Furnishing to a Property that’s Leased? Serve the Owner & the Tenant
It sounds simple enough – serve the owner with a preliminary notice. If ABC Company owns property and they have contracted for an improvement to that property, ABC Company would have to be served with a preliminary notice. Easy.
What happens if ABC Company leases their property to XYZ Company, and XYZ Company contracts for an improvement to the property? That’s when the serving the owner becomes more complicated. Do you serve the fee owner (the entity that owns the property) or do you serve the owner of the leasehold interest (the entity that is leasing the property)?
Best practices dictate that if you are furnishing materials or services to a property that is being leased, both the fee owner and the owner of the leasehold interest (lessee/tenant) should be served with the notice.
While a lien on a leasehold interest can be a valuable collection tool, a lien on the property is always preferred.
By serving both owners with any notices, you provide yourself with the best opportunity for collection of your debt. The hope is that you can proceed with a lien against the property, and if that is not possible, you will at least have a lien on the leasehold interest.
How do you know if the property is being leased?
The biggest flag is when the project is for a retail establishment: stores, restaurants, etc. Other projects where leases come into play are large office buildings, where a tenant may contract for an improvement to their leased space.
When reviewing the Job Information Sheets provided by your customer, if the name of the owner does not coincide with the name of the project, there may be a leasehold situation.
If you serve both the fee owner and the lessee, will you have a lien on the property and the leasehold interest?
It may depend on who contracted for the improvement. Typically, the fee owner will be responsible for the improvement only if they were aware of or they authorized the improvement.
In some states, a written agreement is required before you can hold the fee owner liable. In other states, a fee owner may record a Notice of Non-Responsibility, to prevent a lien for tenant improvements from attaching to their property.
Obtaining a copy of the lease is always helpful, as the lease may spell out who is responsible for specific improvements, or the length of the lease may determine whether a lien on a leasehold interest is available.