A contractor may register a construction lien on a property to obtain payment for their unpaid services or materials. While registering liens is generally straightforward, complexities arise when the property's fee simple registered owner is not the party who retained the contractor registering the lien. In short, the registered owner may not be an "owner" under the lien legislation, to give rise to a valid lien. In commercial construction, determining the validity of such a lien against a fee simple property owner's interest in lands, when the work is performed for a tenant, is a common issue.
Courts have consistently ruled that for a lien to be valid against a landlord's fee simple interest, where the contract is between the contractor and the tenant, the landlord must have requested the work and received a direct benefit from it. A landlord's active participation is not enough.
Xemex was hired to perform renovation work for Koor, a tenant of a small commercial/office building owned by Aspen. Xemex completed the contracted work but was unpaid by Koor. Not only did Koor default on the payment, but it also vacated the premises, leaving it in a state of disrepair and disarray.
As the property owner, Aspen had not contracted with Xemex for the renovations directly. However, improvements were made to Aspen's property, albeit under a contract with Koor, as tenant. When Xemex did not receive payment from Koor, it registered a lien against Aspen's fee simple interest, claiming that Aspen, as the registered owner, should be liable for its unpaid work.
The central question was whether Aspen, in its capacity as the fee simple owner of the lands, could be subject to Xemex's lien, when Aspen did not contract with Xemex but was aware of the work being undertaken. This depended on the interpretation of the term "owner" as defined in Section 1(j) of the Prompt Payment and Construction Lien Act. In order for the lien to be valid, Aspen must meet the definition of "owner" under the Act.
The Applications Judge initially ruled Aspen was an "owner" under the Act, reasoning that the work was impliedly done at its request, and it benefited from the work as registered owner. The result was overturned on appeal, with the Court concluding that although the work was impliedly done at Aspen's request, it did not receive a direct benefit.
What the Court Said
To consider a landlord as an "owner" under the Act, the Court assessed two criteria: firstly, whether the landlord had expressly or impliedly requested the execution of the work, and secondly, if the work provided a direct benefit to the landlord upon completion.
The Court found that Aspen impliedly requested that the work be done due to it actively participating in the work. In making the finding of active participation, the Court observed that Aspen actively reviewed and approved various aspects of the project. Additionally, Aspen's involvement in discussions with Xemex about construction planning, kick-off, and execution, along with its provision of checklists and detailed procedures to integrate the work with existing building systems, demonstrated a level of engagement beyond passive oversight.
However, the Court held that Aspen did not gain a direct benefit from Xemex's work, as the renovation was unfinished and disorganized, leading to an unattractive office layout for potential tenants. The Court also stated that mere legal ownership of the property does not constitute a direct benefit under the Act. Since Aspen did not directly benefit from the renovations, despite having impliedly requested them, the Court concluded that Aspen did not meet the definition of an "owner" in the Act, rendering Xemex's lien invalid.
Takeaways
A contractor performing tenant improvement work should do so with caution, as it can often be left in a position without any valid lien rights if the tenant fails to pay. A contractor can always lien the tenant's leasehold interest in the lands, but if the tenant has no funds and the work is incomplete, that leasehold interest is likely worthless.
On the flip side, liening the landlord's fee simple interest is also risky, as demonstrated by this case. Even if the landlord actively participates in the construction, this does not satisfy the "direct benefit" requirement of the definition of owner in the Act. This case serves as a reminder for both contractors and landlords to be aware of their potential liabilities and rights in tenant-initiated construction projects.
A contractor can try to protect itself by providing a notice to the landlord under section 15(1) of the Act. If such a notice is sent, the landlord must respond within 5 days, otherwise the landlord's fee simple interest can be validly liened by the contractor. But if the landlord disputes being responsible for that tenant work, the contractor would then need to bring the landlord under the definition of "owner" under the Act to validly lien the fee simple interest.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
