Most commercial leases prohibit a tenant from allowing any liens to be filed against the landlord’s property. If a contractor or supplier does file a lien, the lease will likely require the tenant to discharge it promptly, and the lease probably absolves the landlord from any liability to material or service providers following the tenant’s failure to pay.
Despite these contractual protections, 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? Does the landlord have any defenses? The answer depends on the law in the jurisdiction in which the property is located and the surrounding circumstances.
Is There a Contract and Who Are the Parties to It?
If a landlord contracts directly with a general contractor, subcontractor, or supplier, the landlord is responsible for paying for the goods and services they provide. But the analysis is less clear when the landlord is not a party to the contract between the tenant and the contractor. Usually, 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?
As is often the case, this general rule is subject to exceptions. 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 is not unlimited. Instead, a landlord is liable only up to the amount of any unpaid tenant improvement allowance at the time the contractor files its lien. The theory underlying this exception is that, when a landlord provides funds to the tenant for improvements, 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. Although it is common for landlords to grant allowances to tenants, 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 been 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, it will usually be precluded from perfecting its lien.
Another potential defense 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”). In many jurisdictions, a materialman cannot assert a lien against a landlord’s property when the underlying lease grants the tenant only a usufruct.
A landlord receiving notice that a contractor has filed a materialman’s lien against the leased premises need not panic. Several 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.