Navigating the complexities of construction law is crucial for contractors to ensure they are paid for their work. In Arizona, mechanics’ liens can be particularly nuanced when dealing with tenant improvements.
There’s a critical distinction between filing a mechanic’s lien against the real property itself versus filing against a leasehold interest. Do you know the difference?
Here’s a quick breakdown on what these distinctions mean and tips for protecting your payment rights.
What is a Mechanic’s Lien on Real Property?
A mechanic’s lien on real property is a claim made directly against the physical land and any structures on it. The lien is on “the dirt,” so to speak.
In a legal document, you may see terminology that the claimant “claims a lien upon the real property and on the structures and improvements thereon.”
This means that if you, as a contractor, are not paid for services or materials, the lien encumbers the owner’s entire property. This type of lien can prevent the property owner from selling or refinancing the property without first settling the debt.
For a contractor to have the right to lien the real property for tenant improvement work, the property owner must have requested the work, either directly or through an authorized representative. This authorization is key.
Property management companies are automatically considered agents of the property owner. Therefore, if a property manager requests the work, a contractor generally has the right to file a lien on the real property.
What is a Mechanic’s Lien on a Leasehold Interest?
A lien on a leasehold interest comes into play when a tenant requests improvements but does not have the authority from the landlord to act on their behalf.
In this scenario, the contractor cannot legally encumber the owner’s property, as the owner did not authorize the work.
Instead, the contractor can place a lien on the tenant’s interest in the property: the lease itself. The claim should explicitly state it is “upon the leasehold interest of the tenant improvements…and not against the real property itself.”
While a lease does have value, especially in cases such as a long-term commercial lease, collecting on this type of lien can be more challenging. It may encumber the tenant’s right to occupy and use the property as outlined in their lease agreement, but it does not attach to the landlord’s title to the property.
Tips for Contractors Navigating the Type of Mechanic Lien
Do Your Homework.
Lease agreements are often private documents and not publicly accessible, so obtaining clear information is vital. A simple conversation upfront can help you determine your potential lien rights if payment issues arise.
Be intentional about asking the right questions:
- Who is requesting this work? Is it the tenant, the property manager, or the landlord?
- If it’s the tenant, do they have written authority from the landlord to make these improvements?
- Does the lease include any clause allowing the tenant to make improvements?
Make sure you know the lien you’ll be eligible to file before starting the job. If you can’t get clarity on who authorized the work, you may want to reconsider taking the job.
Understand the Risks.
A mechanic’s lien on real property is more valuable and easier to collect on than one on a leasehold interest.
As a result, some contractors decide as a business practice not to take on tenant improvement projects unless the property owner is directly involved or has given clear, written authorization. This proactive approach can save significant headaches and financial risk down the line, but it is ultimately up to you.
Manage and Protect Your Lien Rights with Titan
At Titan Lien Services, we have helped contractors like you understand and navigate your lien rights from start to finish. We are a premier mechanics lien processing and filing services company, and we strive to be the best in the construction industry!
If you have any questions or would like to hear more about what we can do for you, reach out today and we will be happy to assist!