Tennessee Lien law basics – Who, What, and How Much - Webinar

This blog is part one 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 1: Lien Law Basics – Who, What, and How Much?

Part 2: Preserving a Lien – Timing and Filing Requirements in TN

Part 3: Preserving a Remote Contractor’s Lien in TN – The Notice of Nonpayment Requirement

Part 4: Filing Suit to Perfect the Lien in TN

Part 5: Bonding a Lien in TN

Part 6: Overzealous and Improper Liens in TN

Part 7: Licensing Considerations – No License, No Lien in TN

Part 8: Can You Lien for Tenant Work in TN?

Part 9: What about Priority? - The Visible Commencement Standard in TN

Part 10: Other Rights – The TN Prompt Payment Act – Reasonable Assurances and Stopping Work

Part 11: Other Rights – The TN Prompt Payment Act – Notice and Remedies

Tennessee Lien Law Basics

As we go into each of these parts it is important to recognize where liens started and the history. It is pretty similar for most jurisdictions in the United States. Tennessee is really no different.

The History of Liens

The concept of lien law began as Washington DC was being built as a city, with Thomas Jefferson trying to find a way in which to convince people to go ahead and build structures, and give them some security that they were going to get paid. That concept developed over time and became what is generally known as a mechanic’s lien or materialman’s lien in various states.

Tennessee recognizes it like most states, as a construction lien being an extraordinary remedy. This means that you have a right to go sue on a contract or collect on a contract. But the problem a lot of times when you have a defunct construction project is there is no money at the end of it.

Instead, the lien right is an extraordinary lien right that comes under the statutes and allows you to collect against the property. And again, Tennessee is no different. But it is going to require what has generally and historically been considered strict performance, particularly with timing and notice. There were some amendments to Tennessee lien law in around 2007 when a section was added for substantial claims.

It provides a little bit of a saving grace for lienors, but it does not provide a ton in the sense that it still will not let you overcome a timely mechanics lien, it will not let you overcome a failure to provide notice, but it will let you overcome a typo in an address or something of that nature.  

So, as we go into the Tennessee lien law with that foundation.

Who Has Lien Rights in Tennessee?

We will start with who has the right to lien. In a lot of states there are limits. Pretty much all states allow a remote contractor to perfect a lien.

No Tier Limit for Contractors

That is true in Tennessee as well, and in the state you are going to see two sets of contractors or material suppliers.

i. Prime contractor

They are all going to be either a prime contractor, which would include material suppliers directly to the owner, and remote contractors, which is anyone at a lower tier.

ii. Remote contractors

So, even a subcontractor to a subcontractor under Tennessee lien law is considered a remote contractor. And in a number of states, that is going to be limited as to who can bring a lien down the chain, the subcontractor of subcontractor or supplier of the subcontractor. Tennessee does not have that; it is just prime contractors and remote contractors.

So, no matter how far down the chain you are, you are still a remote contractor and still have lien rights.

iii. Laborers

The other thing to mention is that laborers, directly as individuals have some lien rights in Tennessee. It is important to note that those lien rights actually have extra priority. They are very rarely recognized, but they are there to protect the individual.  

The other thing is that there is a distinction in Tennessee law between commercial property and residential real property. So while in the state, remote contractors have lien rights, they do not have lien rights on residential property. They are limited to commercial sites. There are a couple of exceptions to this though, and we will get into it later in the blog.

Land Surveyors, Architects and Engineers

It is not just contractors, prime contractors, remote contractors, suppliers, or subcontractors. Tennessee statutes also allow land surveyors, architects, and engineers as well. These parties have an interesting catch though.  

i. Need to have a contract with the owner or agent of the owner

For a designer, land surveyor, or technical engineer, to have lien rights, they need to have a contract with the owner or agent of the owner. There are some case laws as to whether a general contractor can be an agent of the owner.  

ii. Architects and engineers have lien rights with respect to improvement actually made

And the improvement actually needs to be made. So, just making drawings and things like that do not get an architect or engineer lien rights. However, once those drawings are actually implemented, then those designers will have construction lien rights in Tennessee.

What Work Can be Liened in Tennessee?

Now we will discuss what can be liened in Tennessee. The Tennessee statutes are not a picture of clarity in this respect. But they do provide a lot of guidance. Below is the definition in the statutes, which is really where the lien statutes in Tennessee start.

Title 66 – Property

Chapter 11 – Mechanics' and Materialmen’s Liens  

Part 1 – General Provisions

TCA § 66-11-102 – Lien for work and materials

1. There shall be a lien on any lot or tract of real property upon which an improvement has been made by a prime contractor and any remote contractor. The lien shall secure the contract price.

It is all based on this word ‘improvement.’ It is also based on the mechanics lien securing the contract price. And we highlight both of those words because both are defined in statutes to tell us what they mean. As we go there, we will start with the contract and then go to improvements.

a. Contract

You get your lien for your contract price which presumes you have a contract. The definition of contract is “an agreement for improving real property,” and within that definition it says, “written or unwritten, express or implied..”

When you say contract, people think that they do not have a piece of paper to show. Well in Tennessee you do not have to have a piece of paper because an implied contract or even oral contract will get you lien rights, so long as it is an agreement for improving real property.

Some items to get to, as to whether you have an oral contract or implied in law contract, but if you can prove those elements even if you do not have a piece of paper, you can still lien for the work.  

b. Contract price

The contract price is also defined within the Tennessee statutes and what you are going to see there is whatever the contract says. It is going to say that even if you did not put the contract price in there, the contract price is going to be the reasonable value of what is given.

The other important thing, is that it says, “and extras.” This includes “labor, materials, services, equipment, machinery, overhead and profit, for improving real property, authorized by the Owner..”

