LIENS ON LEASEHOLDS?
What happens if a contractor fails to contract with the actual owner of the property, but instead contracts with a tenant? This situation is fairly common. Especially when there is an emergency and a plumber, electrician, HVAC technician or other contractor is called to perform an emergency repair. Fortunately, most of the time contractors are properly paid for these type of services. However, when they are not it can be difficult to understand what lien rights the contractor has.
A contractor’s lien, sometimes called a mechanic’s lien, is a statutory remedy for a laborer who has completed work under a contract but has not received payment in full. Most often the lien is against an interest in real property. In North Carolina, however, our General Statute 44A-9 allows for a contractor’s lien to be placed against a leasehold interest. The statute states that “a claim of lien on real property authorized under this Article shall extend to the improvement and to the lot or tract on which the improvement is situated, to the extent of the interest of the owner.” N.C.G.S. § 44A-9 (emphasis added). A leasehold is a temporary interest in property that is time limited and subject to the terms of the lease agreement. While this interest is less than the total value of the property, there is still a value to a leasehold that can be leveraged to enforce payment of a debt owed to a contractor.
For a contractor this is good news, to an extent. The combination of the time limited nature of the leasehold interest and the time required to judicially enforce a contractor’s lien effectively makes the protections of a claim against a leasehold interest almost theoretical for shorter-term leases and problematic against all leases. Pete Wall Plumbing Co., Inc. v. Sandra Anderson Builders, Inc., 215 N.C. App. 220, 229, 721 S.E.2d 663, 669 (2011). Additionally, a leasehold terminates, and can terminate, prior to the lien filed by the contractor, which limits the protection given by the statute. The complex nature of real estate projects and business structures designed to mitigate a lessee or lessor’s liability makes the situation even more precarious for contractor’s seeking to protect themselves. (Read more about leases and liens here.) The lien against a leasehold is seen by some as an “illusory” protection that falls short of providing the necessary security a contractor needs. Read more about the illusory nature of a lien against a leasehold in Nate Budde’s article on the Levelset website.
For Contractors: Whenever possible, a contractor should get approval of the owner (lessor) of the property and not solely the owner of the leasehold (lessee).
For subcontractors: Subcontractors should always review the ownership of the property before beginning work. If it looks like a lease, you could lose the ability to enforce your valuable lien rights.
For Owners: Lessors should take caution and protect themselves from being subject to a lien against their property for unpaid balances to contractors who have completed work on their building. A “no lien” clause should be added to any lease agreement that is part of a project that is going to be modified or constructed to meet the needs of the lessee.
An attorney familiar with construction and property law can help contractors or lessors properly protect themselves from costly litigation. If you have an issue involving liens, construction or leases, contact Allen Stahl + Kilbourne to discuss your options.
By James W. Kilbourne, Jr. and Jeff Stahl
Updated: Febraury 19, 2020
