FILING LIEN FORECLOSURE LAWSUIT AFTER SERVING CONTRACTOR’S FINAL PAYMENT AFFIDAVIT

If you are an unpaid contractor in direct contract with the owner of real property, you should be serving a Contractor’s Final Payment Affidavit prior to foreclosing on your construction lien.  This should extend to any trade contractor hired directly by the owner.  As a matter of course, I recommend any lienor hired directly by the owner that wants to foreclose its lien to serve a Contractor’s Final Payment Affidavit.  For example, if you are a plumbing contractor hired by the owner and want to foreclose your lien, serve the Affidavit.  If you are a swimming pool contractor hired by the owner and want to foreclose your lien, serve the Affidavit.  You get the point.  (If you are not in direct contract with the owner, you do not need to serve the Affidavit, but you need to make sure you timely served your Notice to Owner; when you are in direct contract with the owner, you do not need to serve the Notice to Owner because the owner already knows you exist.)

The Contractor’s Final Payment Affidavit is a statutory form.   I suggest working with counsel to help execute to avoid any doubts with the information to include.  The unpaid amount listed should correspond with the amount in your lien and you want to identify all unpaid lienors (your subcontractors and suppliers) and amounts you believe they are owed.

If you are in direct contract with the owner, serving the Contractor’s Final Payment Affidavit is a condition precedent to foreclosing your lien.  To this point, Florida Statute s. 713.06(3)(d)(4) provides:

The contractor shall have no lien or right of action against the owner for labor, services, or materials furnished under the direct contract while in default for not giving the owner the affidavit; however, the negligent inclusion or omission of any information in the affidavit which has not prejudiced the owner does not constitute a default that operates to defeat an otherwise valid lien. The contractor shall execute the affidavit and deliver it to the owner at least 5 days before instituting an action as a prerequisite to the institution of any action to enforce his or her lien under this chapter, even if the final payment has not become due because the contract is terminated for a reason other than completion and regardless of whether the contractor has any lienors working under him or her or not.

In a recent case, A. Alexis Varela, Inc. d/b/a Varela Construction Group v. Pagio, 47 Fla. L. Weekly D1112b (Fla. 5th DCA 2022), the appeal was based on whether the contractor filed suit one day before it should have filed suit after serving the Contractor’s Final Payment Affidavit.  The Affidavit was served on 5/5/21.  The contractor then filed its lien foreclosure lawsuit on 5/10/21.  The trial could dismissed the lien action claiming the contractor did not properly comply with the 5-day condition precedent because the earliest it could have foreclosed its lien was 5/11/21.  The appellate court reversed.  The plain reading of the statue provides it should be delivered to the owner “at least 5 days before instituting an action.”  The statute does not require the lien foreclosure lawsuit to be filed no earlier than the 6th day and does not specifically preclude the lawsuit from being filed on that 5th day.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.lien

 

 

LIEN ATTACHES TO LANDLORD’S INTEREST WHEN LANDLORD IS PARTY TO TENANT IMPROVEMENT CONSTRUCTION CONTRACT

If you are a landlord / lessor, then you want to maximize the protections afforded to you under Florida’s Lien Law in Florida Statute s. 713.10.  These protections are designed to protect your property from liens for improvements performed by your tenant / lessee.  The intent is that if you comply with s. 713.10, then a tenant improvement contractor’s recourse is against the leasehold interest, and NOT against the interest of the real property (or your interest as the landlord / lessor).  Needless to say, it is imperative that a landlord / lessor make efforts to comply with this section when a tenant is performing tenant improvements, even when the landlord is contributing money to those improvements.

Section 713.10 provides in material part:

(1) Except as provided in s. 713.12, a lien under this part shall extend to, and only to, the right, title, and interest of the person who contracts for the improvement as such right, title, and interest exists at the commencement of the improvement or is thereafter acquired in the real property. When an improvement is made by a lessee in accordance with an agreement between such lessee and her or his lessor, the lien shall extend also to the interest of such lessor.

