UNPAID TENANT IMPROVEMENTS AND LIEN RIGHTS

Posted on October 15, 2014October 15, 2014 by Edward Garber

Contractors that perform tenant improvements / build-outs should know what their lien rights are when hired by the tenant (also referred to as the lessee). This is because a contractor hired by the tenant may think their lien rights extend to the real property owned by the landlord when in reality they do not.

Under Florida’s Lien Law, a landlord can take precautions to prevent their real property from being subject to liens by virtue of a tenant improvement. Many landlords take these precautions. If these precautions are taken, a contractor’s lien against the landlord’s real property for unpaid tenant improvements will fail and potentially expose the contractor to liability in the form of reimbursing the landlord for its attorney’s fees. Ultimately, if a landlord takes such precautions, the unpaid contractor can lien the tenant’s LEASEHOLD INTEREST, which is much different than the landlord’s interest. When the contractor moves to foreclose the lien, it is foreclosing on the leasehold interest and not the landlord’s real property. In other words, the foreclosure would result in the assumption of the lease (versus assuming title to the real property) and oftentimes is not an attractive option. Think about it. Which is better: assuming the leasehold interest of a new lease (where you will still be responsible for making the lease payments) or assuming title to the real property? Naturally, it is assuming the title that provides the value in a lien action.

Florida Statute s. 713.10 sets forth the precautions a landlord can take to prevent their property from being subject to liens for tenant improvements as follows:

(2)(a) When the lease [between the landlord and tenant] 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:

a. The name of the lessor.

b. The legal description of the parcel of land to which the notice applies.

c. The specific language contained in the various leases prohibiting such liability.

d. A statement that all or a majority of the leases entered into for premises on the parcel of land expressly prohibit such liability.

Contractors looking in the public records will many times find a short form lease or notice that prohibits the landlord’s property from being subject to liens for tenant improvements.

By way of example, in MHB Const. Services, L.L.C. v. RM-NA HB Waterway Shoppes, L.L.C., 74 So.3d 587 (Fla. 4^th DCA 2011), the landlord of a shopping center entered into a lease with a tenant. A notice of lien prohibition was recorded in the public records long before the lease was ever executed. The tenant hired a contractor to make tenant improvements and the landlord signed and recorded the required notice of commencement before construction began. The contractor recorded a construction lien against the landlord’s interest in the real property and foreclosed on the lien. The landlord relied on the notice of lien prohibition that was recorded in the public records. The contractor countered that by the landlord signing and recording the notice of commencement, the landlord cannot rely on the notice of lien prohibition. The contractor further argued that the landlord required or was responsible for construction because it gave its tenant a reimbursement towards construction improvements (very common). The appellate court disagreed with the contractor based in large part because the landlord complied with s. 713.10 to protect its property from liens.

As a contractor performing tenant improvements, you should know your rights in advance in order to understand what your lien rights are in the event of non-payment. One option contained in s. 713.10 that Florida’s Lien Law provides that is unfortunately not often utilized is:

(3) Any contractor or lienor under contract to furnish labor, services, or materials for improvements being made by a lessee may serve written demand on the lessor [landlord] for a copy of the provision in the lease prohibiting liability for improvements made by the lessee, which copy shall be verified….The demand must identify the lessee and the premises being improved and must be in a document that is separate from the notice to the owner….The interest of any lessor who does not serve a verified copy of the lease provision within 30 days after demand, or who serves a false or fraudulent copy, is subject to a lien under this part by the contractor or lienor who made the demand if the contractor or lienor has otherwise complied with this part and did not have actual notice that the interest of the lessor was not subject to a lien for improvements made by the lessee. The written demand must include a warning in conspicuous type in substantially the following form:

WARNING

YOUR FAILURE TO SERVE THE REQUESTED VERIFIED COPY WITHIN 30 DAYS OR THE SERVICE OF A FALSE COPY MAY RESULT IN YOUR PROPERTY BEING SUBJECT TO THE CLAIM OF LIEN OF THE PERSON REQUESTING THE VERIFIED COPY.

The bottom line is to KNOW your rights. If you specialize in tenant improvements or perform tenant improvements, know your rights under Florida’s Lien Law so that you know what your options are in the event of non-payment. This extends to any subcontractor that is performing work associated with tenant improvements. Since non-payment may only be collateralized by the leasehold interest, a contractor or subcontractor may want to take this into consideration when negotiating their contract. For instance, a contractor may want to ensure it has broad termination rights or suspension rights in the event of non-payment within “x” number of days. A subcontractor may not want a pay-if-paid provision so that it has better recourse against the contractor that hired it. Alternatively, parties may account for this risk by including a better mark-up. Again, knowing your rights on the front-end will allow you to best assess the potential risk of non-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.

