Your Lien is Worthless on Tenant Buildout Work (Seriously) - Florida Webinar

In this blog, presented by SunRay Construction Solutions and Alex Barthet, Principal, The Barthet Firm, construction professionals in Florida can learn in detail about all this and find answers to all the above questions.

Why is My Lien Worthless?

Typically, when you have a contract to do work, the lien rights that you will have been based on the ownership interest of the party with whom you have contracted.  

1. So, if the general contractor contracts with the owner/landlord of the property, then when you as a GC, subcontractor, or supplier record a lien, it attaches to the Fee Simple Owner/Landlord’s interest in the property.

2. However, if the contract only exists between the general contractor and the tenant, then when you record a lien, you can only attach your lien to the interest that the general contractor had with that party, i.e., the tenant.

This is why it is important for you to know who the general contractor is contracting with. You can do this by:

1. Checking the public records in the county where the property is located to determine if whoever you believe to be the ‘owner’ is the owner.  

2. You can also check the Notice of Commencement to find out who the owner is but make sure you do not rely only on the Notice of Commencement. This is because sometimes when the tenant/owner records the Notice of Commencement, there is a blank spot which says owner, but they put in the tenant/entity’s name.

3. The best option to know who the owner of the property is to do a search for the property appraiser’s website to find the current taxpayer of that piece of property and that current taxpayer is almost always the owner.

Does the Lease have “No Lien” Language?

Landlords can take few steps to make sure that your lien does not get attached to their property, such as:

Step 1 - The first thing they would do is ensure they are not contracting directly with you for the work. They will either give their tenant a tenant buildout allowance or ask them to spend their own money on the renovations.  

Step 2 - Secondly, the landlords will also put a provision in the lease agreement that they have with the tenant that says that the tenants are not allowed to do anything that would put a lien on the owner’s property.  

Step 3 - As step three, the landlord will take a snippet of the above provision in the lease agreement, sign and notarize it, and record it in the public records.  

By performing the above three steps, the landlord can prevent a contractor, subcontractor, or supplier from outing a lien on their property. A key point to remember here is that even though the landlord has performed these three steps, it does not mean that you do not have any lien rights. It just means that your lien will be attached to the lease rather than to the property.

So, if you foreclose on your interest in the tenant’s interest in the property, then all you get to do is take over the lease. You do not get to sell the property, instead you can only sell the lease.  

• For example, if you are a supplier on a project managed by the tenant and the landlord has followed all the steps to keep the property free and clear of liens, then when you foreclose on the lien on the leasehold interest, you get to move in, pay rent and run the space for whatever purpose it was intended.

• So, if you foreclose and win the case, you will be the owner of that lease.

However, there is a certain risk attached to this. Typically, what happens is that the landlord is not getting their rent payments from the tenant who has stopped paying you as well. So, what happens? Well, they get evicted. So, if you have a lien on a leasehold interest and the tenant stops paying rent and gets evicted, the thing you have a lien on, which is the lease, is now gone because they have been evicted.

This is why you must be very careful when you have a lien on a leasehold interest, because:

1. You don’t have a lien on the real property, rather it is just on the lease.

2. If the tenant stops paying rent or gets evicted due to some reason, you will end up having a lien on something that is completely worthless which is a void lease agreement.  

Ideally, this is a real risk for small tenants, but much less of a risk for regional or national tenants.

What Does Florida Statute Says?

The statute that governs this is Florida Statute 713.10, and it says that:

• If the lease expressly prohibits liens and a notice of same has been recorded in the official records of the county in which the parcel of land is located before the recording of a notice of commencement and the notice include the following:

1. Name of the lessor.

2. Legal description of the parcel.

3. The specific ‘no-lien’ language contained in the lease.

4. A statement that most of the leases prohibit such liability.

• If all the above exists in the recorded document, the landlord can prevent you from having a lease on the real property and your lien is only secured by the lease.

How Can I Protect Myself?

The first thing you need to understand is that it is exceedingly rare to find landlords who have not complied with the provisions mentioned above to keep their property free and clear of liens. So, if you are working on tenant buildout projects, you should assume that the landlord has followed all the steps and done what they needed to do to keep their property free and clear of liens.  

