Service Area: Collection Services

Oregon Lien Rights Extended by Change Order

Posted on August 30, 2019 by - In Other Commercial Credit News, Mechanic's Liens & Bond Claims

Here’s a Case in Oregon where One Claimant’s Lien Deadline Was Extended, Thanks in Part to a Change Order

In Oregon, the mechanic’s lien should be filed within 75 days from last furnishing materials or services. So how did one subcontractor file a valid lien nearly a year after its technical last furnishing? The answer is in the change order!

At a Glance: Protecting Oregon Mechanic’s Lien Rights

The preliminary notice deadline for private Oregon projects can sneak up on you. You should serve a Notice of Right to Lien upon the owner within 8 business days from first furnishing materials or services. A late notice may be served, but the lien, when later filed, will only be effective for materials and services provided 8 business days prior to serving the notice and thereafter.

The mechanic’s lien deadline is 75 days from last furnishing materials or services, or within 75 days from completion, whichever is earlier. Suit to enforce the lien should be filed within 120 days from filing the lien.

Bethlehem Construction, Inc. v Portland General Electric Company

Here’s a quick timeline for Bethlehem Construction, Inc. (“Subcontractor”) furnishings & subsequent lien filing:

– Subcontractor finished furnishing under the original contract in April 2015 ($122,851 contract)

– Subcontractor was called back to the job in December 2015 for additional work, identified under a change order ($578.13 change order)

– Subcontractor filed a mechanic’s lien in January 2016 for furnishings under original contract and additional change order

Obviously, if the subcontractor’s last furnishing was in April 2015, the lien filing date of January 2016 would have been far beyond the “75 day rule.” At least that was the argument made by the opposing parties. However, the change order that was issued for the subcontractor’s additional work in December 2015 directly referenced the original contract.

For the Court of Appeals, the change order was key: the change order referenced the original contract, which meant both the April furnishing and December furnishing were under the same contract.

“The document was entitled ‘Change Order Request,’ had the original contract number and name in the ‘reference’ field and specified the ‘scope of change’ to the original contract. That document evidences Owner and Subcontractor shared intention that the later work and the earlier work comprised two parts of one single contract.”

But wait – isn’t a furnishing of less than $600 a bit low to be “significant” for a last furnishing amount – perhaps even trivial? According to Blake Robinson in his article Oregon Court of Appeals Clarifies Timing Rule for Constructions Liens, the furnishing of less than $600 wasn’t trivial… not even trifling.

“The court also concluded that the later work was not ‘trivial or trifling’—which was significant because the 75-day deadline to record a lien is not extended by the contractor or subcontractor returning to the project to perform ‘some trifling work or a few odds and ends after apparently completing the job and removing its equipment.’ Here, the later work was not trivial or trifling because the Change Order Request specifically required the work, and the work was ‘significant to the project.'”

Survive the Oregon Trail, I Mean the Oregon Mechanic’s Lien

Oregon’s statute is clear: the lien deadline is 75 days from last furnishing or 75 days from completion. Ensure your lien rights are secure by timely filing your lien and always have proper backup documentation, such as change orders, to support your claim.

Oh, and watch out, you wouldn’t want to die of dysentery.

C’mon, I can’t write about Oregon without a solid reference to the greatest computer game of all time.

Illinois Mechanic’s Lien and Bond Claim Rights

Posted on August 26, 2019 by - Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

What You Should Know About Protecting Lien & Bond Claim Rights in Illinois

In 2019, Illinois HB2722 passed, which added protection under the payment bond for those who provide rental equipment to public projects. The legislation (effective 1/1/20) defines material, labor, apparatus, fixtures and machinery to include those rented items that are on the construction site and those rented tools that are used or consumed on the construction site in the performance of the contract on account of which the bond is given.

What else should you know about Illinois mechanic’s lien and bond claim rights? Read on! 

Protecting Mechanic’s Lien Rights in Illinois

For private commercial projects, there is generally no statutory provision requiring a preliminary notice — but the pros know serving a non-statutory notice is a terrific best practice!

The lien is a two-step process: 1) serve the Notice of Lien and 2) file the Lien.