(2)(a) When the lease expressly provides that the interest of the lessor shall not be subject to liens for improvements made by the lessee, the lessee shall notify the contractor making any such improvements of such provision or provisions in the lease, and the knowing or willful failure of the lessee to provide such notice to the contractor shall render the contract between the lessee and the contractor voidable at the option of the contractor.

(b) The interest of the lessor is not subject to liens for improvements made by the lessee when:

      1. The lease, or a short form or a memorandum of the lease that contains the specific language in the lease prohibiting such liability, is recorded in the official records of the county where the premises are located before the recording of a notice of commencement for improvements to the premises and the terms of the lease expressly prohibit such liability; or
      2. The terms of the lease expressly prohibit such liability, and a notice advising that leases for the rental of premises on a parcel of land prohibit such liability has been recorded in the official records of the county in which the parcel of land is located before the recording of a notice of commencement for improvements to the premises, and the notice includes the following:
      3. The name of the lessor.
      4. The legal description of the parcel of land to which the notice applies.
      5. The specific language contained in the various leases prohibiting such liability.
      6. A statement that all or a majority of the leases entered into for premises on the parcel of land expressly prohibit such liability.

The recent case of K.D. Construction of Florida, Inc. v. MDM Retail, Ltd., 2021 WL 5617447 (Fla. 3d DCA 2021) demonstrates the outcome when a landlord does NOT fully comply with Florida Statute s. 713.10.  In this case, the landlord and its tenant entered into a construction agreement with a contractor to perform tenant improvements to a movie theater.  Both the tenant and the landlord were identified as the owner in the contract.  Both were signatories to the contract.  And the contract specified that the contractor agreed it was performing work on behalf of two separate owners, even though the contractor was performing separate scopes of work on behalf of the tenant and the landlord.

A metal stud and drywall subcontractor was not paid for work it performed and recorded a construction lien.  The lien attached to the landlord’s interest in the real property.  The landlord argued that this was improper – the lien should only attach to the leasehold interest under s. 713.10 (and, while not discussed, it seemed like there was a lease that prohibited such liability against the landlord’s property interest).  The trial court agreed with the landlord ruling the lien did not apply to the landlord’s real property interest.

The Third District Court of Appeal reversed the trial court: “[W]e agree with [the subcontractor] that the exception to lien liability for property owners who record a lease which prohibits such liability does not apply under the circumstances presented here [where the lessor is a party and signatory to the contract].”   K.D. Construction, supra, at *2 (string citing numerous cases relating to a landlord’s liability, or lack thereof, for tenant improvements).

Even though the landlord may have dotted certain i’s and crossed certain t’s, it was a party to a construction contract that included obligations as the owner to pay, and certain scopes were performed on behalf of the landlord.  In reality, the landlord would have been better suited not making itself a party to the contract.   Or, at a minimum, the landlord should have had a separate contract for the separate work that was being performed for it so that liens would attach relative to that work, but not all of the work being performed.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

EQUITABLE LIEN DESIGNED TO PREVENT UNJUST ENRICHMENT

There are instances where a party does not have construction lien rights but, nevertheless, feels the need to pursue an equitable lien against the real property.

No different than a construction lien, an action to enforce an equitable lien has a one-year limitations period if it arises from the “furnishing of labor, services, or material for the improvement of real property.”  Fla. Stat. s. 95.11(5)(b).  In other words, an equitable lien–not nearly as powerful as a construction lien because a construction lien is recorded in the official public records whereas an equitable lien is not–is tied to an analogous one-year limitations period for those liening for construction improvements.  (Notably, if the equitable lien arises outside of the construction improvement context, the one-year statute of limitations would not apply.  See Gabriji, LLC v. Hollywood East, LLC, 45 Fla. L. Weekly D2251a (Fla. 4th DCA 2020) (one-year statute of limitations period does not apply to all equitable liens such as those that do not arise from furnishing labor, services, or material for the improvement of real property)).

