Almost every commercial retail lease provides that the tenant shall not allow any materialman’s or mechanic’s liens to be filed against the landlord’s real property. Moreover, in the event that a contractor or supplier does file a lien against the property, the lease will certainly require the tenant to discharge the lien within a short time following notice. And the lease probably absolves the landlord from any liability to material or service providers following the tenant’s failure to pay.
That’s all good in theory. But what happens when a general contractor, subcontractor, or supplier does file a lien against the landlord’s property? Is the landlord obligated to pay for the goods or services at issue? Does the landlord have any defenses to liability? As in most cases, the answer is, “It depends.” The extent of a landlord’s liability to its tenant’s contractors, subcontractors, or suppliers is a function of both the law in the jurisdiction in which the property is located and the surrounding circumstances. Although laws vary somewhat, this article discusses a number of factors that determine the landlord’s ultimate responsibility.
Is there a contract, and, if so, who are the parties to it?
If a landlord contracts directly with a general contractor, subcontractor, or supplier, the landlord is responsible for ensuring that those parties are paid for the goods and services they provide. In such cases, the question is straightforward and requires little analysis.
But what happens when the landlord is not a party to the contract between the tenant and the contractor? In that case, the question is a bit closer. After all, even though the landlord did not contract with the lien claimant, the landlord did presumably give the tenant permission to renovate the premises, which resulted in the tenant hiring the contractor in the first place. And, once the lease expires, the landlord is usually entitled to retain the value of the services provided. Under such circumstances, doesn’t fairness require that the landlord shoulder at least some liability to the contractor?
Again, the answer depends on the law of the jurisdiction, but, usually the answer is, “No.” The mere fact that a landlord authorizes a tenant to renovate the premises, has actual knowledge of the improvements to realty, and will ultimately retain the value of the renovations at the end of the lease term is not, without more, sufficient to render the landlord indebted to the contractor. Instead, a contractor must affirmatively show that the landlord expressly or impliedly consented to the contract under which the improvements were made. Significantly, the landlord’s consent to the improvements is different than its consent to the contract. The latter will render the landlord liable; the former will not. As a general rule, if there is no contract, there is no liability.
Does the lease provide for a tenant improvement allowance?
Most general rules have exceptions, and the tenant improvement allowance is an example of one. One way that a contractor may show that a landlord “expressly or impliedly consented to the contract under which the improvements were made” is by pointing to a lease provision granting the tenant an allowance for improvements. Thus, even when a landlord does not specify the contractor to whom the tenant improvement allowance will ultimately be paid, courts have held that the mere fact that a landlord agreed to make payments to some contractor is sufficient to make the landlord liable to the tenant’s chosen contractor.
However, the landlord’s liability in this regard is not unlimited. Instead, a landlord is liable only up to the total amount of any unpaid tenant improvement allowance at the time the contractor files its lien. The theory underlying this exception to the general rule is that, when a landlord agrees to provide funds to the tenant for improvements to the landlord’s property, the landlord should be liable to a contractor or supplier in an amount no greater than the amount that the landlord contracted with the tenant to be liable. In the commercial real estate business, it is common for landlords to grant allowances to tenants. However, if the tenant chooses to spend more than what the landlord agrees to pay, the expense in excess of the allowance is the responsibility of the tenant, not the landlord.
What defenses does a landlord have?
What should a landlord do when it receives notice that a lien has be filed against its property—or, worse yet, when it is named as a defendant in a lawsuit to foreclose on the lien? Regardless of whether the landlord has granted the tenant an improvement allowance, in most states, materialmen must strictly comply with statutes governing the filing of liens. If the contractor fails to comply with any of the time, notice, or other statutory requirements, he will usually be precluded from perfecting his lien. (Significantly, the failure to comply with the statutory requirements does not mean that the contractor has no recourse; he may still file suit against any party with whom he has signed a contract, but he may not attach the property of a landowner with whom he has no contractual relationship.)
Another, often overlooked, defense that may be available to a landlord relates to the nature of the property interest conveyed under the lease. Some leases convey an actual “estate” in land (i.e., an “estate for years”), while other leases convey only a possessory interest and a right to use the property (i.e., a “usufruct”). The legal distinctions between these conveyances and the manner in which they are created is beyond the scope of this article, but it is sufficient to note that, in many jurisdictions, a materialman cannot assert a lien against a landlord’s property when the underlying lease grants the tenant only a usufruct. Therefore, the nature of the parties’ lease may provide the landlord with an additional defense.
A landlord receiving notice that a contractor has filed a materialman’s lien against the leased premises need not panic. A number of factors will determine whether the landlord is ultimately liable to the contractor for an unpaid bill. The nature of the contract, the amount of any unpaid tenant improvement allowance, and the availability of certain defenses may protect the landlord from the claims of contractors and suppliers.