NOT SO FAST DEVELOPER WITH YOUR CREATIVE EFFORT TO WIPE OUT THE CONTRACTOR’S (INFERIOR) LIEN!

Posted on September 21, 2014September 21, 2014 by Edward Garber

Two things are certain in construction: (1) developers will obtain construction loans to finance the construction of their project and (2) there will unfortunately be bad projects where the developer’s lender forecloses on the (first priority) mortgage given in connection with the construction loan. Not only is this bad for the developer, but it is bad for contractors because the lender will look to foreclose (and wipe out) all inferior liens, such as unpaid contractors and suppliers’ liens (which will be inferior to the lender’s mortgage).

The case of CDC Builders, Inc. v. Biltmore-Sevilla Debt Investors, LLC, 39 Fla. L. Weekly D1997a (Fla. 3d 2014) illustrates a bad project where a lender moved to foreclose on a construction loan. But, unlike a more traditional example of the construction lender foreclosing, this case involved a hyper-creative attempt by the developer to purchase its own construction loan and then foreclose on the corresponding mortgage for the sole purpose of intentionally wiping out its general contractor’s lien.

In this case, the developer hired the contractor to build luxury homes. The contractor completed the homes, but the developer failed to pay the contractor for the last eight homes. The contractor recorded construction liens to collateralize its nonpayment. The developer was unable to pay off its construction loan due to a lack of luxury home sales. To avoid the lender foreclosing, the developer negotiated loan extensions where the developer was required to pay money to reduce the lender’s exposure on the loan. However, the developer did not want its payments to reduce the principal of the loan. Why? Because the developer wanted to ensure there would be no equity in the real property to satisfy the contractor’s liens. So, the developer negotiated with its construction lender to treat any money it paid the lender for loan extensions as junior liens against the property. The developer then had another company created. This other developer-related company purchased the construction loans from the construction lender in exchange for loan assignments. (This was done so the other company maintained a first priority interest with the real property since it purchased the original construction loans.) Once this other developer-related company purchased the construction loans, it moved to foreclose on the loans. Why? Because, by doing so, the developer could wipe out the contractor’s liens as inferior liens on the real property. Very creative and it actually worked as the trial court entered a final summary judgment of foreclosure in favor of this developer-related company (meaning the contractor’s inferior liens would be valueless based on the equity in the real property).

The Third District Court of Appeal reversed the trial court’s foreclosure judgment (as there were questions of fact as to whether the developer-related company was actually created by the same investors that controlled the developer). The Third District, employing a policy of fairness, held that:

“The law does not permit a person to borrow money from a bank, give the bank a mortgage, incur additional liens and junior mortgages on the property, purchase the mortgage back from the bank, and then foreclose on the mortgage for the primary purpose of eliminating the additional liens and junior mortgages.

***

[I]nvestors cannot grant mortgages, contract for the improvement of the property mortgaged, and then use a network of companies to purchase and foreclose the mortgage for the primary purpose of extinguishing the construction liens that increased the value of the property. To hold otherwise would undermine the long-standing principle…persons cannot do indirectly what they are not permitted to do directly.”

CDC Builders, supra.

Stated differently, and less eloquently then the Third District, the law does not permit a developer to undertake creative avenues to purchase the very mortgage and loan it originally obtained to finance its construction for the sole purpose of cheating its contractor out of payment for improving the real property. To find otherwise would simply give the developer a windfall since it would not have to pay for construction improvements that it wanted and which improved the value of its property.

SERVING REQUESTS FOR SWORN STATEMENTS OF ACCOUNT UNDER FLORIDA’S LIEN LAW

Posted on August 14, 2014August 14, 2014 by Edward Garber

Florida Statute s. 713.16 provides a useful vehicle under Florida’s Lien Law for parties on private projects to serve a Request for a Sworn Statement of Account on another party to potentially deprive: (a) a lienor (contractor, subcontractor, supplier, design professional) of lien / bond rights or (b) an owner of the right to recover attorney’s fees in an action to enforce a lien. An unsuspecting party that receives a Request for a Sworn Statement of Account could find itself in an undesirable position by failing to respond within 30 days after the Request.