An equitable lien is designed to prevent unjust enrichment when there is no adequate remedy at law although it is a completely separate cause of action than a cause of action for unjust enrichmentGabriji, supra.   An equitable lien:

[I]s “ ‘a right granted by a court of equity, arising by reason of the conduct of the parties affected which would entitle one party as a matter of equity to proceed against’ certain property.”  “Such a lien ‘may be declared by a court of equity out of general considerations of right and justice as applied to the relations of the parties and the circumstances of their dealings.’ ” 

Gabriji, supra (internal citations omitted).

However, importantly, there is also law that supports that a claim for an equitable lien must be supported by “evidence of fraud, misrepresentation, or other affirmative deception.”  Wal-Mart Stores, Inc. v. Ewell Industries, Inc., 694 So.2d  756, 757 (Fla. 1st DCA 1997); Gordon v. Flamingo Holding Partnership, 624 So.2d 294, 297 (Fla. 3d DCA 1993).  Such evidence will likely be needed to support an equitable lien in a construction context which is pursued because a party did not properly perfect construction lien or payment bond rights.  An equitable lien may be an appropriate cause of action in certain instances as an argument to pursue recourse for non-payment where the cause of action is designed to foreclose a lien based on equity–not a statute or written instrument.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

DON’T DO THIS WHEN IT COMES TO CONSTRUCTION LIENS

When it comes to preparing and recording a construction lien, this case is an example of what NOT TO DO!   I mean it — this exemplifies what NOT TO DO!  It is also a case study of why a party should always work with counsel in preparing a construction lien so that you can avoid the outcome in this case–your lien being deemed fraudulent.

In Witters Contracting Company v. West, 2020 WL 4030845 (Fla. 2d DCA 2020), homeowners hired a contractor to renovate their home under a cost-plus arrangement where the contractor was entitled to a 10% fee on construction costs.  The contract also required extra work to be agreed in writing between the owner and contractor.

During construction a dispute arose.  The contractor texted the owner that it will cancel the permit and record a $100,000 construction lien if the owner did not pay it $30,000.   Shortly thereafter, the contractor’s counsel sent the homeowners a demand for $59,706 with back-up documentation.  Less than a week later, the contractor recorded a construction lien for $75,000.  The owners initiated a lawsuit against the contractor that included a claim for fraudulent lien.  The contractor then amended its construction lien for $87,239.

The trial court found that the contractor’s claim of lien was fraudulent because it was compiled “with such gross negligence as to the amount claims therein to constitute willful exaggerations.”   A trial was held on damages and $87,239 was awarded as punitive damages against the contractor, plus attorney’s fees and costs, all of which were permissible when a lien is deemed to be a fraudulent lien.

Think about it.  The contractor asked for $30,000 under the threat it will record a $100,000 lien.  It then sent a demand letter for $59,706.  Then it recorded a construction lien for $75,000.  Then it amended the construction lien to $87,239.  This was all in a very short time period.  And, this is likely why the lien was deemed to have been compiled with such gross negligence as the contractor, evidently, had no clue what he was owed under the cost-plus contract or, if he did, he went about it incorrectly.  It is possible the contractor was owed something, but the manner in which he went about it created the wrong perception.  It is unclear whether his counsel was involved in preparing the lien or why the lien was different from the amount in the demand letter sent by counsel.  Nevertheless, clearly, this is the perception you want to avoid and why working with counsel in preparing a lien is vital.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

VALUE IN RECORDING LIEN WITHIN EFFECTIVE NOTICE OF COMMENCEMENT

Construction lien priority is no joke!   This is why a lienor wants to record its construction lien within an effective notice of commencementA lien recorded within an effective notice of commencement relates back in time from a priority standpoint to the date the notice of commencement was recorded.  A lienor that records a lien wants to ensure its lien is superior, and not inferior, to other encumbrances.  An inferior lien or encumbrance may not provide much value if there is not sufficient equity in the property. Plus, an inferior lien or encumbrance can be foreclosed.

