Liens and the “Participating Owner”
Jun 19, 2003
When property is subject to a lease and the tenant makes improvements with the landlord's knowledge, contractors, subcontractors and suppliers may have a lien against the property for their unpaid bills. Landlords generally believe that they can avoid such liens if they have given a notice of non-responsibility. However a notice of non-responsibility is of no effect if the lease requires the tenant to perform the work. In such cases the landlord is considered to be a “participating owner” and the law treats the tenant as the agent of the landlord.
Under what circumstances will the lease be deemed to require the work to be performed? This was the issue presented in a recent appellate court case and the answer given by the court was rather startling. The lease did not expressly require the making of any particular improvements, but the court said that issue was “whether the improvements were a practical necessity for the contemplated use of the premises." And in answering that question the court was willing to take into consideration all of the circumstances of the transaction.
The key facts, in the opinion of the court, appeared to be the following:
1. By the terms of the lease, the tenant could only use the property for a specific purpose, which in this case was "telecommunications purposes."
2. The tenant's initial improvements included cabling, increased electrical supply and other work specifically suited for telecommunications purposes.
3. Without the making of such alterations the premises would not have been suitable for the permitted use.
4. The lease required the tenant to obtain the landlord's approval of the plans and specifications.
5. The landlord retained control over the construction process, had its representatives meet regularly with the contractor, and even collected a substantial monthly administrative fee for overseeing construction.
Counsel for the landlord has indicated that he will seek to have the California Supreme Court over-turn this decision. But until further notice landlords would be well advised to take protective measures so that their properties will not become subject to mechanics liens. Facts such as those referenced above (except for point 5) are not uncommon in commercial leases. Landlords must therefore consider such measures as requiring the tenant to provide security for the cost of making improvements or controlling the disbursement of funds to be sure that all construction costs are paid.
Written by: Michael Carbone - Attorney at Law
Michael Carbone has been in the private practice of law since 1967 and has an extensive background in business litigation. He is a real estate attorney practicing in San Francisco, who represents owners of commercial property. If you have any questions or comments please reply to: firstname.lastname@example.org or 415.357.1622. You can also check out his website at www.mygoodoffices.com.
The information contained in this article is not intended to constitute legal advise with regard to any particular matter.