SJC CLARIFIES LIEN RIGHTS IN TENANT CONSTRUCTION CASE

Published on: May 16, 2011

The Massachusetts mechanic’s lien law, going back more than 100 years, allows contractors to file a lien on a tenancy interest. See G.L.c. 254, §25. There is nothing new in that concept. But a battle is often waged over whether the contractor can also assert a mechanic’s lien on the landlord’s premises.

A lien against the landlord’s interest is typically couched in terms of the “owner’s consent” to the tenant construction work, but just as often it is a strategic maneuver mostly to increase the contractor’s leverage in its efforts to be paid.

The Supreme Judicial Court recently issued a decision clarifying some of the standards to be applied in assessing the validity of the contractor’s claim in that instance. On balance, the decision will be viewed with concern by many landlords and greeted happily by many contractors.

Statutory standard

Section 2 of Chapter 254 governs lien claims by prime contractors. It states, in part:

“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 such owner for [work giving rise to lien rights] shall have a lien upon such real property … owned by the party with whom or on behalf of whom the contractor was entered into… .”

Thus, a contractor signing a contract with a tenant would have lien rights against the landlord’s larger interest only if the contractor is doing work “for, on behalf of, or with the consent of” the landlord.

The work “consent” was in the statute when originally enacted in the 1800s. Amendments in 1916 provided separate sections for laborer and contractor liens, and the contractor section did not include the word “consent.” In the 1996 amendments to Chapter 254, the word “consent” was included once again, in §2.

Thus, some of the caselaw construing this issue is from a century ago or more.

Underlying dispute

The case of Trace Construction, Inc. v. Dana Barros Sports Complex, LLC, 2011 Mass. LEXIS 165 (SJC, April 13, 2011), arose from a failed business endeavor.

The tenant, referred to here as “Barros,” entered into a lease for a 70,000-square-foot building, intending to establish an indoor basketball camp facility.

The owner, Richard Madigan, as trustee of Oxford Road Realty Trust, had once operated an indoor tennis club in the building, but more recently had used the building for storage and industrial space. Barros was going to have to renovate the space in order to set up the basketball camp.

The five-year lease provided that all the alterations and improvements, other than personal property and equipment that were removable “without material damage,” would be retained by Madigan. Further, Barros had to obtain Madigan’s consent to any alteration.

Barros engaged two contractors to perform work on the building in order to fit out the space for the camp. One of the contractors, in turn, engaged a number of subcontractors for portions of the work.

In short, although the renovation work limped close enough to the goal line (or, more appropriately, to the basket) that Barros could use the facility, the contractors and subcontractors were never fully paid, and they filed mechanic’s liens against the leasehold interest as well as the landlord’s fee simple interest.

About a year later, Barros delivered a “surrender of possession” notice to Madigan and vacated the premises.

The Superior Court determined after a bench trial that the contractors and subcontractors had valid liens on the leasehold interest, but denied all claims against the fee interest. All parties appealed. The issues on appeal were:

  • Did the two contractors having direct contracts with Barros perform work with the landlord’s consent such as to allow liens on the landlord’s fee interest?

 

  • Did the subcontractors have the same rights to pursue a broader lien against the fee simple interest?

 

  • Were the liens on the leasehold interest wiped out by the tenant’s “surrender?”

Owner’s ‘Consent’

Although the lien law requires a “written contract” in order to pursue and enforce a mechanic’s lien, there is no specific requirement that the owner’s (read: landlord’s) consent to the construction activity be in writing.

And to clarify that point, the SJC expressly noted in Trace, at *11, that Chapter 254 “does not require that the owner’s consent be written.”

Also, the SJC ruled that the phrase “on behalf of” in the latter part of the sentence in §2 (see quoted portion above) references the earlier phrase “acting for, on behalf of, or with the consent of.”

Thus, one who has the consent of the landlord for the work is acting “on behalf of” the landlord and can file a lien on the landlord’s real estate interest. The SJC decision confirms that such consent can be in the form of something other than a written document.

Cases on the issue of an owner’s “consent” have held that consent will not be implied by the landlord’s silence. The SJC noted that “consent” has ordinarily required “something more than awareness of an intent to perform work, or awareness of ongoing work, and a failure to object.” Id. at *17.