An example of the importance of lien priority can be found in the recent decision of Edward Taylor Corp. v. Mortgage Electronic Registration Systems, Inc., 45 Fla.L.Weekly D1447b (Fla. 2d DCA 2020). In this case, a contractor recorded a notice of commencement for an owner.  While an owner is required to sign the notice of commencement that the contractor usually records, in this case, the owner did not sign the notice of commencement.  Shortly after, the owner’s lender recorded a mortgage and then had the owner sign a notice of commencement and this notice of commencement was also recorded.  When there is a construction lender, the lender always wants to make sure its mortgage is recorded first—before any notice of commencement—for purposes of priority and has the responsibility to ensure the notice of commencement is recorded.  Here, the lender apparently did not realize the contractor had already recorded a notice of commencement at the time it recorded its mortgage.

An unpaid subcontractor recorded a lien and foreclosed on the lien.  Because the lien related back in time to the original notice of commencement, the subcontractor moved to foreclose the mortgage as an inferior interest.  (Remember, the mortgage was recorded after the notice of commencement the contractor recorded that was not signed by the owner.)  The lender argued that the notice of commencement was a legal nullity because it was not signed by the owner, therefore, its mortgage had priority.  The trial court agreed with the lender.  The appellate court did not:

[W]e hold that a notice of commencement not signed by the owner, but instead signed by the general contractor with the owner’s authority, is not a nullity, per se, in a lien foreclosure action brought by a subcontractor where the subcontractor has strictly complied with chapter 713 and relies upon the defective notice of commencement, which is otherwise in substantial compliance with section 713.07. In other words, the lender may not use the deficient notice of commencement as a sword against a subcontractor who bears no duty to ensure the validity and accuracy of the notice of commencement.

Edwin Taylor Corp., supra.

This is a good result for a subcontractor that is now in a position to have a lien that is superior to a lender’s mortgage — a situation that rarely occurs and should not occur.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

QUICK NOTE: WEBINAR ON MAXIMIZING PAYMENT DURING COVID-19

How do you maximize payment, particularly during an uncertain COVID-19 economy?  Check out the webinar I did for LevelSet where you can watch the webinar or read the transcript.  I don’t want to give any spoilers, but it discusses preserving and enforcing lien and payment bond rights, tidbits to ensure you are maximizing payment, charting contractual notice provisions relating to force majeure, and those contractual provisions to note moving forward in this new climate. All good-to-know information to ensure you are preserving rights and appreciating risks with a topic that did not cross your mind a few months ago!

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

QUICK NOTE: THE NOTICE OF CONTEST OF LIEN IS A POWERFUL TOOL

If you receive a Notice of Contest of Lien, do NOT ignore it.  The Notice of Contest of Lien is a powerful tool that shortens the limitations period for a linear to foreclose on a construction lien to 60 days or else the lien is discharged by operation of law.   Conversely, if you receive a construction lien, consider recording a Notice of Contest of Lien based on its utility.

As an example of the usefulness of the Notice of Contest of Lien, in Rabil v. Seaside Builders, LLC, 226 So.3d 935 (Fla. 4th DCA 2017), a contractor filed a construction lien foreclosure lawsuit on a residential project.  The homeowners then transferred the lien to a lien transfer bond and recorded a Notice of Contest of Lien.  The contractor did not amend the lawsuit to sue the lien transfer bond surety within the 60-day window.  Consequently, the homeowners moved to dismiss the lien foreclosure lawsuit, release the lien transfer bond, and discharge the corresponding lis pendens.  The trial court denied the motion.  On appeal, the Fourth District reversed holding that “[b]ecause the contractor did not file suit against the surety within sixty days [in response to the Notice of Contest of Lien], the lien was automatically extinguished by operation of law, and the clerk was obligated to release the bond.” Rabil, 226 So.3d at 937.

