Can Contractors Enforce Liens Against Landlords of Nonpaying Tenants?
Letting tenants hire contractors to perform improvements on the property they lease from you can be risky business. One of the principal dangers is that if the tenant fails to pay its contractors, they may seek to collect the debt from you—by placing a mechanic’s or construction lien on the property. Like many landlords, you may include language that expressly bars tenants from letting their contractors place a lien on the property and disclaims any liability for tenant’s debts to its contractors. But, as some landlords don’t discover until too late, the clauses you include in a tenant’s lease aren’t enough to strip the contractor of its lien rights.
The lesson is that a landlord’s risk of liability for liens placed by a tenant’s contractors depends not simply on the terms but the provisions of the construction liens statute in your state. While lien laws vary by state, the following cases illustrate the two general approaches.
Contractor Can’t Enforce Lien Against Landlord
Situation: A restaurant tenant hired a contractor to install kitchen equipment in the space it leased in a mall. The contractor finished the work, but the tenant paid only $61,035 of the $274,424 bill. So, the contractor placed a lien on the space to secure the $213,389 balance. And because the tenant had since been evicted, the contractor named the landlord as owner of the property and went to court to foreclose. The court ruled that the lien applied only to the tenant and didn’t attach to the property. The contractor appealed.
Ruling: The Michigan court denied the appeal.
Reasoning: As in most states, under Michigan law, a construction lien to secure a contractor’s right to payment for improvement work generally attaches to the interest of the party who contracted for the improvement, in this case the tenant. Exceptions: A contractor’s lien may reach the property interest of a landlord or other noncontracting owner where:
- The landlord requires the improvements;
- The improvements are primarily for the landlord’s benefit; and/or
- The tenant acts as the landlord’s agent in contracting with the contractor.
The contractor was unable to prove that any of the exceptions applied in this case. In fact, the court concluded that the evidence suggested just the opposite. The lease allowed but didn’t require the tenant to make the improvements. The tenant leased the space “as is,” understanding that it wasn’t designed for restaurant use and that improvements would be essential to its business operations. Thus, any improvements were primarily for the tenant and not the landlord’s benefit. The landlord even specifically agreed to let the tenant remove the improvements later in case the next tenant wanted to use the space for a different purpose.
Nor could the contractor show that the tenant had acted as the landlord’s agent. The lease included language disclaiming any agency relationship between the parties:
Nothing contained herein shall be deemed or construed by the parties hereto, nor by any third party, as creating the relationship of principal and agent or of partnership or of joint ventures between the parties hereto, it being understood and agreed that neither the method of computation of Rental, nor any other provision contained herein, nor any acts of the parties herein, shall be deemed to create any relationship between the parties hereto other than the relationship of landlord and tenant.
- Architectural Stainless, Inc. v. Karet Projects, LLC: 2021 Mich. App. LEXIS 3012
Contractor Can Enforce Lien Against Landlord
Situation: A tenant hired a contractor to perform electrical wiring for workstations and make other improvements to the leased property. The tenant didn’t pay for the work. So, the contractor filed a construction lien on the property to secure the $13,707 owed by the tenant, who had since abandoned the space. The landlord sued to remove the lien, claiming it attached only to the tenant’s lease interest in the property. The court sided with the contractor, and the landlord appealed.
Ruling: The Utah appeals court affirmed the lower court’s ruling that the lien was enforceable against the landlord.
Situation: As in the Karet case, the tenant and not the landlord was the one that contracted with the contractor. And just like the mall in Karet, the landlord in this case allowed but didn’t require the tenant to make improvements.
The reason the landlord lost this case was because of the differences in the state lien law statutes. In Utah, the question of whether a construction lien made by a tenant to improve leased space extends to a landlord’s interest isn’t based on whether the landlord required or primarily benefited from the work the way it is in Michigan. As the court noted, construction lien statutes in Utah are “broadly construed” in favor of contractors. And because limiting a contractor’s rights to a tenant’s leasehold interest doesn’t offer significant protection, liens extend to the interests of the owner/landlord in the underlying property. As a result, the construction lien did attach to the landlord’s ownership interest in the property.
- Vineyard Props. of Utah LLC v. RLS Constr. LLC: 2021 UT App 144, 2021 Utah App. LEXIS 147, 2021 WL 6141045
How to Protect Yourself
The bottom line is that you can’t just use boilerplate lease language but need to understand the rules of your state to secure proper protection against liens.