A. An Owner Serving a Request for Sworn Statement of Account

Section 713.16(2) authorizes an owner to serve a Request for Sworn Statement of Account:

“The owner may serve in writing a demand of any lienor for a written statement under oath of his or her account showing the nature of the labor or services performed and to be performed, if any, the materials furnished, the materials to be furnished, if known, the amount paid on account to date, the amount due, and the amount to become due, if known, as of the date of the statement by the lienor. Any such demand to a lienor must be served on the lienor at the address and to the attention of any person who is designated to receive the demand in the notice to owner served by such lienor and must include a description of the property and the names of the owner, the contractor, and the lienor’s customer, as set forth in the lienor’s notice to owner….The failure or refusal to furnish the statement under oath within 30 days after the demand, or the furnishing of a false or fraudulent statement, deprives the person so failing or refusing to furnish such statement of his or her lien….The failure to furnish a response to a demand for statement of account does not affect the validity of any claim of lien being enforced through a foreclosure case filed before the date the demand for statement is received by the lienor.”

This is a useful tool for an owner that wants to obtain accounting information of a lienor that served it with a notice to owner or recorded a lien on the owner’s property. The statutory form for this Request is set forth below. If the lienor neglects to respond within 30 days after the Request, the owner has the argument that the lienor lost its lien rights by failing to respond. The Request needs to be served via certified mail, return receipt requested, or by a common carrier delivery service such as FedEx where the receipt of the Request is tracked.

REQUEST FOR SWORN STATEMENT OF ACCOUNT

WARNING: YOUR FAILURE TO FURNISH THE REQUESTED STATEMENT, SIGNED UNDER OATH, WITHIN 30 DAYS OR THE FURNISHING OF A FALSE STATEMENT WILL RESULT IN THE LOSS OF YOUR LIEN.

To: (Lienor’s name and address)

The undersigned hereby demands a written statement under oath of his or her account showing the nature of the labor or services performed and to be performed, if any, the materials furnished, the materials to be furnished, if known, the amount paid on account to date, the amount due, and the amount to become due, if known, as of the date of the statement for the improvement of real property identified as (property description) .

(name of contractor)

(name of the lienor’s customer, as set forth in the lienor’s Notice to Owner, if such notice has been served)

(signature and address of owner)

(date of request for sworn statement of account)

B. A Contractor Furnishing a Payment Bond Serving a Request for Sworn Statement of Account

Section 713.16(4) authorizes a contractor that furnished a payment bond on a private project to serve a Request for Sworn Statement of Account on a lienor (sub-subcontractor or supplier that served a notice to owner / notice to contractor):

“When a contractor has furnished a payment bond pursuant to s. 713.23, he or she may, when an owner makes any payment to the contractor or directly to a lienor, serve a written demand on any other lienor for a written statement under oath of his or her account showing the nature of the labor or services performed and to be performed, if any, the materials furnished, the materials to be furnished, if known, the amount paid on account to date, the amount due, and the amount to become due, if known, as of the date of the statement by the lienor.”

Florida Statute s. 255.05(8) (governing Florida public projects) similarly authorizes a contractor that furnished a payment bond on a Florida public project to serve a Request for Sworn Statement of Account on a claimant not in privity of contract with the contractor when the contractor receives payment from the public body.

The requirements for a contractor serving the Request are ultimately the same as the owner, except the contractor can only serve the Request when it furnishes a payment bond (since the owner’s property is exempt from liens) and the owner makes a payment to the contractor or a lienor (bond claimant). The failure to respond within 30 days after the Request should deprive the bond claimant of its rights under the payment bond.

C. A Lienor that Recorded a Lien Serving a Request for Sworn Statement of Account

Section 713.16(5) authorizes a lienor that recorded a lien to serve a Request for Sworn Statement of Account on the owner:

“Any lienor who is perfecting a claim of lien may serve with the claim of lien or thereafter a written demand on the owner for a written statement under oath showing:

1. The amount of the direct contract under which the lien was recorded;

2. The dates and amounts paid or to be paid by or on behalf of the owner for all improvements described in the direct contract;

3. The reasonable estimated costs of completing the direct contract under which the lien was claimed pursuant to the scope of the direct contract; and

4. If known, the actual cost of completion.”

The form of this request is different than the request served by the owner and needs to include the below warning on the top along with a request for the 4 categories (referenced above) taken from the statute. An owner that does not provide the statement within 30 days after the Request is not deemed the prevailing party for purposes of attorney’s fees.