The court cited Francis v. Sayles, 101 Mass. 435, 439 (1869) (that the landlord may have been aware of the tenant’s work but did not object, did not establish consent); Hayes v. Fessenden, 106 Mass. 228, 230 (1870) (owner’s knowledge of buyer’s intent to perform work prior to taking title, and failure to object, did not constitute consent); cf., Roxbury Painting & Decorating Co. v. Nute, 233 Mass. 112, 114, 118 (1919) (owner knew buyer intended to perform work prior to taking title in order to secure the mortgage for the closing, and that was sufficient for the appellate court to vacate a lower court verdict for the owner).

Barros and Madigan had discussed the pending renovations, and Madigan had visited the building while the work was ongoing, but the SJC was not particularly influenced by those facts.

What the SJC found of greater import, though, was that the lease called for the renovation work to become part of the demised premises, and such work would not become the property of Barros.

Finally, the court found persuasive the fact that Madigan had priced the rent low in order to encourage Barros to invest in renovations:

“Madigan’s conduct thus went beyond silent acquiescence in Barros’s undertaking. The provisions of the lease and the pricing agreement evidence contemplation and active encouragement of renovation investments in the property that would, at Madigan’s election, remain for his benefit. We conclude, based on the sum of the evidence, that the work was performed ‘with the consent of’ Madigan for purposes of G.L. c. 254, § 2, and that the contractors have a valid lien on Madigan’s fee interest.”

Thus, the SJC allowed the lien claims against the landlord’s fee interest, of the two companies that had contracted directly with Barros. That occurred in the absence of any written consent by Madigan and in the context of negotiations and lease terms between landlord and tenant that were probably not out of the ordinary.

Subcontractor rights against landlord’s fee interest

Subcontractor liens are established by §4 of Chapter 254, and the language in that section varies from §2.

Subcontractors have lien rights “upon such real property, land, building, structure or improvement owned by the party who entered into the original contract.” There is no reference to “consent,” but only a reference to the party entering into the prime contract.

The court noted:

“This provision is notably distinct from § 2, the provision governing contractors, in that the subcontractor’s lien is limited to the property owned by the party who entered into the original contract; it does not extend to the property owned by the person for whom, or on whose behalf, or with whose consent, the contract was made. Trace, 2011 Mass. LEXIS at *19.”

The subcontractors argued that the court should construe §4 broadly so as to encompass any property subject to a lien under §2, but the response was simple: “We decline.”

Since the prime contractors had entered into contracts with Barros, and not Madigan, the subcontractors had lien rights only against the leasehold interest.

‘Surrender’ of the lease

In reviewing the competing claims about validity of the liens against the leasehold interest, the SJC started with the premise that any lien against the leasehold would not survive surrender or termination of that interest.

Here the court distinguished conveyance of a leasehold interest from termination of that interest. In the former circumstance, the lien would continue to be enforceable against the successor in interest, but in the latter, the lien rights would be extinguished.

The SJC also recognized the ambiguity arising from the fact that the leasehold interest was returned to the landlord. Was that a “conveyance” as argued by the contractors, or a “termination” as argued by Madigan?

The SJC ruled that the situation would be governed based on whether the surrender was voluntary or not.

On that issue, the SJC looked to the fact findings of the Superior Court. The lower court had noted that Barros was not only unable to pay the contractors, but also fell behind in paying rent — enough so that Madigan drew down a letter of credit that Barros had furnished.

The “surrender” was, in fact, acknowledgement of the inevitable and mere substitution by Barros and Madigan in lieu of the more formal process of default and termination.

Citing from Applebee’s Northeast, Inc. v. Methuen Investors, Inc., 46 Mass. App. Ct. 777, 784 (1999), the court noted: “The fact that the termination was carried out cooperatively, without litigation or other controversy, is not material where plain grounds for forfeiture existed.”

Conclusion

What is the lesson for owners (whether landlords or tenants), contractors and subcontractors?

The case provides ammunition to a contractor pursuing payment from a financially shaky tenant. The decision even gives the contractor greater leverage in circumstances of a bona fide dispute with the tenant, by increasing the likelihood that a lien against the landlord’s interests will be upheld.

Landlords are placed in a more constrained setting. To what extent will the landlord seek to control construction work by a tenant, or take other action that will be argued after the fact as “consent,” since it is now clear that the consent need not be in writing?

Subcontractors are the losers here, since the limits of their ability to assert a lien on the landlord’s interest is now clearly established. So the SJC has clarified an element of the mechanic’s lien statute in a manner that will be felt and heard in the real estate and construction industries.

If you would like further information please contact Ed Allcock at eallcock@meeb.com or at 781-843-5000 (150).