Mechanic's Liens: Don't Be Caught By Surprise
Shopping center tenants commonly contract for at least a portion of their own tenant improvements and retain their own contractors to do so. When the tenant does not pay the contractor, subcontractor or material supplier, the shopping center owner may be forced to pay for the work to avoid the possible foreclosure of a mechanic’s lien on the property -- if the owner does not take the necessary precautions.
In California, and in many other states, a claimant may record a mechanic’s lien against the shopping center to secure payment for work performed on the premises. After the mechanic’s lien is recorded, the claimant has 90 days to file a foreclosure lawsuit against the shopping center owner. If successful, the claimant will be able to enforce a lien on the shopping center owner’s property even though there was no contract between the claimant and the owner. Therefore, owners with tenants making improvements should be aware of both the risks to which it is exposed, and how to minimize those risks.
As long as the owner has “knowledge” the work of improvement has begun, a mechanic’s lien may be properly recorded. California’s mechanic’s lien law treats contractors differently from subcontractors and material suppliers with respect to whether the owner is deemed to have “knowledge” that the improvement work has begun.
An owner is deemed to have “knowledge” that a “contractor” has begun “work” as soon as there is the slightest amount of visible work at a site. For this reason, it is advisable to include a provision in tenant leases requiring the tenant to notify the owner of the date tenant improvement work will begin at the premises.
An owner is deemed to have “knowledge” that a “subcontractor or supplier of material” has begun work when the subcontractor or supplier of material serves the owner with a “Preliminary 20-day Notice” that work has commenced at the premises. Shopping center owners or their property management staff should be trained to recognize and maintain a log of such notices and their significance so that correct preventative action may be taken.
What kind of action will help defend against a subsequent recording of a mechanic’s lien after the shopping center owner has “knowledge” that work has begun? A property owner may provide notice to others and to the person who has worked on the improvement that it disclaims responsibility for paying for the improvement. This notice is referred to as a “Notice of Non-Responsibility.” When properly posted and recorded, a Notice of Non-Responsibility may protect an owner from the recording of the mechanic’s lien when the owner is not the contracting party or otherwise deemed to have “caused” the improvement work.
Once an owner has “knowledge” that the work has commenced (either by deliveries of material or the initiation of construction, or by receiving the Preliminary 20 day Notice), the owner has 10 days to conspicuously post its Notice of Non-Responsibility at the work site. The Notice of Non-Responsibility must include: (1) a description of the property so that the property may be identified (the legal description of the property will suffice); (2) the name and address of the owner and the nature of the owner’s interest in or title to the land (e.g., “fee simple” or “leasehold”); (3) the name of the party who contracted for the work; and (4) a disclaimer of responsibility for any claims that arise out of the work being performed at the described property. The notice should also be dated and signed.
The Notice of Non-Responsibility must also be recorded with the county recorder’s office for the county where the property is located within the same 10-day period. Having a simple form Notice of Non-Responsibility on file and ready to post and record during the 10-day window of time can make providing such notice a simple task, easily incorporated into the management of a shopping center owner’s property.
Unfortunately for the owner, a Notice of Non-Responsibility will not protect against the recording of a mechanic’s lien in all circumstances. A Notice of Non-Responsibility is invalid in California where the owner “ordered” or “caused” the improvement work, such as when an owner’s lease “requires” the tenant improvements or it is anticipated that a tenant will construct tenant improvements.
Even where improvements by the tenant are required or anticipated in the lease, there are certain measures a landlord can take to protect itself against mechanic’s liens. An owner may require the tenant to provide a payment bond equal to the construction contract price before the work begins. An owner may require that the contract between the tenant and its contractor specifically acknowledge that mechanic’s liens will not be effective against the owner. If the owner is paying for the cost of the tenant improvements, the owner should require that the tenant provide applicable mechanic’s lien releases before payments are made to the contractor, subcontractors and suppliers. The owner may wish to consider requiring the tenant to provide monthly lien releases even where the owner is not paying for the improvements, if the improvements are of a sufficiently large scale. Another means of protection is an increase in the security deposit until the improvements are completed and appropriate releases are received by owner.
Whether a shopping center property becomes subject to a mechanic’s lien may depend on whether the owner takes necessary steps to protect itself from such claims. Those steps may include inserting certain provisions in the lease where the lease requires or anticipates the construction of tenant improvements and/or posting and recording a timely Notice of Non-Responsibility once tenant improvement work begins. The particular circumstances of each lease will determine which one or more of these steps are appropriate.
About the Authors: Alan S. Petlak, Esq. is Of Counsel and Leslie D. Reed, Esq. is an Associate at Pircher, Nichols & Meeks, a law firm that represents real estate clients nationwide through its offices in Los Angeles and Chicago. Mr. Petlak specializes in real estate litigation and Ms. Reed specializes in commercial real estate transactions.
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