However, there are chances where you may end up having rights in the underlying property even though you are just doing tenant buildout. In such cases, before you sign the contract to do the work, make sure that you:

1. Check to see which party (owner or tenant) has hired the general contractor.

2. Search the public records or go to the property appraiser’s website to find out who the actual owner of the property is and whether they are the ones who have contracted with the general contractor. If not, then you should assume that you are working for a tenant and therefore, your lien will be attached only to the leaseholder’s interest.

3. Search the public records for a “no-lien” affidavit.  

A key point to remember is that almost all leases have the necessary language, and you should assume your tenant buildout work will only give you a lien on the lease and not the land.

1. If you are a subcontractor, you need to be extra careful about signing contracts which have a pay-when-paid clause. This is really important because if the landlord is going to evict the tenant, then your lien doesn’t really exist anymore which in turn means you have no lien rights, and the contractor doesn't have to pay you because the contractor never got paid themselves and you have a pay-when-paid provision.

2. Send your Notice to Owner and record your lien timely. Now, it does not automatically mean that you have no rights if you do work on a tenant project, but your rights are limited to the leasehold interest of the property. And if you send your notice and record your lien timely, you will have better rights.  

3. You can also send a “Demand for Copy of Lease Prohibiting Liens”. This is a separate notice from the required Notice to Owner.

Demand for Copy of Lease

This form is basically a letter that goes to the landlord, and it asks them to provide you a verified copy of the lease that exists between the landlord and the tenant. This copy should be provided within 30 days. The reasons why you can ask for this is because:

1. One, the statute permits it; and

2. Two, the idea is that if you ask the landlord for this document, it is got to go via certified mail, and if you send this request, the landlord is obligated to send you a copy of the lease.

By requesting the copy of the lease, you can look into it yourself to see if there is any provision that prohibits liens from being attached to the property.

• The interest of any lessor who does not serve a verified copy of the lease provision within 30 days after demand, or who serves a false or fraudulent copy, is subject to a lien under this part by the contractor or lienor who made the demand.

• This means that if the landlord does not respond timely or responds incorrectly to the demand, then you may be able to get an interest in the landlord’s property.

• However, this is not an automatic process. It is applicable only if the contractor or lienor has fully complied with their obligations as per the lien law. This means that you have to send out your notices and timely file your lien.

Recap

To summarize, below are the key points to bear in mind when performing work on tenant buildouts:

• Your lien is of limited value on tenant buildout work. You need to be aware of the credit risk associated with that.

• Do your research to verify who owns the property and who contracted with the general contractor. This will help you to understand what your lien is going to attach to if you have to record a lien.

• If you are a subcontractor, then try to limit or eliminate the pay-when-paid clause, if possible.

• Send a “Demand for Copy of Lease” to try and create a right to an interest in the landlord’s property.

If you require expert assistance with Florida lien law, SunRay, a leader in Florida lien law webinars, is here to help. We offer specialized webinars to safeguard your rights and ensure the successful outcome of your project. Please contact us at 800-403-7660 to discuss how we can assist you in securing the payment you are entitled to.

FAQs

Why is my lien considered "worthless" on tenant buildout work?

Your lien rights typically attach to the interest of the party you contract with. If you contract with the tenant, your lien attaches to their leasehold interest, not the property itself. This is less valuable because if the tenant is evicted, your lien becomes worthless.

How do landlords prevent liens from attaching to their property on tenant buildout projects?

Landlords typically include "no-lien" clauses in their leases, prohibiting tenants from taking actions that could encumber the property. They may also record notice of this clause in public records.

As a subcontractor, how can I protect myself on tenant buildout work?

Be cautious of "pay-when-paid" clauses in your contract, as you may not get paid if the tenant defaults and the general contractor doesn't get paid.

What is a "Demand for Copy of Lease Prohibiting Liens" and why is it important?

This is a formal request you can send to the landlord asking for a copy of the lease. If they fail to respond or provide an inaccurate copy, you may gain lien rights on the landlord's property itself, not just the tenant's leasehold interest.

What steps can I take to ensure I have the maximum lien rights possible on a tenant buildout project?

Verify who owns the property and who contracted with the GC * Search public records for a "no-lien" affidavit * Send a timely Notice to Owner and record your lien * Send a "Demand for Copy of Lease Prohibiting Liens"

Are there any situations where my lien on tenant buildout work could attach to the property itself?

Yes, but it's rare. If the landlord fails to comply with the "no-lien" clause requirements or doesn't respond properly to a "Demand for Copy of Lease," you may gain lien rights on the property.

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