Does the recording of a Notice of Commencement signed by the Landlord affect the Landlord’s rights under a previously recorded Notice of Lien Prohibition? The answer, of course, is: “it depends.”
A “Notice of Lien Prohibition” is a tool sometimes available to landlords that prohibits contractors and materialmen from placing a lien on the landlord’s underlying fee interest to space that has been leased to a tenant, when a tenant has made improvements on the space but failed to pay the the contractor and/or materialman in full. This tool is available under Section 713.10 (2)(b) of the Florida Statutes, which provides the following protection for landlords:
The interest of the lessor shall not be subject to liens for improvements made by the lessee when:
1. The lease, or a short form or a memorandum of the lease that contains the specific language in the lease prohibiting such liability, is recorded in the official records of the county where the premises are located before the recording of a notice of commencement for improvements to the premises and the terms of the lease expressly prohibit such liability; or
2. The terms of the lease expressly prohibit such liability, and a notice advising that leases for the rental of premises on a parcel of land prohibit such liability has been recorded in the official records of the county in which the parcel of land is located before the recording of a notice of commencement for improvements to the premises, and the notice includes the following:
a. The name of the lessor.
b. The legal description of the parcel of land to which the notice applies.
c. The specific language contained in the various leases prohibiting such liability.
d. A statement that all or a majority of the leases entered into for premises on the parcel of land expressly prohibit such liability.
Steps to Take for Protection
To minimize the risk of a lien being placed on the landlord’s fee interest to rental property for
work performed by or on behalf of a tenant, it is important for landlords to take the appropriate steps (outlined above) in a timely manner to secure the lien prohibition. However, there are caveats to this protection. For one, the second sentence of Section 713.10 (1) states:
When an improvement is made by a lessee in accordance with an agreement between such lessee and her or his lessor, the lien shall extend also to the interest of such lessor.
So, if there is an agreement between a landlord and tenant (whether in the lease or a separate document) where the tenant is “obligated” to construct improvements, the protection under the Notice of Lien Prohibition disappears. Understandably, the debate would be focused on whether or not the tenant was “obligated” to make the improvements.
Recent changes to this Section include a new requirement for landlords to provide a copy of the prohibition contained in the subject lease to a contractor/lienor who requests same in writing. Section 713.10 (3) states:
Any contractor or lienor under contract to furnish labor, services, or materials for improvements being made by a lessee may serve written demand on the lessor for a copy of the provision in the lease prohibiting liability for improvements made by the lessee….The interest of any lessor who does not serve a verified copy of the lease provision within 30 days after demand, or who serves a false or fraudulent copy, is subject to a lien under this part by the contractor or lienor who made the demand if the contractor or lienor has otherwise complied with this part and did not have actual notice that the interest of the lessor was not subject to a lien for improvements made by the lessee.
Likewise, contractors/lienors who are left holding the bag when tenants fail to pay amounts due under valid contracts will resort to filing claims against the landlord fee owners with the hopes of piercing the protection provided by a properly recorded Notice of Lien Prohibition. The most recent example is MHB Construction Services, L.L.C. v. RM-NA HB Waterway Shoppes, L.L.C. (2011 WL 5864801 (Fla.App. 4 Dist.)).
In this case, MHB claimed that RM-NA’s execution and recording of a Notice of Commencement on behalf of a tenant who was constructing improvements to their leased premises plus RM-NA’s obligation to reimburse a portion of the construction costs to such tenant rendered the properly recorded Notice of Lien Prohibition ineffective.
Florida’s Fourth District Court of Appeals rejected this argument finding that:
- RM-NA had complied with the requirements of Section 713.10 (2)(b) and properly established the prohibition against a lien to the landlord’s interests in the property;
- The lease did not obligate the tenant to construct improvements, in fact, the plain language forbade any improvements to the leased premises by tenant unless and until the landlord (RM-NA) granted its approval in writing;
- RM-NA was not a party to the construction contract between the tenant and MHB;
- The requirements under Section 713.13 of the Florida Statutes for the recording of a Notice of Commencement, which included the obligations to name the “owner” of the improvements and disclose that such ownership was limited to a leasehold interest, and to further name the owner of the fee interest of the underlying property, were not only met; but in no way adversely affected RM-NA’s rights provided by the “lien prohibition clause;” and
- The fact that RM-NA’s $10,000 contribution towards the construction costs was less than 10% of the total cost of improvements and was contingent upon the tenant obtaining a final release from MHB in no way adversely affected the lien prohibition.
Florida’s lien laws are constantly being tweaked by the legislature in an effort to find balance between the interests of property owners, and the interests of contractors and suppliers who provide services and materials. While it is relatively easy to understand the concerns of the affected parties, striking the appropriate balance (not to mention, crafting plain-reading and unambiguous language) is far from easy. There have been many “horrible” cases on both extremes which have led to equally horrible outcomes for “innocent” parties.
The simple fact is that no law is perfect, and lien laws are far from perfect because each case has a unique set of circumstances. The best advice that can be given with regard to potential liens, whether you are an owner or a contractor, is to try to follow the letter of the law as it currently exists; and, if you have any doubts as to the proper procedure(s), consult with legal counsel to give you the appropriate guidance.