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The Real Estate Settlement Observer

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By Nikki Smith | Real Estate Pro in District of Columbia

Landlord protection against construction lien claims for tenant improvements

A common, but easily preventable, occurrence for many commercial property owners is having a mechanic's lien filed against their property when their tenant has not paid its contractor and/or their tenant's contractor has failed to pay one of its suppliers, subcontractors or laborers for improvements made to the property by the tenant.

The mechanics lien is a cloud on the property's title and can prevent the sale or refinancing of the property until the mechanic's lien is paid. Often a mechanic's lien for tenant improvements is discovered long after same has been filed in the public records, but by taking a few proactive measures landlord's can ensure that their properties will be protected from the burdens imposed by such mechanic's liens.

Florida Statutes §713.10
provides a landlord with absolute protection from mechanic's liens arising from tenant improvements when the landlord: (i) expressly provides in its lease that that there may be no liens against the landlord's interest in the property for tenant improvements; and (ii) records, in the clerk's office in the county where the property is located, the lease, or a memorandum of the lease, which contains the prohibition against liens attaching to the interests of the landlord.

The following is sample language which a landlord may include in its lease agreement to prohibit the creation of mechanic's liens for tenant improvements in accordance with Florida Statues §713.10 by recording the lease agreement or a memorandum thereof in the applicable county clerk's office:

In accordance with the applicable provisions of the Florida Mechanic's Lien Law and specifically Florida Statutes, Section 713.10, and notwithstanding anything to the contrary contained in this Lease, the interest of Landlord, whether real or personal, in and to the Premises, the Property, the Project or any part thereof shall not be subject to or chargeable with any liens for labor performed or material supplied in connection with any work or improvements performed or caused to be performed by Tenant or any of Tenant's Agents, and Tenant shall have no right, power or authority to create or allow to be created any such liens regardless of whether Landlord has approved or consented to such work or improvements.

All persons and entities contracting or otherwise dealing with Tenant relative to the Premises and the Project are hereby placed on notice of the provisions of this paragraph, and Tenant hereby agrees to notify such persons or entities in writing of the provisions hereof prior to the commencement of any such work or improvements.

Additionally, if the landlord owns commercial properties with multiple units such as office centers and shopping centers, and all of the leases entered into by the landlord on a particular parcel of land prohibit liability for liens for tenant improvements, Florida Statues §713.10(2) provides that the landlord may, in lieu of recording each lease or memorandum thereof, record a master notice in the public records of the county in which the parcel of land is located which contains the following:

  • The name of the landlord.
  • The legal description of the parcel of land to which the notice applies.
  • The specific language contained in the various leases prohibiting such liability.
  • A statement that all leases entered into for premises on the parcel of land contain the language identified in paragraph (iii).

Although Florida Statues §713.10 provides that the interest of the landlord shall not be subject to liens for improvements made by the lessee when the landlord complies with the provisions therein, commercial property owners can take several additional measures to protect their interests when tenant improvements are being made in their properties as, in some instances, mechanic's liens are filed notwithstanding full compliance with Florida Statues §713.10.

In such instances such mechanic's liens are not valid but require commercial property owners to commit resources and funds to remove the invalid clouds created by such improperly filed mechanic's liens.

First, every lease agreement should provide that the tenant shall notify any and all contractors making any tenant improvements of the provision or provisions in the lease agreement which prohibit liens against the landlord's interest in the property.

Ideally, the landlord's lease agreements should require the tenant to include language in all of its contracts with all contractors providing labor, services and materials for tenant improvements that the all such contractors acknowledge that they have been notified of the provisions in the lease agreement which prohibit liens against the landlord's interest in the property and that under no circumstance will they file any such liens against the landlord's interest in the property.

Contractors are less likely to file invalid mechanic's liens for tenant improvements against the landlord's interest in the property when they contractually agree not to do so and are made aware of the framework set forth in Florida Statues §713.10.

Furthermore, landlords should include in their lease agreements a provision that all contracts for labor, services and materials for tenant improvements are subject to the review and approval of the landlord. This provides the landlord with the opportunity to make sure that the requisite acknowledgment by the contractors regarding the provisions in the lease agreement which prohibit liens against the landlord's interest in the property is contained in the applicable construction contract.

In addition, landlords should require in their lease agreements that their tenants obtain lien waivers from the general contractor, every material supplier and every subcontractor who works on a project and labor waivers from any person who supplies labor to the project and provide copies of same to the landlord.

In the event the tenant can not timely provide the required lien waivers to the landlord, the landlord will have sufficient time to investigate the reasons therefore and take corrective actions regarding same in lieu of learning of any potential problems at a later point in time when a cloud on the title to the landlord's property would be more problematic.

Finally, it is advisable for landlords to run lien searches on their properties subsequent to the completion of significant tenant improvements to determine whether any liens for tenant improvements have been filed against the landlord's interest which the landlord has not been served with notice of same.

As Florida Statutes §713.08 provides that a claim of lien must be recorded within ninety (90) days from the date the lienor last furnished labor or materials to the project in order to be valid, the lien search should be run soon after the expiration of such 90 day period.

If a landlord fully complies with Florida Statues §713.10 mechanic's liens for tenant improvements can not attach to the landlord's interest in the property, and if the landlord takes a few additional actions, as described herein, the landlord can increase the likelihood that mechanic's liens for tenant improvements will not be filed against the landlord's interest in the property notwithstanding the provisions of Florida Statues §713.10, and that the landlord will discover any potential lien problems arising from tenant improvements well in advance of any sale or refinancing of the property.

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