  1. Serve a copy of the notice of lien upon the owner and the lender within 90 days after last furnishing materials or services. The notice of lien is not required when contracting directly with the owner.
  2. File the lien within 4 months after last furnishing materials or services. In certain circumstances a lien may be filed after 4 months from last furnishing materials or services, but it will have limited effectiveness.

The lien is enforceable for the unpaid portion of the contract, except when the owner has disregarded the requirement to obtain sworn statements from contractors when making payments.

For private residential projects, which would be an owner-occupied single-family residence, there is a preliminary notice requirement.

  • Contractors contracting directly with the owner: Provide a printed statement to the owner as part of your contract or as a separate printed statement and serve a Contractor’s Sworn Statement prior to payments being made by the owner.
  • Those not contracting directly with the owner: Serve notice upon the owner within 60 days from first furnishing materials or services. A late notice may be served, but the lien, when later filed, will only be effective for amounts not paid to the prime contractor at the time the notice is received.

The mechanic’s lien guidelines for residential projects are the same as commercial projects, with one extra step: when contracting directly with the owner, serve a copy of the lien upon the owner within 10 days after filing the lien.

Should you need to proceed with suit to enforce your lien, whether on a commercial project or residential project, file suit within 2 years from last furnishing materials or services, but within 30 days from receipt of a demand to commence suit.

Did You Know? While the statute allows liens for those who lease construction equipment on a commercial project, the statute does not allow liens for those who lease construction equipment if the improvement is either a single-family residence or a multi-family residence of fewer than 12 units in a single building.

Need more details on mechanic’s liens in Illinois? Click here to read full statute!

Protecting Bond Claim & Public Improvement Lien Rights in Illinois

Like private commercial projects, public projects do not have a preliminary notice requirement. As a best practice, serve a non-statutory notice & include a request for a copy of the payment bond. Typically, for state projects or any political subdivision thereof, payment bonds are required for general contracts exceeding $50,000.

In the event you need to proceed with a bond claim, serve the bond claim notice upon the public entity within 180 days from last furnishing materials or services. Within 10 days from serving the public entity, serve a copy of the bond claim notice upon the prime contractor. File suit to enforce the bond claim within 1 year from last furnishing materials or services, but within 90 days from serving the public improvement lien, if a public improvement lien was served.

When proceeding with a public improvement lien, you should serve the lien upon the public entity and the prime contractor as soon as possible to trap funds, but within 30 days from written demand. The claim is a lien on the funds owed to the prime contractor by the owner at the time the lien is served.

Key Suit Notes for Public Improvement Liens

  • File suit to enforce the public improvement lien within 90 days from serving the lien.
  • On State projects, file suit at least 15 days prior to the date the appropriation of funds will lapse.
  • Serve a copy of the complaint upon the owner within 10 days from filing.

Have Questions? Need Help? We’re here for you!

Furnishing Labor and Performing Labor Are Different

Posted on August 12, 2019 by - Mechanic's Liens & Bond Claims, UCC Financing Statements

According to Oklahoma Court of Appeals, Furnishing Labor and Performing Labor Are Different

An Oklahoma Court of Appeals has determined mechanic’s lien rights don’t extend to a party furnishing labor, because under Oklahoma statute, furnishing labor and performing labor are not synonymous.

Protecting Lien Rights in Oklahoma

When you are furnishing to a private project in Oklahoma, you secure your right to file a mechanic’s lien by serving a prelien notice upon the owner and prime contractor within 75 days from last furnishing materials or service. The prelien notice may not be required if you are contracting directly with the owner, if the lien claim is less than $10,000, if the lien claim is for retainage only, or if the project is a non-owner-occupied residential project.

If you need to file a lien and you contracted with the contractor or the subcontractor, you should file the lien within 90 days from last furnishing. However, if you contracted with the owner, the lien deadline is within 4 months of last furnishing.

