Construction liens have been part of Wisconsin law since the 1800s. Given that most construction projects put the contractor in the role as lender until final project completion, liens may help mitigate the large financial risk faced by most contractors on construction projects.
Tenant buildouts pose serious risks to contractors. Many buildouts involve new businesses that may be undercapitalized and may fail before the buildout is even complete. In most cases, a contractor will have no recourse against the fee owner, but will be limited to filing suit against the tenant, and the lien would be limited to the leasehold interest.
General Lien Principles
For projects that are partly or wholly commercial in nature, for both contractors and subcontractors, there are three steps to perfect a lien prior to commencement of a lien foreclosure action (which must be filed within two years of the filing date for the claim for lien):
1) a notice of intent served on the owner 30 days before the filing of a lien claim;
2) the filing of a lien claim in the circuit court in the county where the property is located within six months of the date of last substantial work (not warranty work); and
3) service of a copy of the lien claim on the owner within 30 days of filing.
Serve means personal delivery, delivery by registered or certified mail, service in a manner described for service of a summons, or any other means of delivery in which the recipient makes written confirmation of the delivery.
Who Is the Owner?
Wis. Stat. chapter 779 is very specific on who is an owner for purposes of a lien claim.
Saul C. Glazer, U.W. 1990, is a partner at Axley Law Firm in Madison. He focuses his practice on construction law, and assists owners and contractors in preparing construction contracts and resolving construction disputes.
An owner means the owner of any interest in land who, personally or through an agent, enters into a contract, express or implied, for the improvement of the land. Agency will be presumed, in the absence of clear and convincing evidence to the contrary, between employer and employee, between spouses, between joint tenants and among tenants in common, but there shall be a similar presumption against agency in all other cases.
Accordingly, the key for triggering a lien claim against an owner is an express or implied contract (personally or through an agent) for an improvement in land to the extent of the owner’s interest in that land. If the express presumptions for certain agents do not apply, agency is not presumed.
There is no presumption of agency between a landlord and tenant.
What Is the Interest in the Land?
In the absence of the landlord’s express or implicit agreement to a contract for improvements, the tenant would be the owner for the purposes of the construction contract. The tenant is not a fee owner. The tenant only has a leasehold interest in the land.
Therefore, the lien against a tenant is against the tenant’s leasehold interest, and not the fee interest. The lease itself may prohibit liens from tenant improvements.
Protection for the Contractor
In the vast majority of tenant buildouts, absent express authorization from the fee owner, the contractor’s lien rights will be limited to the leasehold interest. Given that many tenants may have limited finances or may go out of business, the contractor whenever possible should seek the fee owner to expressly guarantee some or all of the cost of the tenant buildout.
A contractor can request the tenant have a payment bond or place the construction funds in escrow. A contractor may request the tenant corporation or limited liability company have individuals sign personal guarantees.
In the absence of an express authorization, there may be situations where a contractor may be able to allege unjust enrichment against the fee owner, depending on the type of improvements and if the owner retained the benefits of the improvements.
However, many tenant improvements do not increase the property value, and in fact may decrease the property value if they need to be removed in order to construct a different buildout. Even if a contractor is not paid, the contractor is responsible to pay its subcontractors.
Protection for the Fee Owner
Whenever possible – assuming the fee owner does not want to be responsible for the cost of the buildout – the fee owner should have the contractor expressly agree that the fee owner is not responsible for the cost of the buildout regardless of any potential unjust enrichment.
Another potential mechanism to avoid liability is to have a title company handle the buildout, with an appropriate amount of funds held in escrow from the start of the construction (including a contingency for change orders).
Alternatively, the owner can require the tenant to have a letter of credit or security deposit to cover some or all the cost of the buildout. The fee owner could also require an upfront payment bond to eliminate the lien rights. The lease itself should include a provision prohibiting tenants from allowing liens on the property.
The Bottom Line
Tenant buildouts can be disastrous for both fee owners and contractors. Fee owners, whenever possible, should have contractors expressly disclaim any right to payment from the fee owner.
Contractors, whenever possible, should seek some security or guarantee from fee owners and tenants, or make sure there are other measures in place to insure that the tenant will pay for the buildout.