This case exemplifies the utility of recording a Notice of Contest of Lien and how it benefitted the homeowner upon filing the Notice of Contest of Lien after recording the lien to a lien transfer bond post-initiation of the lawsuit.  The is exactly why a Notice of Contest of Lien should not be ignored.  If you receive one, the smart play is to immediately consult with counsel, just like the smart play if you receive a construction lien is to consult with counsel.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

CONSTRUCTION LIEN FORECLOSURE ACTION MUST BE BROUGHT IN COUNTY WHERE PROPERTY LOCATED

A construction lien foreclosure action is an action against the real property and MUST be brought in the county where the property is located. It is an action concerning subject matter jurisdiction (the jurisdiction of the court to hear the matter) and, thus, can be raised at any time in a proceeding.  If you are looking to foreclose a construction lien, please make sure 1) the lien is recorded in the right jurisdiction and 2) the lien is foreclosed on in the right jurisdiction.

In a recent case, Prime Investors & Developers, LLC v. Meridien Companies, Inc., 2020 WL 355930 (4th DCA 2020), a dispute arose between a general contractor and subcontractor on a hotel project in Miami-Dade County. The general contractor filed suit against the subcontractor for untimely and defective installation in Broward County. The subcontractor counter-sued the general contractor for breach of contract and asserted a claim against the developer of the hotel to foreclose a construction lien. Remember, the property was located in Miami-Dade County but the lawsuit was in Broward County.

The trial court granted summary judgment in favor of the subcontractor and against the developer and contractor. The trial court entered a money judgment against the contractor and the developer, but did not initiate any foreclosure proceedings.

The appellate court reversed the summary judgment because there were genuine issues of material fact. The subcontractor, in its motion for summary judgment, did not address the general contractor’s affirmative defenses. (“When a party raises affirmative defenses, a summary judgment should not be granted where there are issues of fact raised by the affirmative defenses which have not been effectively factually challenged and refuted. The movant must disprove the affirmative defenses or show they are legally insufficient.”). Prime Investors & Developers, LLC, 2020 WL at *4 (citation omitted).

The appellate court did address the construction lien foreclosure issue by reminding “that “[a] lien against property is in rem, affecting title to the property, and must be brought in the circuit with jurisdiction over the property.Prime Investors & Developers, LLC, 2020 WL at *4 (citation omitted).  In other words, the subcontractor filed the construction lien foreclosure lawsuit in the WRONG jurisdiction. Oops!

However, the appellate court did not seem to challenge the right of the subcontractor to obtain a monetary judgment, absent the foreclosure proceedings, against the developer. While the subcontractor cannot foreclose its construction lien, it may have a basis to obtain a monetary judgment that excludes foreclosure against the developer if it prevails at trial. This is certainly not the same leverage the subcontractor wanted when it recorded the lien and initiated a construction-lien foreclosure.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

CIRCUMSTANCES IN WHICH DESIGN PROFESSIONAL HAS CONSTRUCTION LIEN RIGHTS

If you are a design professional (architect, landscape architect, interior designer, engineer, surveyor, or mapper) you have construction lien rights in the event you are not paid.   This does not mean your lien rights are absolute so it is important to understand the circumstances which allow you to record a construction lien on a project.  These circumstances are contained in Florida Statute s. 713.03:

(1) Any person who performs services as architect, landscape architect, interior designer, engineer, or surveyor and mapper, subject to compliance with and the limitations imposed by this part, has a lien on the real property improved for any money that is owing to him or her for his or her services used in connection with improving the real property or for his or her services in supervising any portion of the work of improving the real property, rendered in accordance with his or her contract and with the direct contract.

(2) Any architect, landscape architect, interior designer, engineer, or surveyor and mapper who has a direct contract and who in the practice of his or her profession shall perform services, by himself or herself or others, in connection with a specific parcel of real property and subject to said compliances and limitations, shall have a lien upon such real property for the money owing to him or her for his or her professional services, regardless of whether such real property is actually improved.