Oklahoma Court of Appeals States Furnishing Labor & Performing Labor Aren’t the Same

The Case: Advanced Resource Solutions, LLC v. Stava Building Corporation & Mid-Continent Casualty Company v. McDermott Electric, LLC

The Parties:

  • General Contractor: Stava Building Corporation (Stava)
  • Subcontractor: McDermott Electric, LLC (McDermott)
  • Sub-Sub and/or Supplier: Advanced Resource Solutions, LLC (ARS)

The Chain of Events

Stava hired McDermott as an electrical subcontractor for the construction on the Luther-Walmart project. McDermott contracted with ARS, a temporary staffing agency, and ARS provided temporary laborers. The contract between McDermott and ARS was “laborers for commercial construction on an open account.”

ARS provided laborers to McDermott on this open account, for the construction on the Luther-Walmart project, for several months. When McDermott failed to pay over $100,000 in outstanding invoices, ARS filed a mechanic’s lien. After the lien was filed, Stava filed a bond to discharge the lien from the property.

After Stava posted the bond, the question of whether ARS held a valid lien claim came up. Stava argued that Oklahoma’s lien statute states the lien claimant “must have performed labor” to have a valid claim. This is an excerpt of Stava’s argument from the court decision:

“ARS was a professional employer organization (PEO) and did not “perform labor” as required under the lien statutes. Therefore, ARS, a supplier or provider of labor, was not within the class of persons entitled to assert a mechanic’s lien in Oklahoma.”

Of course, ARS disagreed, claiming it is a “…temporary staffing company, as it was the direct employer of the licensed journeymen and apprentice electricians that worked on the Walmart Project. Thus, it was the employer that furnished labor within the meaning of the lien statutes and therefore a proper lien claimant.”

 The Court Says

“ARS merely furnished labor, licensed apprentice and journeymen electricians to McDermott, who then actually labored. Furnishing labor is not the same as performing labor.”

Unfortunately for ARS, the Court of Appeals determined ARS is not within the class of parties entitled to mechanic’s lien rights. Why? Because technically, ARS wasn’t the party performing the labor, ARS provided people who performed the labor.

Is this a distinction without a difference?

No, as it turns out, the Court of Appeals decision indicates that statute may have afforded ARS lien rights if it were a contractor instead of a subcontractor. In other words, the statute specifically includes ‘performs’ labor or ‘furnishes’ labor under the statute for contractors, whereas the statute for subcontractors only includes ‘performs’ labor, not ‘furnishes’ labor.

“In the present case, under the contractor statute, § 141, any person who performs labor or furnishes labor, materials, or equipment under a contract to make improvements to real property shall have a lien on the real property for the value of that labor, materials, or equipment. However, under the subcontractor statute, § 143, the Legislature choose to limit potential lien claimants to those who actually perform labor or furnish materials or equipment. The Legislature did not include those who furnish labor.”

Did ARS Have Other Options? UCCs Maybe?

After reviewing this case, I spoke with Cindy Bordelon, NCS’ in-house UCC expert and manager. We discussed the details of the case and I asked Cindy whether ARS could have filed a UCC when it initially contracted with McDermott.

“Yes! Based on the case information, ARS provided the laborers on an open account, essentially extending credit.  Article 9 allows the securing of an ‘Account’ which is defined by 9-106 as ‘any right to payment for goods sold or leased, or for services rendered.’ With a signed security agreement granting the security interest, ARS could have filed a UCC on McDermott.”

Even though ARS says they provided the laborers for a specific project, the Luther-Walmart?

“Certainly. Actually, since it appears ARS provided the laborers on an open account, McDermott could have used the laborers on any project, and a valid UCC filing could have protected ARS.”

If you furnish labor (i.e. temporary staffing) or if you furnish materials & are too remote for lien rights, you may want to consider implementing UCCs.

Construction Lienholder Group Wins in Bankruptcy

Posted on August 9, 2019 by - In Other Commercial Credit News

Grab Your Rally Cap! Construction Lienholder Group Wins in Bankruptcy

If ever there were a time in construction litigation for folks to put on their rally hats, it would be in the case of M & G USA Corp, where the Construction Lienholder Group took grass roots action to ensure their lien rights were protected in a bankruptcy.

Man, Who Doesn’t Love A Good Underdog Story?