Tennessee lien laws are pretty broad once you have a contract as to what actual work can be liened, so long as it is improving the property.

c. “Improvement” - TCA § 66-11-101

If you take a look at this section if the statute, there us block quote of the definition improvement. What we would like to talk about is the breadth of it. It includes a whole lot of things so long as you are improving the property. Later in the webinar series, we will get into what is called visible commencement, which has some parallels here to what an improvement is.

You can lien, so long as you are improving the property with a contract with the owner. So that covers what work can be claimed.

Tennessee allows materials that are being delivered and it also allows manufactured materials even if they have not yet been delivered so long as they are ultimately delivered. The best example of this is custom cabinets and things like that, that are being custom-built for a specific project or specific home. Typically, it is more on the project side because subcontractors do not have lien rights on residential properties.

But it is again telling you how broad that depth of what can be liened. And again, as long as you are doing it to improve the property, and it is delivered to the property, or in the case of a product that is being specifically manufactured and has no other reasonable value even before it is delivered so long as it is ultimately delivered, it is okay.

What Property Can be Liened in Tennessee?

Now we move to what property can be liened in Tennessee.  

a. Real property

You can lien ‘real property.’ Real property is the land. The land itself that the new structure sits on is the real property.

i. Leaseholds and Horizontal Property Regime

The other thing we would tell you is that Tennessee lien law specifically addresses improvements for people that do not own the property. And this comes into play a whole lot more often than most people realize. This applies to leaseholds and condo units – what in Tennessee would be considered ‘Horizontal Property Regime.”

But think of leaseholds and condo units where you are asked to go in whether it is a residential or commercial condo unit. Go in and do an improvement for let us say, a restaurant in a high-rise. Obviously, the restaurant does not own the high-rise but it is a restaurant that has no funding.  

Do you have lien rights against that lessee? The answer is this: you have a lien in Tennessee against the lease interest but not necessarily the land in the situation with the restaurant. But there are some exceptions that allow you to get a piece of it.

You have to pay attention to the person that you signed the contract with. Are they the lessee, owner, is it a condo, or is it a fee simple property? You are only going to have lien rights as a general matter the extent that the owner that you contract with has lien rights. There again are exceptions that we will talk about later or being an agent of the owner.

While talking about what property can be liened, the whole idea of a mechanics lien, going back to Thomas Jefferson, is that you are improving a property and you are going to secure payment for that improvement to the property. You read that above when we discussed the definition of an improvement.

ii. Apportionment requirements between lots/parcels

So, what Tennessee has done, is taken that and filtered it done. What we mean by that is, Tennessee has statutory apportionment requirements. That means that whatever the lowest subdivision of the property is, whether it is individual townhouse units, whether it is specific lots within the development, whatever the lowest division of the property is, you have to portion your lien in the same way.

There are some exceptions for that for lots that are next to each other, since they are all being improved as one lot and there are a lot of details around this, if you get into a situation where you have a new development, you see this a lot with site work where the lots are peeled off, town homes are individually being filled off, it is a new subdivision and multiple houses, or driveways are being poured at once.

We suggest that you consult someone about how to portion it. The key there is that there is likely to be an enforcement requirement, and it is possible that the courts will simply throw the lien out if you do not apportion. The practical implication of that is that you get a lien on more property than you could have ever obtained otherwise because the lien again, is limited the contract price.

b. No lien rights on certain types of properties

Now generally in Tennessee, you can lien to the extent of the interest of the person with whom you contract. What you cannot lien in Tennessee, is pretty much the same as in other states.

i. State or Federal Property

You cannot lien state or federal property. You have probably heard of the Miller Act which requires the prime contractor, whether we are talking about federal work under the Miller Act or state work under the Miller Act.

To post a bond, instead of lien rights, the contractor’s security is within that payment bond posted by the general contractor. So, again, no liens can be placed on state or federal property.

ii. For property where a payment bond has been recorded, rights are via the bond claim

The other thing in Tennessee that is a little bit unique, is that the state allows private contractors to implement the public scheme. This means that it allows the prime contractor in a private project to obtain and procure a payment bond, and then record it in the chain of title. And as long as it does that, then a contractor’s, prime contractor’s, or remote contractor’s rights are limited to the payment bond, and there is no right to actually lien the property.

Practically, that means that either the prime contractor from an owner’s bond or the remote contractor from the prime contractor’s bond is protected on the payment side and there is no need to allow an encumbrance to the property.  

We see this in a number of cases from prime contractors who under a lot of times, cost relationships with the owner, go ahead and get a payment bond, and post it against the property. So then they do not have to worry about subcontractor liens impacting the owner and the owner's financing.

Limitations on the Lien Amount in Tennessee

At the very high level for limitations, know that there are some things expressly prohibited by the statute.

a. Expressly prohibited by statute

Interest, service charges, late fees, attorneys' fees or other amounts... “which did not result in improvement to the real property..” The things mentioned in that first half are expressly forbidden. If you lien those items, you are in jeopardy of either the court throwing those items out or throwing out the lien altogether. You also open up some potential other liability for an exaggerated lien which will be discussed in a different part of this blog series.

b. Furnishing tools, equipment, and machinery

When you are trying to put together a lien, particularly when you are using equipment that your own company owns, you may ask what the reasonable change for that from a lien perspective is. Some people want to throw in purchase price, some people want to come up with a rental value that is essentially the purchase price. There are some limitations within Tennessee law.

The definition says, “actual use and any reasonable period of non—use.” Some of these limitations are in the statute itself. There are some bases surrounding all of this, but you should be aware when you are thinking about it. If you keep in mind that you are talking about a reasonable rental value, you will probably be okay.