Florida’s Construction Lien Law is intended to provide a balance of protections for owners, contractors, subcontractors and material suppliers. Commercial landlords and lenders should be aware of recent changes to the Construction Lien Law which, in certain circumstances, have tipped the scale against their interests.
One of the most common problems faced by a commercial landlord is when a tenant’s contractor (or a subcontractor, supplier or laborer) records a construction lien against the landlord’s interest in the property. Such lien encumbers or “clouds” the landlord’s title to the property and can prevent the sale or refinancing of the property. It can also create a default under the landlord’s mortgage.
For many years the Construction Lien Law has allowed Florida landlords to include provisions in their leases prohibiting construction liens on the landlord’s interest in their property for construction contracted for by their tenants. Section 713.10 provides a safety net allowing the landlord to be insulated from liability for such liens under two circumstances. First, the landlord can record the lease or a short form of the lease in the county public records including the terms of the lease which expressly prohibit such liability. Alternatively, if all of the leases entered by the landlord for given premises prohibit such liability, the landlord can record a blanket notice in the public records instead of all leases or short forms of the leases. The notice must contain the following:
- Name of the landlord;
- Legal description of the land;
- The specific language contained in the various leases prohibiting liability for construction liens related to tenant improvements; and
- A statement that all or a majority of the leases entered for premises on the land contain the language identified in the notice.
Recording the lease, short form lease or the blanket notice limits construction liens to the tenant’s leasehold interest only.
However, the construction lobby was able to convince the Florida Legislature that such limitation is unfair to the contractors who complete tenant improvements, but don’t get paid, regardless of the fact that the landlord did not contract for the work. The 2011 Florida Legislature approved an amendment to the Construction Lien Law that may allow contractors to lien the landlord’s interest in the property even where the landlord has complied with the safety net requirements outlined above limiting contractors’ lien rights. Section 713.10(3), gives contractors the right to serve a landlord with a written demand for a copy of the provision in the lease prohibiting liability for improvements made by the tenant. The copy must be verified by the landlord using a penalties-of-perjury clause. If the landlord does not respond within thirty days, then the landlord’s interest may be subject to liens (regardless of the landlord’s compliance with the safety net referenced above and regardless of what the lease itself says) as long as the contractor did not have actual notice of the existence of the limit on liens against the landlord’s interest in the property. Landlords should be watchful for these notices and respond to same as provided in the statute.
An unintended consequence of this statutory change is to inhibit the insurability of a landlord’s title so long as there is an unexpired Notice of Commencement recorded for any tenant improvements, thereby stifling a pending sale or refinance of the property. Title underwriters can no longer insure the priority of a mortgage recorded after a Notice of Commencement for tenant improvements, nor can they insure a purchaser’s interest free and clear of potential liens arising under such Notice of Commencement.
How is a landlord to best protect its interests in consideration of the changes to the Construction Lien Law?
Landlords should consider adding language to their lease form requiring that the tenant use the approved Notice of Commencement form attached to the lease as an exhibit, which form specifically identifies the tenant as the owner of a “leasehold” interest in the premises, identifies landlord as the “fee simple” owner, and contains the same lien limiting language found in the lease. This will ensure that contractors are put on additional notice that they are contracting with a tenant and not the fee simple owner of the property and that the landlord has expressly disclaimed all liability to the contractor.
Landlords should consider adding language to their form lease expressly requiring the tenant to notify all contractors making tenant improvements of the provisions of the lease prohibiting liens against the landlord’s interest in the property and requiring the tenant to include such language in any contracts with contractors providing labor, services, and materials to the leased premises. The lease should also require that the tenant’s contractors acknowledge receipt of such notice and agree that they are prohibited from filing liens against the landlord’s interest in the property with respect to the tenant improvement work, and that such notice must be received by the landlord prior to commencing any work to the premises. The landlord may also want to include a requirement that all tenant improvement contracts are subject to the review and approval of the landlord in order to ensure compliance with the foregoing requirements.
Landlords should also include a requirement in their form lease that upon final payment, tenants obtain unconditional lien waivers and releases from contractors, subcontractors, suppliers, and laborers and provide copies of same to the Landlord.
Landlords should include language in their form lease requiring that tenants remove, satisfy, or bond off any liens filed by the tenant’s contractors, subcontractors, suppliers, or laborers within a specified time period following the recording of same, and to indemnify, defend, and hold landlord harmless for all damages arising out of the recording of any such lien.
Finally, landlords should consider the addition of a provision to their form lease requiring that tenants pay a specified daily fee (i.e. a liquidated damage amount) until the lien is satisfactorily removed. This will create urgency on the part of the tenant to take care of the issue as soon as possible.
As with many areas of law, construction liens are subject to a myriad of technical requirements. Commercial landlords and lenders are well advised to make sure they are protected by advice and direction from experienced legal counsel.