This week I read an article by Daniel Lowenthal, Delaware Court Grants Substantial Contribution Award to Mechanic’s Lien Creditors, which recapped a Delaware Bankruptcy Court decision in the M & G USA Corp case.

Here are the events leading up to the decision:

– In 2013, the debtor began construction of an industrial plant in Texas (anticipated completion was 2015)

– In 2017, the construction was incomplete, costs and delays were out of control, plus there were “hundreds of millions of dollars in mechanic’s liens being filed.” The debtor filed for bankruptcy protection.

– After the bankruptcy was filed, a group of mechanic’s lien creditors formed an ad hoc creditor committee: Construction Lienholder Group (CLG). In the words of Lowenthal “They made it known right away that they would be heard in the case.”

I’m starting to rally! I picture mechanic’s lien filers in superhero capes standing atop an unfinished industrial plant in Texas, preparing to fight.

CLG asked the judge to appoint an official lienholder committee, but the judge denied the request.  “He said they hadn’t satisfied the ‘heavy burden imposed by 11 U.S.C. § 1102(a)’ and he doubted the ‘propriety or wisdom” of allowing’ a group of putatively secured creditors” to have an official committee in the case,” according to Lowenthal. If an official committee had been recognized, the CLG would have been able to recover professional fees. Despite the judge’s denial of official committee recognition, CLG forged ahead knowing they would be responsible for their own fees.

As the bankruptcy case progressed, CLG retained legal representation, then actively participated in the 363 sale, objected to the debtor’s bankruptcy plan, and even negotiated $32M in DIP financing which allowed the debtors to sell the industrial plant with a clear title.

Once the bankruptcy plan had been confirmed, CLG filed a motion arguing it had made a substantial contribution to the bankruptcy case and should be reimbursed for administrative expenses.

Picture them on the steps of the courthouse, stating the facts of their case, and standing their ground… waiting patiently for the judge to decide. 

Of Course, How Would We Know Our Superheroes Are Heroes If There Isn’t A Villain?

The bankruptcy trustee swooped in and, according to Lowenthal, counter-argued that “…the lien creditors were likely to receive full payment on their claims, that an award of $1.6 million would amount to a “windfall,” that their actions in the case were motivated to protect their own interests, that the motion practice they undertook was costly, and that their ultimate compromise was not necessary for the plan to confirm.”

What Will the Judge Say?

With immense disappointment the crowd falls quiet, heads down, shoulders slumped. Then the murmurs started… here comes the judge. A hopeful hush falls over the crowd as the judge speaks.

“…substantial contribution is a high bar to satisfy. Parties-in-interest are presumed to be ‘self-interested unless they establish that their actions are designed to benefit others who would foreseeably be interested in the estate’…The Bankruptcy Code doesn’t define ‘substantial contribution’ but the contribution must provide ‘tangible, clearly demonstrable benefits to the estate.’”

So, did it? Did CLG provide “tangible, clearly demonstrable benefits to the estate?”

You betcha!

The judge cited two actions CLG took which positively impacted the case. The first? CLG “negotiated for an additional $32 million DIP cushion in the DIP Facility’s lienholder reserve.” These funds allowed the debtor to sell the plant with a clear title, as I mentioned above. If CLG hadn’t negotiated these funds, it is likely the mechanic’s liens would have discouraged potential buyers. Plus, the judge declared CLG played a meaningful role in negotiating the bankruptcy plan.

(They) “facilitated and encouraged the negotiations that led to a settlement between the mechanic’s lienholders and other economic stakeholders…”

But wait, there’s more!

Aside from the additional funds and the significant negotiations, the judge also noted the exceptional group for having:

“… identified and contacted all of the lien claimants, something Judge Shannon described as an ‘arduous task.’  And he further emphasized that the CLG did its work in the case ‘without expectation of compensation.’”

Let’s start that slow clap people!

The judge determined CLG would be compensated under the administrative claims. “…Based on time, the nature, the extent, and the value… of the services provided.”

The Takeaway? Don’t Just Sit There!

