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#18:  Lien Rights in Tenant Fit-up Cases

10/11/2014

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A commercial tenant signs a long term lease with a landlord.  The lease expressly contemplates that the tenant may make improvements to the property.  Maybe it says the improvements become the property of the landlord at the end of the lease term, maybe it says the tenant must restore the property to its pre-lease condition at the end of the lease term, and maybe it's just silent on the issue.  Say the tenant hires you to build out the fit-up, and doesn't pay you.  A mechanic's lien against the tenant's leasehold interest, while theoretically possible, isn't much help (a sheriff's sale of the leasehold won't fetch many interested bidders if, as is usually the case, the landlord has reserved the right to approve any new tenant -- and won't fetch any at all if the rent is at market rate and other space is available).  Can you lien the landlord's property as well?

The New Hampshire Supreme Court has yet to answer this question.  Other states take varying approaches.  Some (California, Illinois) allow the lien as long as the landlord knew of the improvements and didn't object; others (Florida, Massachusetts, New York) require proof of the landlord's express consent to the improvements; still others (Michigan, Missouri, Tennessee) allow the lien only if the tenant was acting as the landlord's agent.  A few states (Georgia, Ohio, Texas) disallow the lien unless the owner was a party to the construction contract.  Some of these differences track differing language in the applicable statutes.  For instance, Massachusetts lien law gives lien rights to "A person entering into a written contract with the owner of any interest in real property, or with any person acting for, on behalf of, or with the consent of the owner . . ."

New Hampshire's statute is not so generous, and requires that the debt arise "by virtue of a contract with an agent, contractor or subcontractor of the owner" (RSA 447:5).  Agency can be express or implied.  It is safe to say that many factors (is the tenant required or merely allowed to make improvements? does the lease give the landlord the right to approve any plans? does the landlord benefit from the improvements? is the cost of the improvements borne by the landlord through offsets in rent?) may play into whether a tenant is acting as agent for the landlord.  The underlying concern is generally one of fairness to the landlord.

The balance was struck in favor of the landlord in I.B.E.W. Local 490 v. Maureen Electrical, Inc., Merrimack County Superior Court No. 2012-CV-684 (Jan. 16, 2013), a case involving a lien asserted against the owner of the Merrimack Premium Outlets.  The leases required all tenant fit-up work to be approved by the landlord
after submission of plans and specs; required the landlord's approval of the contractors implementing them; and provided that with one exception (track lighting) "all tenant improvements shall become the property of Landlord when installed."  Nevertheless, the Court concluded that the landlord received little benefit from the improvements contracted for by its tenants, and rejected the argument that the tenants were acting as agents of the landlord in constructing improvements, based on three factors: "The improvements will not become the property of the lessor until the end of the lease, in 10 years.  The alterations, while substantial and permanent, are not beneficial, but are actually a cost because a new tenant will want to fit up the space it rents for itself.  Finally, there is no evidence the rental payments reflect any increased value of the property as a result of the improvements."

The lesson here is that a contractor considering doing a tenant fit-up should always ask to see the lease and verify that the landlord both allows the improvements and owns them once they are made.  Even that is not enough to ensure lienability of the landlord's interest -- but it is a safe bet that without them lienability will not be found.

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#17:  Arbitration vs. Litigation: Which Is Best For Your Contract?

10/1/2014

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Experienced trial lawyers will tell you that the judicial system is ill-suited to resolving certain types of complex civil cases, and if pressed for an example are as likely to point to construction disputes as any other.  It's not just that construction cases aren't sexy (and perhaps for many judges and juries downright boring).  It's that their blending of arcane questions of engineering and architecture with the practicalities of construction means and methods cries out for a particular expertise in the decision-maker.  This explains the popularity of arbitration in construction cases, a dispute mechanism now largely enshrined in form contracts like those promulgated by the AIA.

Of course forms can be altered, and arbitration clauses can be stricken from a proposed contract so that litigation will become the default mechanism for dispute resolution.  Not knowing what some future dispute will look like when you pick up a pen to sign your contract, predicting which procedure will yield the fairest result at the least cost can be difficult, particularly since these two considerations are often in tension.

The conventional wisdom is that arbitration is less expensive than litigation despite the fact that the arbitrator and any arbitration administrator (such as the American Arbitration Association) will charge a fee for their services.  Proponents of this conventional wisdom point to the relative speed of the arbitration process as compared with courts, its limitations on "discovery" (e.g., depositions) that often run up huge bills in litigation, possible avoidance of expensive expert witnesses to educate a judge and jury on matters already within the arbitrator's expertise, curtailment of "motion practice" that marks many court cases, and the diminished likelihood of an appeal (I'll have more to say on appeals from arbitration awards in a future blog).  But these considerations should be tested before you agree to arbitrate up front.  Here are some practical questions to ask yourself:

First, is the contract price at least six figures?  If not, chances are that the amount at stake in any future dispute won't justify the expense of paying an arbitrator and an arbitration administrator, even under the streamlined rules governing smaller arbitrations.  Not having to pay a judge and a jury for their time may save you more than not having to pay for the "discovery" costs that litigation can impose but that arbitration will limit or even prohibit absent the parties' consent.

Second, is the scope of work complex or tricky?  If not, there is less likelihood that an expert witness will be required at trial to educate a judge or jury untrained in engineering or in construction means and methods.  One of the things you are buying when your arbitrate is the expertise of the arbitrator; don't be in a rush to buy it if it isn't likely to be needed.

Third, is budgeting your time predictably critical to your bottom line?  For the busy businessman, arbitration offers more flexibility and certainty of schedule.  The parties schedule the arbitration hearing when convenient for them, and don't get "bumped" by a court which has suddenly found its priority criminal docket to be beefier than anticipated when the trial was first scheduled.  Those "bumps" can end up costing you.  (This can be a money-saver in legal fees as well; your attorney won't have to gear up for trial twice.)

Arbitration may have other advantages over litigation that may tip the balance.  For one, it is a private procedure, unlike a trial in open court that creates a public record of the result.  If confidentiality is of value to you, arbitration becomes more attractive.  And if you are the type of person who gets nervous on the witness stand in front of a jury of your peers, you are likely to prefer the informality of the conference room to the formality of the courtroom.

In residential construction, the psychological factor must be considered as well.  Because jurors can more easily identify with them, homeowners may fare better than their contractors with a jury than with an arbitrator, and vice versa.  I typically counsel residential contractors to present their customers with a contract containing an arbitration clause for this reason.  But you never know!


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    Frank Spinella

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