WARNING: YOUR FAILURE TO FURNISH THE REQUESTED STATEMENT WITHIN 30 DAYS OR THE FURNISHING OF A FALSE STATEMENT WILL RESULT IN THE LOSS OF YOUR RIGHT TO RECOVER ATTORNEY FEES IN ANY ACTION TO ENFORCE THE CLAIM OF LIEN OF THE PERSON REQUESTING THIS STATEMENT.

Serving a Request for Sworn Statement of Account is a useful vehicle in an impending construction dispute. As shown above, this vehicle can be served by an owner, a contractor, or a lienor depending on the circumstances. Do NOT neglect the utility of serving a Request; and, do NOT ignore a Request if in receipt of one!

THE IMPORTANCE OF AN EFFECTIVE NOTICE OF COMMENCEMENT ON YOUR LIEN RIGHTS

Posted on August 6, 2014August 6, 2014 by Edward Garber

Contractors, subcontractors, and suppliers need to appreciate the importance of an EFFECTIVE Notice of Commencement. This recorded document, among other things, governs the priority of YOUR lien rights on a private construction project because a construction lien RELATES BACK in time to an effective Notice of Commencement.

The Notice of Commencement is recorded in the public records where the project is located. It is a statutory form (per Florida Statute s. 713.13) and gives the lienor the required information about the project so that the lienor can preserve its lien / bond rights. A copy of the Notice of Commencement form is included at the bottom of this posting. The Notice of Commencement must be recorded within 90 days of construction otherwise the Notice is invalid.

The Notice of Commencement is effective for 1 year unless a different expiration date is specified. If a project is going to last longer than a year, a more realistic expiration date should be specified. However, the Notice of Commencement can be amended at any time within its effective period to extend the expiration date. The amended Notice of Commencement should reflect that it is amending the original Notice of Commencement that is recorded (and specify the book and page of the recording) and a copy must be served by the owner on the contractor and any other lienor that served a Notice to Owner to preserve its lien rights “before or within 30 days after the date the amended notice is recorded.” Fla. Stat. s. 713.13(5)(b).

In demonstrating the importance of an effective Notice of Commencement, Section 713.13(6) provides:

“Unless otherwise provided in the notice of commencement or a new or amended notice of commencement, a notice of commencement is not effectual in law or equity against a conveyance, transfer, or mortgage of or lien on the real property described in the notice, or against creditors or subsequent purchasers for a valuable consideration, after 1 year after the date of recording the notice of commencement.”

What does this mean? The best way to explain is to apply this statutory language to the following facts of a condominium project:

Construction loan recorded on 1/1/09.

Notice of Commencement recorded on 5/1/09. It is only effective for 1 year and an amended Notice was never recorded.

On 6/15/10 a mortgage is recorded on a condominium unit. When this is recorded, the unit owner’s mortgagee secures a release from the construction lender relating to the lender’s mortgage relating to the unit.

On 7/1/10 a construction lien is recorded.

Under this factual pattern, the lienor that recorded a lien would absolutely want its lien to take priority over the unit owner’s mortgage. The lienor will argue it takes priority since the lien should relate back to the Notice of Commencement that was recorded prior to the mortgage on the unit. But, wait. The Notice of Commencement expired before the lien was recorded and an amended Notice of Commencement was never recorded. This means the lien takes priority as of the date it is recorded and, thus, the mortgage on the condominium unit takes priority.

Now, let’s add another realistic wrinkle to this fact pattern. Let’s say the Declaration of Condominium (the instrument creating the condominium) is recorded on 6/1/10, before the lien is recorded.

The Declaration of Condominium would need to be recorded before mortgages are recorded on individual units. For the construction of a new condominium, the lien would apply to the ENTIRE condominium property provided the lien relates back to the Notice of Commencement. This is because the lien would take priority before the Declaration of Condominium was even recorded. But, if the Notice of Commencement expired, then the Declaration of Condominium would take priority over the lien since the Declaration of Condominium would have been recorded first (since the lien would not relate back to the Notice of Commencement). This means that the lien would not apply to the entire condominium property, but would more equitably apply to each unit based on the unit’s pro rata share of the common expenses. See Fla. Stat. 718.121. In other words, if the lien is $100,000 and there are 100 units each responsible for 1% of the condominium association’s budget, each unit would be responsible for the principal amount of $1,000 in order to discharge the lien relating to the unit. And, mortgages on the individual units may take priority over the lien potentially nullifying the value of the lien based on the equity in the units.

