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Tenant Improvements – A Cautionary Tale

If a tenant hires a contractor to make improvements to a property, but the tenant doesn’t pay the contractor in full, can the contractor sue the landlord for the difference? It sounds unlikely, but it happened in one case recently.

Former Boston Celtics player Dana Barros leased a warehouse and hired a contractor to make improvements so he could turn it into a sports complex. Later, the contractor believed it hadn’t been paid in full, so it went to court against Barros and against the owner of the warehouse. The warehouse owner argued that it couldn’t be sued because it was merely the landlord; it never signed an agreement with the contractor.

Most states have what are called “mechanic’s liens, such that if a contractor isn’t paid in full by someone for work on a property, it can place a lien on the person’s interest in the property. In Massachusetts, the law applies to anyone who hires a contractor, as well as anyone acting on that person’s behalf or with that person’s “consent.” In this case, the Massachusetts Supreme Court ruled that Barros had hired the contractor with the “consent” of the landlord.

Although the lease didn’t require Barros to hire a contractor and make improvements, the court noted that the need for the improvements was obvious, the lease had been structured specifically to entice Barros to make the improvements, and the lease specified that the improvements would belong to the landlord after the lease was up.  Therefore, the court said, the contractor could place a lien not only on Barros’s rental interest in the property but on the landlord’s ownership interest as well.

Building owners who are contemplating having tenants make substantial improvements might want to protect themselves against this possibility by requiring the tenant to obtain a bond or place the construction funds in an escrow account.

Below is a summary of various strategies a landlord can implement to avoid liens from its tenant’s improvements:

  • add no-lien language in all leases and record a notice thereof
  • add language that requires tenants to
    • use a pre-approved form Notice of Completion (NOC) for their tenant improvement work
    • notify, in writing, all contractors making tenant improvements that the landlord’s interest in the property is not subject to construction liens
    • submit all tenant improvement contracts to the landlord for prior review and approval
    • obtain unconditional lien waivers and releases from its contractors and all of their lower-tiered subcontractors, material suppliers, and laborers prior to making payment for tenant improvements, and provide copies of same to the building owner (especially if the building owner is contributing any kind of tenant allowance).

There are more details for each of these strategies outlined in an article titled “Steps Every Landlord Should Take to Prevent Liens by its Tenant’s Contractors” written by Stacy Bercun Bohm and Leslie Miller Tomczak who are partners with Akerman LLP in Fort Lauderdale.

While this tale provides great advice to building owners and landlords alike, it is also important to monitor changes to the building during and after improvements against baseline data. Did energy consumption increase as expected? Is thermal comfort affected adversely in this space or elsewhere? Are water leaks being monitored and detected? Building Assure’s my Building Alerts can help.

Building Assure has designed and developed my Building Alerts with the small building owner in mind. Our low-cost solution provides all the necessary data to monitor energy consumption and waste, air quality, thermal comfort (temperature and humidity), water leak detection, equipment maintenance, service quality check (was the service conducted, and did it achieve the desired results), and much more. All while providing full transparency to your tenants and service contractors.

To learn more contact us at info@buildingassure.com

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