I am inspired by the Construction Lienholder Group! They took on the bankruptcy court and they won. They played an active and substantial role in this bankruptcy; they didn’t simply submit a proof of claim form and hope for the best. This should be a reminder to all of us that we shouldn’t be complacent with the rules. It’s OK to buck the system – in a safe way of course – because sometimes you gotta fight for your rights… your mechanic’s lien rights.

Legislative Changes in Tennessee: What Builders Need to Know

Posted on August 2, 2019 by - In Other Commercial Credit News

Legislative Changes in Tennessee for the Construction Industry

Earlier this year we shared a post that was all about Tennessee. Since that post, there have been some legislative changes that may impact those in the construction industry. A recent article from Bass, Berry & Sims PLC recaps some of the key changes and what those changes could mean for you.

What’s New Tennessee?

Repeal is the word for Tenn. Code Ann. § 66-21-108.

In May 2018, Tennessee legislature enacted statute that allowed an owner to recover up to $100,000 in attorney’s fees, reasonable costs, and damages, if the owner successfully challenged the validity of a mechanic’s lien filed on their property.

“This created a significant risk of liability for general contractors and subcontractors in the event their recorded mechanic’s or materialmen’s liens were later found to be invalid.” – Bass, Berry & Sims PLC

As of April 2019, this statute has been repealed (with an exception for the owners of certain residential units.) It sure didn’t take legislators long to make changes!

Continuing Education, Certified Electrical Inspectors and Construction Managers for Utility Districts

According to Bass, Berry & Sims PLC, residential contractors licensed after January 1, 2009, will need to complete eight hours of continuing education every two years. Bonus for those of you in trade organizations: “…active membership in a trade association, if proof of such membership is filed with the board, constitutes four hours of continuing education annually, and could cover the biannual requirement.”

Electrical inspectors are joining the plumbing and mechanical inspectors in certification requirements. Of course, the certification requirements vary by trade. Electrical inspectors will need to be certified by the Tennessee State Fire Marshal and then comply with recertification every three years.

Construction managers aren’t just for city, county, or local government organizations anymore. Tennessee is welcoming utility districts into the fold. “Under the revised law, utility districts and utility authorities are also authorized to contract with construction managers for new projects or additions to existing facilities.”

More Time to File a Mechanic’s Lien? Not this Time.

You know the saying “kickin’ the can down the road?” Apparently, that’s the name of the game for the Tennessee Senate Commerce and Labor Committee (Committee). The Committee opted to hold off on a bill that would extend the time for filing a mechanic’s lien from 90 days to 12 months and would give suppliers more time to serve the notices of non-payment. But that’s not all – Bass, Berry & Sims PLC says pay-if-paid would be no more.

“Perhaps most significantly, the bill would prohibit the use the “pay-if-paid” provisions in contracts between prime contractors and subcontractors. These commonly used provisions make payment from the owner a condition precedent to the prime contractor’s obligation to pay its subcontractors and suppliers.”

We’ll have to wait & see what comes from the Tennessee Senate when they review the bill again in 2020. Stay tuned for more updates on legislative changes!

Virginia’s Mechanic’s Lien Form Has Changed

Posted on July 26, 2019 by - In Other Commercial Credit News

Virginia is for Lovers of Mechanic’s Liens: Virginia’s Mechanic’s Lien Form Has Changed

Virginia is for lovers… lovers of mechanic’s liens? Maybe that’s not the slogan the state of Virginia had in mind. Although I may be one of the few that loves mechanic’s liens, today I would like to share the love & discuss the changes to Virginia’s mechanic’s lien form which went into effect July 1, 2019. The changes include the addition of the property owner’s address, the date from which interest is claimed, and identifying any amount of the claim that is not due at the time of the lien.

Securing Mechanic’s Lien Rights in Virginia

If you are furnishing to a private commercial project in Virginia, you are not required to serve a preliminary notice to secure your mechanic’s lien rights. However, we always recommend serving a non-statutory notice to ensure other parties are aware you are furnishing to the project.

Should you need to file a mechanic’s lien, serve the lien upon the owner and prime contractor within 90 days from the last day of the last month in which materials or services were furnished, but within 90 days from the project completion or work termination. The lien may only include, except for 10% retainage, materials or services furnished within 150 days prior to the last furnishing date stated in the lien. Accordingly, multiple liens may be required.