Notably, even if a lien relates back to the Notice of Commencement and takes priority over the Declaration of Condominium, a court may still find the equitable result is that each unit is only liable for its pro rata share of common expenses. See Southern Colonial Mortgage Co., Inc. v. Medeiros, 347 So.2d 736 (Fla. 4^th DCA 1977). However, this equitable approach should arguably not apply because the lien would attach to the entire condominium property and the lienor should be entitled to foreclose that property including all units since the lien would have priority over any mortgage and deed associated with those units. At this point, the unit owner should look to its title insurance policy.

Take-aways:

Make sure the Notice of Commencement is recorded within 90 days from the start of construction. If not, there will be a strong argument that the Notice is not valid. This means that a lien would not be able to relate back to the Notice.

Make sure the lien is recorded within an effective Notice of Commencement. If not, the lien will not relate back to the Notice, but will take priority as of the date it is recorded. This is a big difference.

If the Notice of Commencement is on the verge of expiring, prepare and send a letter to the owner advising the owner that it needs to record an amended Notice of Commencement to ensure the parties are performing construction within an effective Notice of Commencement.

Understand the potential priority of your lien based on the recording of the Notice of Commencement, any amended Notice of Commencement, the Declaration of Condominium, and other recordings that may impact the priority of your lien if the Notice of Commencement expired.

NOTICE OF COMMENCEMENT

State of _____

County of _____

The undersigned hereby gives notice that improvement will be made to certain real property, and in accordance with Chapter 713, Florida Statutes, the following information is provided in this Notice of Commencement.

1. Description of property: (legal description of the property, and street address if available).

2. General description of improvement: __________.

3. Owner information or Lessee information if the Lessee contracted for the improvement:

a. Name and address: __________.

b. Interest in property: __________.

c. Name and address of fee simple titleholder (if different from Owner listed above): __________.

4. a. Contractor: (name and address) .

b. Contractor’s phone number: _____.

5. Surety (if applicable, a copy of the payment bond is attached):

a. Name and address: __________.

b. Phone number: _____.

c. Amount of bond: $_____.

6. a. Lender: (name and address) .

b. Lender’s phone number: _____.

7. Persons within the State of Florida designated by Owner upon whom notices or other documents may be served as provided by Section 713.13(1)(a) 7., Florida Statutes:

a. Name and address: __________.

b. Phone numbers of designated persons: __________.

8. a. In addition to himself or herself, Owner designates __________ of __________ to receive a copy of the Lienor’s Notice as provided in Section 713.13(1)(b), Florida Statutes.

b. Phone number of person or entity designated by owner: _____.

9. Expiration date of notice of commencement (the expiration date will be 1 year from the date of recording unless a different date is specified) _____.

WARNING TO OWNER: ANY PAYMENTS MADE BY THE OWNER AFTER THE EXPIRATION OF THE NOTICE OF COMMENCEMENT ARE CONSIDERED IMPROPER PAYMENTS UNDER CHAPTER 713, PART I, SECTION 713.13, FLORIDA STATUTES, AND CAN RESULT IN YOUR PAYING TWICE FOR IMPROVEMENTS TO YOUR PROPERTY. A NOTICE OF COMMENCEMENT MUST BE RECORDED AND POSTED ON THE JOB SITE BEFORE THE FIRST INSPECTION. IF YOU INTEND TO OBTAIN FINANCING, CONSULT WITH YOUR LENDER OR AN ATTORNEY BEFORE COMMENCING WORK OR RECORDING YOUR NOTICE OF COMMENCEMENT.

LIEN RIGHTS FOR PROFESSIONAL (DESIGN) SERVICES

Posted on August 1, 2014August 1, 2014 by Edward Garber

Design professionals (e.g., architect, engineer, interior designer, surveyor, and mapper) have lien rights for professional services they perform under Florida’s Lien Law.

Florida Statute s. 713.03 governs liens for professional services and provides:

(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.

