What Is A Mechanic’s Lien
In 2010 we completed a lease with a tenant for 4,000 square feet. The tenant accepted the premises as-is with no improvements required of the landlord. The tenant was a research and development company based out of Texas, and they made significant upgrades to the premises, spending approximately $300,000 (at tenant’s sole cost).
Shortly after the tenant completed their upgrades, the landlord was provided with written notice that the general contractor had not been paid for the construction completed, and that the general contractor was filing a mechanic’s lien against the property. The tenant informed the landlord that they were possibly filing for bankruptcy. This meant that the landlord was possibly financially responsible for paying the general contractor for construction that they completed at the property, even though the landlord did not hire them for such work nor did the landlord benefit from the construction, as the construction was customized for lab use for the tenant’s specific use.
To help prevent these issues from occurring in the future, we are providing a basic overview of mechanic’s liens and options that landlords may consider taking to protect their property. Mechanic’s Liens are primarily used by general contractors and subcontractors (contractor) to ensure contractors are paid for services provided. If a contractor is hired by a landlord or tenant, and they are not paid for their services, the contractor has the right to file a mechanic’s lien against the property.
The issue that landlords face is when a tenant hires a contractor to complete tenant finish, and does not pay the contractor, the contractor still has the legal right to file a mechanic’s lien against the property (even though the landlord did not hire the contractor), in which case the landlord may be financially responsible to cure the lien.
To help prevent this from occurring, we advise landlords to take the following actions:
- Landlords need to ensure their lease agreement includes covenants against liens that requires the tenant to cure any liens that are being filed against the property. However, this may not be sufficient protection for the landlord. If the tenant does not have the financial ability to cure the lien (tenant files bankruptcy), the landlord may still be financially liable to cure the lien.
- Landlords may protect their property from mechanic’s liens relating to work completed by their tenants by giving written notice of non-liability. The written notice that is posted on the property generally states that contractors are not permitted to file mechanic’s liens against the property and all financial obligations for services provided by the contractor are the responsibility of the tenant. In essence, the contractors are made aware in writing that they cannot file a lien against the property before they start construction.
There are many items that have to be addressed within the written notice and when posting these notices (location of posting, posting prior to construction work beginning, etc.). It may not be practical for landlords to provide these postings for every property they lease, thus landlords typically provide these postings only when a tenant is completing a significant amount of construction. Additionally, mechanic’s liens do expire after a certain amount of time unless action commences (such as foreclosure) within a certain amount of time after the mechanic’s lien is filed.
- Be aware of what is happening at your property. If you know a 4,000 square foot tenant is getting significant repairs done, you can investigate what work is being done, who the contractor is, and what the agreement between them involves. Since it’s your property, you have the right to know.
- Do your due diligence. When you first consider the tenant, whether through a letter of intent or lease proposal, you have the opportunity to conduct due diligence. What is their financial condition? What is their intended use? What improvements are they planning? Questions like these can reveal red flags you can investigate to save yourself from headaches later on.
This issue may be rare, but it can be very frustrating and potentially expensive when it does occur. Hopefully by taking these steps you can prevent this situation from happening to you.