Two points of interest for lien filers in Virginia:

  • Virginia is an unpaid balance lien state, so if you need to file a lien you should file it sooner rather than later.
  • Virginia statute dictates that a subcontractor, lower-tier subcontractor, or material supplier may not waive or diminish their lien rights, right to assert bond payment claims, or the right to assert claims for additional costs in advance of furnishing any labor, services, or materials.

In the unlikely event that you need to proceed with suit to enforce your lien, you should file suit within 6 months from filing the lien or within 60 days from the project completion or work termination, whichever is later.

What’s in the Virginia Mechanic’s Lien

According to § 43-4. Perfection of lien by general contractor; recordation and notice the lien shall include the name and address of the property owner, the name and address of the lien claimant, the claimant’s contractor license number, a description of the materials or services provided, the claim amount, any amounts of interest due, and in addition to a statement declaring your intention to claim a lien, a description of the location of the real property.

New to the form is a section regarding monies that are not yet due: “Amount claimed: $__________. If any part of the amount claimed is not due as of the date of this mechanic’s lien, identify the date or event upon which it will be due and the sum(s) to which the due date(s) or event(s) apply: _________.”

How important is the new section? According to Virginia construction lawyer, Christopher G. Hill, this change is important and leaving it blank could cost you your lien rights.

“… addition of a specific section of the form spelling out which portion if any are claimed but not due (for instance retention or money subject to pay if paid clauses) as of the date of the recording of the memorandum of lien. Failing to spell this out on your memorandum of lien could potentially cost you a valid lien given the picky nature of these powerful but finicky beasts.”

Yikes! If you have questions or concerns about your lien rights in Virginia, it’s always best to seek a legal opinion.

“Virginia Love” picture is courtesy of Virginia.org

Key Collection Questions & Important Documentation

Posted on July 22, 2019 by - Credit Risk Management

Prep to Collect: Key Collection Questions & Important Documentation

You’ve gone around and around with your debtor for weeks, maybe even months, but still haven’t received past-due payments. You decide you need collection assistance and think about hiring an attorney. These four collection questions can help determine the best debt recovery plan for your business and better assist in communicating with and demanding payment from your customer.

Four Questions to Consider When Placing Your Collection with an Attorney

How Much Am I Owed?

The amount of money you’re owed can greatly impact how you proceed with the collection process. If it’s a larger past-due payment and/or from a high-risk account, you may want to bypass an in-house placement and send your case right to an experienced attorney for review.

How Past-Due Is the Payment?

It’s important to know exactly how long your receivable has gone unpaid. There could be a pertinent underlying reason for late payments, such as your debtor experiencing financial distress, or maybe there are payment issues higher up the ladder of supply. It’s critical to get out in front on the collection process because the longer an amount goes unpaid, the harder it is to collect. Some studies indicate that after six months the collectability of a past-due amount can be reduced by as much as 52%.

Am I Involved In an Ongoing Dispute with the Debtor?

If you’re involved in an ongoing dispute with the debtor, over issues such as invoice discrepancies or quality-of-work, it could result in late payments. Therefore, we recommend placing your collection with an attorney who will work quickly to resolve dispute(s) and ultimately get you paid.

Is It a Secured Amount?

If you have security in place, such as a UCC filing, mechanic’s lien or bond claim, we recommend attorney involvement to best leverage your security. For example, if you have a lien on an unpaid project, an attorney can assist in resolving the balance owed, including, if necessary, foreclosing on that lien. Similarly, if there is a UCC in place, an attorney can proceed with replevin action or repossession through the courts.

Importance of Documentation in the Collection Process

Why Do I Need Supporting Documentation?

Any collection professional needs thorough, up-to-date information to best demand payment from your debtor. Providing the proper documentation at the start of the collection process will allow an attorney to efficiently and effectively handle your claim – putting you in the best position for receiving payment.

What Type of Documents Do I Need?

Supporting documentation? The more the merrier! Every collection attorney requires basic information such as the debtor’s full name, physical address and the amount owed. However, we recommend you also provide any additional paperwork that supports your claim. This could include signed invoices, written contracts or agreements, proofs of delivery and/or bills of lading. With access to proper backup documentation, the collector can speak more intelligently regarding your claim and even speed-up the collection process.

