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This blog has been taken from a webinar presented by SunRay Construction Solutions and Alex Barthet. Alex is a board-certified construction lawyer who serves clients in the state of Florida. We will discuss how to lien for tenant improvements.
Why Is Liening for Tenant Work Different?
You may be wondering how liening for tenant work is different from liening for any other type of work. To understand the answer to this question you need to understand a little bit more about the lien law.
What is a lien/construction lien/mechanic’s lien?
The premise of the Florida lien law is that your lien encumbers the property interest of the person who contracted for the work.
Your lien attaches to the interest of the contracting party
If you are doing work for a tenant, and the tenant is at the top of the pyramid, then your lien encumbers the tenant’s interest in the property which is merely the lease. It is not the owner’s interest in the property. If the landlord was the party that was contracting for the work, then your construction lien in Florida would attach to the landlord’s interest which allows you to sell the property as a whole.
The best way to think about this is, let us say you are building a restaurant in a strip mall, or an office in an office park. The tenant is the one who contracts you for the work. So whether you are a supplier to the electrician or the contractor yourself, your lien is more likely than not only going to attach to the tenant’s interest.
That interest is only the right to possess the property in exchange for rent, which for you as an unpaid lienor does very little to satisfy your need to get paid.
There are exceptions
There are many exceptions to this rule, and it is probably one of the more complicated series of rules that exist in the Florida lien law. And the lien law itself is already complicated to begin with.
What Steps Do I Need to Follow to Secure My Lien Rights in the Tenant’s Lease?
This is the main crux of the issue – knowing what steps to follow to secure your lien rights in the tenant’s interest. These steps still need to be following in liening for the landlord’s interest. Follow the rules for different documents that you know:
1. Send your Notice to Owner
You need to send your Notice to Owner (NTO) no later than 45 days from your first work or delivery of materials to the project.
2. Send your Claim of Lien
The Claim of Lien needs to be recorded no later than 90 days from your last work or last delivery of materials to the project.
3. Serve lien on all interested parties
You need to serve the construction lien in Florida to all interest parties, which means that everyone listed on the Notice of Commencement needs to get a copy of your lien within 15 days of it being recorded.
4. Serve Contractor’s Final Affidavit if in privity with the tenant
If you are in direct privity or direct contract with the tenant, you need to serve what is called a Contractor’s Final Affidavit no later than five days before you foreclose on your lien. It is highly recommended that if you are in privity with the tenant or owner that you serve the Contractor’s Final affidavit at the same time that you record your lien.
5. File a civil action to foreclose on the lien
Finally, no later than one year from the recording date of the Claim of Lien, you need to bring a civil action or a lawsuit in court to foreclose on your lien. But also note that this period of time can be shortened by the landlord or the tenant if they serve upon you a 20-Day Summons to show cause which reduces the time to 20 days, or a Notice of Contest of Lien which reduces your time to 60 days.
What Steps Do I Need to Follow to Secure My Lien Rights in the Landlord’s Property?
If you are doing work on a tenant build-out and want to secure your right in the landlord’s property, you need to follow the rules for different documents that you know. This requires the same documents and deadlines that were mentioned earlier.
You need to send you Notice to Owner (NTO) in 45 days, lien in 90 days, service the lien in 15 days, and send the Contractors final Affidavit no later than five days before you sue. You also have to file your lawsuit within a year.
These are the rules you know, but there are some other things that you need to do.
1. The improvement needs to be with center of the lease
You need to understand that your lien will only attach to the landlord’s interest in the property. The work that is being performed is considered the pith (center) of the lease.
For example, assume that a landlord contracts with a tenant and that lease says that tenant has to pay the landlord rent, and in exchange for the rent, you can use the space. But it doesn’t say anything about building out the space. It gives the tenant permission to build out but that is not the crux of or an important component of the lease.
So the tenant decides that he/she is going to build out the space, hire some people, doesn’t pay them, and they record liens on the property. Those liens will not attach to the landlord’s interest because the lease did not include any provisions that would require the tenant to build out the space.
Now let us take another example. A landlord and a tenant enter into a lease. The lease says that the tenant needs to pay rent for the space. But in addition, the landlord says that as part of the agreement, that the tenant agrees to build out the space to a Class A office space. The landlord may give the tenant improvement allowances for that, or not. But it becomes a key component in the lease.
This is where you have what is called the “pith of the lease.” So now you can potentially have your lien attached not only to the tenant’s interest in the property, but the landlord’s interest in the property. This means that if you don’t get paid for that build-out, you can sell the whole shopping mall to get paid.
2. If not, the lien only attaches to the tenant’s interest
The next question you need to ask is if this lease requires the tenant to build out the space. One of the things you should ask for is a copy of the lease. There is a specific mechanism in the Florida law lien law that will permit you to do that, and we will discuss this later.
3. Search the public records for a lien prohibition
There is another way for the landlord to keep their property free and clear of liens even if the lease includes language that requires the build-out. This is to include in his lease with the tenant, a provision that says no matter what, you cannot have any liens attached to this property.
