Contractors Performing Fit-Out Work for Commercial Tenants in Pennsylvania: How to Fortify Your Mechanics’ Lien Rights
If you are a contractor that enters into contracts with commercial tenants to perform fit-out work in Pennsylvania, there are steps you can take to protect yourself from the following scenario.
Scenario: You enter into a written contract directly with a commercial tenant to fit-out the commercial space they leased from the landlord or property owner(s). You perform and complete the fit-out work with no deficiencies, yet the tenant does not pay you in full for the work you performed. You decide to file a mechanics’ lien to secure payment of the amount you are owed. A mechanics’ lien against the property owner’s interest in the property is a powerful tool because the property owner will face the risk of losing the property in a foreclosure sale if you prevail on your mechanics’ lien claim (in which case you may be paid from the sale proceeds along with any other parties, if any, that have an interest in the property).
Potential Problem: Since you contracted directly with the tenant, you can only file a mechanics’ lien against the tenant’s leasehold interest in the real property. What does that mean? Well, if you prevail on your mechanics’ lien claim against the tenant, instead of being able to foreclose on the property and force its sale, you may just trade places with the tenant as the lessee (including the tenant’s obligation to pay rent!). Generally speaking, a lien on a tenant’s interest as a lessee does not provide the same security for payment as a lien on the property owner’s interest. While a lien on the tenant’s interest can put pressure on the tenant to pay for the work performed or risk losing its lease, it does not provide the same collateral that the owner’s interest does because foreclosing on the tenant’s interest won’t result in a foreclosure and sale of the property (therefore there are no sale proceeds to go to you to pay for your work). In Pennsylvania, oral consent by the property owner to the fit-out work will not give you the right to file a mechanics’ lien against the owner’s interest in the property. Neither will the fact that the property owner had knowledge of and acquiesced to the fit-out work.
Solution: If you contracted directly with the tenant to perform fit-out work, Section 1303 of the Mechanics’ Lien Law allows you to file a mechanics’ lien against the property owner’s interest if the owner has signed a writing indicating that the work was for the immediate use and benefit of the owner. Given that, here are the steps to take to make sure you will be able to file a mechanic’s lien against the property owner’s interest in the event you are not paid by the tenant:
1. Identify the Property Owner(s): You can’t determine if the property owner(s) have signed a writing that satisfies Section 1303, nor can you have them sign such a writing, if you don’t know who the property owner(s) are. Title companies can perform title searches quickly and for a small fee and provide a report identifying the current property owner(s). This information is critical.
2. Request a Copy of Tenant’s Lease: Once you have identified the property owner(s), you can see if they signed the tenant’s lease. If they have, depending on the lease terms, the lease may satisfy Section 1303 if it allows for construction and improvements on the leased property that will benefit the owner. It is recommended that you have an attorney review the tenant’s lease to determine if it satisfies Section 1303 as there is no “magic language” that will tip off a layman that it meets the requirements of Section 1303 (a comprehensive review of all lease terms has to be performed in light of Section 1303 and the caselaw interpreting it). If your attorney concludes the lease is signed by the property owner(s) and satisfies Section 1303, then you can proceed with the project knowing you will be able to secure any failure of the tenant to make payment by filing a mechanics’ lien on the property owner’s interest in the property.
3. If the Lease Does Not Satisfy Section 1303, Ask the Owner(s) to Sign a Specific Form: In the event the tenant will not provide you with the lease or the lease simply does not satisfy Section 1303, you can ask the property owner(s) to sign a writing that does satisfy Section 1303. Will they sign it? You never know unless you ask. If you do not want to take that step for business reasons, etc., that’s fine so long as you know you will not be able to lien the property owner’s interest if you are not paid in full by the tenant. We have drafted a free form that you can access on our website for this purpose (click here for “Forms and Resources”).
4. Timing: If you do decide to go through the above steps to fortify your right to file a mechanics’ against the property owner’s interest in the property, it makes sense to raise the issue during contract negotiations with the tenant. Requesting a copy of the lease and possibly asking the owner to sign a certain form would be an appropriate and normal topic of discussion when negotiating the contract with the tenant (as opposed to sometime after the contract has been executed or work has commenced).
If you have a questions about mechanics’ liens or any other construction law matter, please contact Jeff Venzie email@example.com or Julie Pfaff firstname.lastname@example.org of Venzie Construction Law or (484) 359-7323.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.