What commercial property owners must know about protecting themselves from liens for work performed for tenants

One of the problems for commercial property owners involves work done at the request of a tenant (i.e., tenant finish, tenant remodel, tenant repairs, or other similar work) that can become the obligation of the property owner. Specifically, a mechanic’s lien claim can be brought by the unpaid general contractor, trade subcontractor, and/or material supplier against the property owner.

The Colorado mechanic’s lien statute does provide potential protections for a property owner, and they are relatively simple actions to take. However, they must be implemented as a practical matter before the “first lienable” construction work is done. Note: the first lienable work is typically done in the form of construction drawings. For that reason, the preventative measures discussed here must be implemented by the property owner or the contract property manager before the date on which construction drawings are begun.

The first step toward property owner protection from lien claims resulting from tenant-originated construction work is the drafting of a specific provision in the lease document that requires owner permission in writing for the construction of tenant improvements. The lease also needs to say, in conspicuous bold type, that the tenant has no right to allow any mechanic’s lien to attach to the property, that neither the landlord nor the property will be subject to such liens, and that the tenant will fully indemnify the owner of the property for the defense of any such claims, including all costs and attorneys’ fees incurred.

If such a provision is in place, then the owner needs to enforce it, and not make it useless by casually telling a tenant that it need not comply with it. That means that if the owner learns of the tenant’s intention to construct improvements, the owner needs to (1) see the full plans; (2) be given a complete list of suppliers, general contractors, and trade subcontractors; and (3) provide written permission to the tenant for the work in question – while still disclaiming any responsibility by the owner of the property for any lien claim.

Then the owner of the property needs to record the lease with the County Clerk and Recorder of the county in which the property is located. This gives public notice that the tenant cannot subject the property to lien claims, and that the contractor and subcontractors can only look to the tenant for payment.

At the same time the written consent is given, and the lease is recorded, the owner (or the property manager) should also post a large and conspicuous notice of non-liability of the owner of the property for mechanic’s liens. This notice should be attached to the front door in a manner that is hard to remove, and it should be confirmed by the owner (through inspection) at least weekly that the notice is in place through the entire time of delivery of materials and construction work. The owner or property manager should also keep a log of these inspections as proof, if such proof becomes necessary, that the notice was in place. If the notice is removed it should be immediately replaced. If this notice is not in place, the protections of the notice are lost entirely.

The notice needs to say the following:

NOTICE OF OWNER’S NON-LIABILITY FOR MECHANIC’S LIENS FOR CONSTRUCTION ON THIS PROPERTY

This property is presently under tenant-finish construction with the consent of the owner, but the suppliers, general contractor, trade subcontractors, providers of labor and/or equipment are given notice under C.R.S. § 38-22-105(2) that the owner of the property, and the property itself shall not be subject to any claims of mechanic’s liens, or other similar claims. This notice serves to advise any supplier, general contractor, trade subcontractors, providers of labor and/or equipment that the sole obligation for payment for all construction-related charges is the obligation of the tenant alone, and not the obligation of the owner or property manager.

This may seem like a lot of work for the property owner or property manager, but it is a simple case of an ounce of prevention being worth a pound of cure. Without taking these steps, the property and/or the owner are potentially liable for mechanic’s liens of suppliers and construction contractors. Otherwise, the full costs of a tenant-originated remodel or interior finish may become the obligation of the property owner. This is in addition to the costs of hiring a qualified attorney to defend, negotiate, and potentially go to trial on these issues.

Also, if there is a lender involved in the financing of the property, it will be necessary for the owner to defend and address their problems. This is because the terms of the deed of trust are likely to be violated by the bringing of a lien claim against the property, and the lender is probably going to be brought into the case.