In addition to having that in the lease, the landlord needs to also record a copy of that section of that lease in the public records where the property is located. So the tenant can search the public records for this lien prohibition that may have been recorded by the landlord.
How is this done?
1. You first need to know the real name of the owner of the property, who may also be the landlord. If you don’t know their legal name then one way to find it, is to go to the property appraiser website for the county that the property is located in and do a search by the address to find the owner’s name. More often than not, the owner is going to be the landlord but this is not always true.
You can also find the owner’s name in other ways. Maybe it is referenced in your contract, on the permit, in the Notice of Commencement, but however you decide to find it, you need to be able to find the landlord’s legal name.
2. The next step is to find the Memorandum of Lease in the recorded documents in the county where the project is located. The Memorandum of Lease will mention whether the property can be liened.
You should do these things at the beginning of the job. Because if you assume that you will have a lien on the landlord’s interest but have never checked to see if the Memorandum of Lease for lien prohibition has been recorded, you may find out the hard way when you are not paid and your lien attaches to the tenant’s interest only.
This is a big deal because if you are not getting paid, there is a pretty big chance that the landlord is also not getting paid by the tenant for the rent. When that happens, the landlord can evict the tenant which means that the lease you may have had a right to foreclose upon is now worthless because the tenant is gone.
For example, there is a tenant who built out a space where he ran a restaurant. After the restaurant was completely built out, the tenant had a dispute with the contractor. he didn’t pay the contractor their final draw because of issues with respect to construction. Irrespective of the construction issues, the restaurant continued to operate but ultimately failed around a year later.
The premises were vacated and the lease was defaulted on. Now because the landlord followed all the steps necessary to have a lien prohibition in the lease and recorded the necessary documents, this contractor who has a lien on the leasehold, now has nothing because the tenant has been evicted, and the lease is worthless because it has been cancelled.
So this is an example where the contractor now no longer has a right to recover anything because as a result of the lease being terminated, they have no security. They can sue the entity which is the tenant, but the tenant was a single purpose entity who did nothing, owned nothing, and has now disappeared.
Demand a copy of the lease
One of the other things you can do is demand a copy of the lease. There is a specific provision in the Florida Statute that gives you the right to demand a copy of the lease. Below is the language for that request, that you should serve at the beginning of the job.
This demand is served upon you pursuant to Fla. Stat. § 713.10(3). The undersigned is under contract to furnish labor, services, or materials for improvements being made by the above referenced Lessee regarding the Property referenced above. The undersigned hereby demands a copy of the provision in the lease between you and Lessee prohibiting liability for improvements made by the Lessee to the Property, which copy shall be verified under Florida Statute, § 92.525. Reimbursement for reasonable copy costs is recognized.
(Contractor’s signature and address)
You need to send out this form apart from your Notice to Owner. This demand requests a verified copy within 30 days of the lease. And if you don’t get the lease, then you have the right to terminate your contract because you haven’t been provided this information.
What Other Landmines Do I Need to Watch Out For?
Some of the other things that you need to be on the lookout for if you are doing tenant build-out work.
As a subcontractor the pay-when-paid provision is deadly
As a subcontractor, you need to be especially careful with pay-when-paid provisions when you are doing tenant improvement work.
For example, you are a plumber, you have a contract with a contractor, and your contract has a valid pay-when-paid provision in it. Your lien only attaches to the tenant’s interest. You do not get paid by the contractor because the contractor has not been paid by the tenant, and you do not have lien rights in the actual property, only the lease.
If the tenant does not pay the contractor, defaults on their lease and the lease is worthless, now you don't have anyone to go after. Your lien on the property, assuming that you even followed all the steps is no good because there is no value in the lease and they may get evicted.
You cannot sue the contractor also because the contractor isn't in breach of their agreement. They only have to pay you when they have been paid by the tenant. And they have not been paid. So, be very careful when signing contracts with contractors that have a pay-when-paid provision, if you only have an interest in the tenant’s property.
As a supplier, no other security can create a financial risk
As a supplier, if you have no other significant security then the security interest only in the tenant’s interest in the property may create a significant financial risk for the same reason. Many suppliers think that if they sell $100,000 worth of electrical supplies to this electrician for this job, then at least I can lien the property and get paid.
If your lien is only on the tenant’s interest of the property, that interest is not great because the tenant doesn’t have the financial ability to pay, and they get evicted, you have no real security. You are left going after our customer who may have a hard time paying you the amount of money that you have delivered to the job site.
Get a project-specific personal guaranty
So, it is nice to get some additional security as a supplier. One of the things you can do is get a personal guaranty. If you can’t get a personal guaranty for the entire account, maybe you should consider getting a project-specific personal guaranty. So on this Job A where you have solid lien rights, you don’t need the personal guaranty, but Job B is a tenant build-out. Your lien rights are iffy, and you don’t get a project-specific personal guaranty.