The first circumstance pertains to design professionals that do NOT have a direct contract with the owner of the property.  In this circumstance, you have lien rights for your services “used in connection with improving the real property” or your services “in supervising any portion of the work of improving the real property” that you perform under your contract and with the direct contract, presumably between the owner and your client.  The important, operative word in this circumstance involves improving the real property.

The second circumstance pertains to design professionals hired directly by the owner.  In this circumstance, you have broader lien rights as you have lien rights for your services “regardless of whether such real property is actually improved.”  Hence, improving the real property is of no moment.

A design professional does not need to serve any preliminary notice (such as a notice to owner) in order to preserve their lien rights.  However, a design professional still needs to record a construction lien within 90 days from their final furnishing date.

A construction lien from a design professional is less common than a lien from a contractor, subcontractor, or supplier. Nonetheless, design professionals do have construction lien rights that an owner should be cognizant of and a design professional should understand in furtherance of best ensuring payment.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

FILLING OUT THE CONTRACTOR’S FINAL PAYMENT AFFIDAVIT

When preparing a contractor’s final payment affidavit, I always suggest for a contractor (or anyone in privity of contract with the owner) to identify the undisputed amounts their accounting reflects is owed to ALL subcontractors, etc., regardless of whether that entity preserved their lien rights.  If the contractor provided a payment bond, I footnote this simply to support that none of the lower-tiered subcontractors have lien rights or are the traditional “lienor.”   (Thus, there is no prejudice to the owner if an entity is inadvertently omitted from the affidavit.)

There are times, however, where a contractor does not identify a subcontractor that did not serve a notice to owner and, therefore, has no valid lien rights.  Or, a contractor omits a lienor that actually did serve a notice to owner and preserve its lien rights; this happens.

There was an older First District Court of Appeals case that harshly (and, quite, unfairly) held that the contractor must identify everyone in the final payment affidavit regardless of whether that entity timely served a notice to owner or their lien is invalid.  This case, however, predated, a 1998 statutory change to Florida’s Lien Law.

Today, the statute (in Florida Statute s. 713.06) currently provides:

(d) When the final payment under a direct contract becomes due the contractor:

1. The contractor shall give to the owner a final payment affidavit stating, if that be the fact, that all lienors under his or her direct contract who have timely served a notice to owner on the owner and the contractor have been paid in full or, if the fact be otherwise, showing the name of each such lienor who has not been paid in full and the amount due or to become due each for labor, services, or materials furnished….

The contractor shall have no lien or right of action against the owner for labor, services, or materials furnished under the direct contract while in default for not giving the owner the affidavit; however, the negligent inclusion or omission of any information in the affidavit which has not prejudiced the owner does not constitute a default that operates to defeat an otherwise valid lien. The contractor shall execute the affidavit and deliver it to the owner at least 5 days before instituting an action as a prerequisite to the institution of any action to enforce his or her lien under this chapter, even if the final payment has not become due because the contract is terminated for a reason other than completion and regardless of whether the contractor has any lienors working under him or her or not.

Fla. Stat. s. 713.06(d)(1).

The Fourth District Court of Appeals in Fetta v. All-Rite Paving Contractors, Inc., 50 So.3d 1216 (Fla. 4th DCA 2010), claimed that the purpose of the statute is for the contractor to identify all lienors who have timely served a notice to owner that has not been paid in full.  (Hence, you do not need to identify those that did not timely serve a notice to owner even though, from a practical standpoint, identifying all makes sense as a just-in-case.). Further, even if there was an omission, that would not render a lien invalid unless the owner can prove prejudice and prejudice is not so easy to prove.

When in doubt, consult counsel when finalizing or filling out a contractor’s final payment affidavit.  Rights can be preserved and items footnoted as appropriate for clarification purposes, such as the fact that the amount in the affidavit may not include amounts that are not available under the lien law (i.e., delay damages).

 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.