Contractors that perform tenant improvements / build-outs should know what their lien rights are when hired by the tenant (also referred to as the lessee). This is because a contractor hired by the tenant may think their lien rights extend to the real property owned by the landlord when in reality they do not.
Under Florida’s Lien Law, a landlord can take precautions to prevent their real property from being subject to liens by virtue of a tenant improvement. Many landlords take these precautions. If these precautions are taken, a contractor’s lien against the landlord’s real property for unpaid tenant improvements will fail and potentially expose the contractor to liability in the form of reimbursing the landlord for its attorney’s fees. Ultimately, if a landlord takes such precautions, the unpaid contractor can lien the tenant’s LEASEHOLD INTEREST, which is much different than the landlord’s interest. When the contractor moves to foreclose the lien, it is foreclosing on the leasehold interest and not the landlord’s real property. In other words, the foreclosure would result in the assumption of the lease (versus assuming title to the real property) and oftentimes is not an attractive option. Think about it. Which is better: assuming the leasehold interest of a new lease (where you will still be responsible for making the lease payments) or assuming title to the real property? Naturally, it is assuming the title that provides the value in a lien action.
Florida Statute s. 713.10 sets forth the precautions a landlord can take to prevent their property from being subject to liens for tenant improvements as follows:
(2)(a) When the lease [between the landlord and tenant] expressly provides that the interest of the lessor shall not be subject to liens for improvements made by the lessee, the lessee shall notify the contractor making any such improvements of such provision or provisions in the lease, and the knowing or willful failure of the lessee to provide such notice to the contractor shall render the contract between the lessee and the contractor voidable at the option of the contractor.
(b) The interest of the lessor is not subject to liens for improvements made by the lessee when:
1. The lease, or a short form or a memorandum of the lease that contains the specific language in the lease prohibiting such liability, is recorded in the official records of the county where the premises are located before the recording of a notice of commencement for improvements to the premises and the terms of the lease expressly prohibit such liability; or
2. The terms of the lease expressly prohibit such liability, and a notice advising that leases for the rental of premises on a parcel of land prohibit such liability 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 for improvements to the premises, and the notice includes the following:
a. The name of the lessor.
b. The legal description of the parcel of land to which the notice applies.
c. The specific language contained in the various leases prohibiting such liability.
d. A statement that all or a majority of the leases entered into for premises on the parcel of land expressly prohibit such liability.
Contractors looking in the public records will many times find a short form lease or notice that prohibits the landlord’s property from being subject to liens for tenant improvements.
By way of example, in MHB Const. Services, L.L.C. v. RM-NA HB Waterway Shoppes, L.L.C., 74 So.3d 587 (Fla. 4th DCA 2011), the landlord of a shopping center entered into a lease with a tenant. A notice of lien prohibition was recorded in the public records long before the lease was ever executed. The tenant hired a contractor to make tenant improvements and the landlord signed and recorded the required notice of commencement before construction began. The contractor recorded a construction lien against the landlord’s interest in the real property and foreclosed on the lien. The landlord relied on the notice of lien prohibition that was recorded in the public records. The contractor countered that by the landlord signing and recording the notice of commencement, the landlord cannot rely on the notice of lien prohibition. The contractor further argued that the landlord required or was responsible for construction because it gave its tenant a reimbursement towards construction improvements (very common). The appellate court disagreed with the contractor based in large part because the landlord complied with s. 713.10 to protect its property from liens.
As a contractor performing tenant improvements, you should know your rights in advance in order to understand what your lien rights are in the event of non-payment. One option contained in s. 713.10 that Florida’s Lien Law provides that is unfortunately not often utilized is:
(3) Any contractor or lienor under contract to furnish labor, services, or materials for improvements being made by a lessee may serve written demand on the lessor [landlord] for a copy of the provision in the lease prohibiting liability for improvements made by the lessee, which copy shall be verified….The demand must identify the lessee and the premises being improved and must be in a document that is separate from the notice to the owner….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 if the contractor or lienor has otherwise complied with this part and did not have actual notice that the interest of the lessor was not subject to a lien for improvements made by the lessee. The written demand must include a warning in conspicuous type in substantially the following form:
WARNING
YOUR FAILURE TO SERVE THE REQUESTED VERIFIED COPY WITHIN 30 DAYS OR THE SERVICE OF A FALSE COPY MAY RESULT IN YOUR PROPERTY BEING SUBJECT TO THE CLAIM OF LIEN OF THE PERSON REQUESTING THE VERIFIED COPY.
The bottom line is to KNOW your rights. If you specialize in tenant improvements or perform tenant improvements, know your rights under Florida’s Lien Law so that you know what your options are in the event of non-payment. This extends to any subcontractor that is performing work associated with tenant improvements. Since non-payment may only be collateralized by the leasehold interest, a contractor or subcontractor may want to take this into consideration when negotiating their contract. For instance, a contractor may want to ensure it has broad termination rights or suspension rights in the event of non-payment within “x” number of days. A subcontractor may not want a pay-if-paid provision so that it has better recourse against the contractor that hired it. Alternatively, parties may account for this risk by including a better mark-up. Again, knowing your rights on the front-end will allow you to best assess the potential risk of non-payment.
Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.