this request, the request was not timely responded to, and as a result they have lien rights.
Through the SunRay Construction Solutions portal, SunRay customers can request this copy of the letter. You can request that in addition to sending a Notice to Owner that you can have SunRay send this request for a copy of the lease and it should be something that you do out of habit whenever you know you are doing work on a tenant buildout space.
ii. Exceptions to the Demand for Copy of the Lease
Now there are some exceptions to this rule. As mentioned above, it is not guaranteed that when you send this request, and the other side does not response that you automatically get a lien on the property.
The contractor or the lienor must otherwise have complied with all of the other sections of the lien law and that you did not have actual notice that the interest of the lessor was not subject to a No Lien Affidavit. This means you cannot make this request knowing that you have no lien rights, still overcome that, and have a lien.
But again, it is very important to make the request to protect yourself.
You can get a copy of this document, and have it sent for you through SunRay Construction Solutions if you want a copy of the form yourself. By far, the easiest thing to do is when you are in the process of having SunRay handle your notices, that you get this request from them.