Important Documents to Include

  • Contract or Agreement
  • Credit Application
  • Invoices and Statement of Account: this should include copies of returned / NSF checks
  • Purchase Orders
  • Proof of Deliveries
  • Personal Guarantee
  • Trade References
  • Correspondence & Notes: this could include emails, letters (demand letters, payment requests & notices) and documented phone conversations
  • Corporate Certificate: this should include your debtor’s legal identity, including whether it is a corporation, partnership or proprietorship
  • Credit Report

Unfortunately, there’s no sure way of determining the collectability of a past-due account. Therefore, it’s best to weigh the costs against the potential debt recovery and be proactive in your efforts – start taking steps to secure future receivables today.

Are you caught up in past-due payments and need some collection expertise? Let our national network of attorneys, specializing in secured and unsecured commercial collections, help get you paid!        

Iowa Lien Attached to Building, Not Lessor’s Property

Posted on July 12, 2019 by - In Other Commercial Credit News

Who Is Responsible for The Costs Associated with The Construction of The Facility, The Lessor, Lessee or Both?

In Iowa, the Lien Attached to the Building, Not the Lessor’s Property

A lessor owns the real property, signs a 50-year lease with the lessee and the lessee builds a facility on the leased property. Who is responsible for the costs associated with the construction of the facility, the lessor, lessee or both? According to the Iowa Supreme Court, the costs are the responsibility of the lessee, which means the liens can only attach to the lessee’s building and not the real property.

The Case Before the Iowa Supreme Court

Cargill, Incorporated (Cargill) signed a 50-year lease with HF Chlor-Alkali, LLC (HF). Cargill owned the land and the lease was established to permit HF to build a manufacturing facility on the property. HF hired general contractors, who in turn hired multiple subcontractors and suppliers to build the facility. All construction contracts were made with HF – no one contracted with Cargill – and HF owned the building.

What happens next is no surprise: parties in the ladder of supply weren’t paid for the construction of the facility. Mechanic’s liens were filed, and the lien claimants pursued foreclosure actions.

Cargill objected to the foreclosure of the liens against its property and argued the liens could only attach to the building owned by HF and not the property owned by Cargill. Cargill’s argument relied on the 2007 and 2012 statute changes.

The Iowa Supreme Court agreed with Cargill.

Iowa’s 2007 & 2012 Statute Changes Made the Difference

Iowa modified its mechanic’s lien laws in 2007 & again in 2012. These legislative updates included a refined definition of “owner.” Here’s a quick recap from R. Zachary Torres-Fowler in his recent article, The Lessor of Two Evils: Iowa Supreme Court Holds That Mechanic’s Liens Will Not Attach to the Property of a Lessor for Work Authorized by a Lessee.

“…in 2007, the Iowa legislature removed contracts with ‘the owner’s agent’ as a basis for permitting a mechanic’s lien to attach to the owner’s property.  In 2012, the Iowa legislature further revised the mechanic’s lien statute to narrow the definition of ‘owner’ to exclude persons ‘for whose use or benefit any . . . improvement is made.’”

Iowa statute dictates a lien is available “Every person who furnishes…by virtue of any contract with the owner, owner-builder, general contractor, or subcontractor shall have a lien upon such building or improvement…” So, what does that mean for Cargill? The contracts weren’t with Cargill; thus, Cargill’s property is not subject to the lien. Because HF contracted for and owns the building, the lien can only attach to the building.

What Does this Mean for You?

This should be a warning to those furnishing to potential lessor/lessee situations. Don’t assume mechanic’s lien rights will extend to the property; rights may only be available on the leasehold interest, or as in this case, the building on the property.

Each state handles these situations differently and sometimes statute defers to the language within the contract between the lessor/lessee. You may recall a New York case we reviewed in April, in which the property owner was liable for the construction costs, because the lease specifically required the tenant to make the electrical improvements.

Review your contracts, review property ownership, review the lease whenever possible, and always seek a legal opinion.