This statutory language is important to the design professional. Paragraph 1 says that a design professional shall have lien rights for their professional services rendered pursuant to their contract and the direct contract (or contract with the owner of the real property, typically the owner-architect contract in the design-bid-build scenario) in connection with improving the real property. This would be the paragraph relied on by design professionals NOT in privity of contract with the owner. On the other hand, Paragraph 2 would apply to design professionals that enter into a direct contract with the owner of the real property for professional services (such as the architect in the design-bid-build scenario). Under this paragraph, the design professional has lien rights for their professional services regardless of whether the real property is even improved. This means that the owner can decide not to use the professional services (the design) or abandon the project and the design professional in direct contract with the owner has lien rights even though the real property has not been improved. Now, if a design professional enters into a contract with a developer or person that never had an interest in the real property, the design professional is not going to be able to use this statute to create lien rights because it never entered into a contract with the actual owner of the real property. See Grossman v. Pollack, 100 So.2d 660 (Fla. 3d DCA 1958) (finding that architect could not enforce lien for leasehold interest that never came into being because there was no privity between architect or anyone with interest in the real property).

Design professionals have flexibility preserving lien rights since they do not have to comply with all of the technical requirements that a general contractor, subcontractor, or supplier must comply with. Design professionals do NOT need to serve a Notice to Owner (within 45 days of initial furnishing) unlike the supplier or subcontractor not in privity of contract with the owner. And, the design professional in privity of contract with the owner does NOT need to serve a contractor’s final payment affidavit (at least 5 days before filing a lawsuit) unlike the contractor hired directly by the owner. The ONLY thing the design professional needs to do to secure its lien rights is to record a lien within 90 days of its final furnishing of professional services (and serving a copy of the lien on the owner).

The downside, however, is that a design professional’s lien maintains a priority standpoint from the date the lien is recorded. So, anything that is recorded before the design professional’s lien will be superior to the lien. This is different than a lien recorded by a general contractor, subcontractor, or supplier in that their lien relates back to an effective notice of commencement, which is important from a lien priority standpoint.

For example, let’s assume there is a new construction project. The owner obtains financing and a mortgage securing the construction loan is recorded. This mortgage should have superior priority to any other encumbrance on the property (if not, lenders would never lend money!). After the mortgage is recorded, and before construction commences, a notice of commencement is recorded (which lasts for 1 year unless a different expiration date is specified; although, the notice of commencement can be amended). Within the effective period of the notice of commencement, the structural engineer records a lien; the next day the architect records a lien. Months later, and within the effective period of the notice of commencement, the framing subcontractor records a lien. What is the priority of these liens? The framing subcontractor’s lien will have priority because it will relate back to the notice of commencement. Then, the structural engineer’s lien will have priority over the architect’s lien because it was recorded the day before the architect’s lien. Remember, design professional’s liens do not relate back to the notice of commencement and their priority is dictated as of the date/time they are recorded. Any other contractor or supplier that records a lien within the effective notice of commencement will have priority over the design professional’s lien since these liens will relate back to the earlier recorded notice of commencement.

CONSTRUCTION RENTAL EQUIPMENT SUPPLIERS AND THE ENFORCEMENT OF LIEN RIGHTS

Posted on July 17, 2014July 17, 2014 by Edward Garber

Construction rental equipment suppliers play a large role in the performance of construction projects, whether it is through furnishing a crane, barge, excavator, scissor lift, scaffolding, loader, compressor, generator, shoring, pump, etc. Routinely, the trade subcontractor that needs the equipment to perform its contractual scope of work procures the rental equipment.

Well, how do these rental equipment suppliers enforce lien rights on private projects if they remain unpaid?

To begin with, they need to serve preliminary notices such as the Notice to Owner within 45 days from initial furnishing, which is the date rental equipment is delivered to the site. The lien must then be recorded within 90 days from final furnishing, which is the last date the rental equipment is on the job site and available for use. These dates should (hopefully) be pretty easy to determine as suppliers document the date rental equipment was delivered to the job site and the date the equipment was picked-up from the job site. If not, these dates should be obtained by the renting party’s records.

Before recording the lien, the rental equipment supplier needs to determine the lien amount. The rental equipment supplier will typically lien for the entire amount of the rental equipment it furnished to the renting party / lessee for the project pursuant to the contractual rate(s) in the rental agreement. This is generally the appropriate strategy because Florida’s Lien Law provides in pertinent part:

“The delivery of rental equipment to the site of the improvement is prima facie evidence of the period of the actual use of the rental equipment from the delivery through the time the equipment is last available for use at the site, or 2 business days after the lessor of the rental equipment receives a written notice from the owner or the lessee of the rental equipment to pick up the equipment, whichever occurs first.”

Fla. Stat. s. 713.01(13).

This language is important to the rental equipment supplier because if the supplier has the documentation as to when the rental equipment was delivered and picked-up, then this should shift the burden to the owner to prove that the rental equipment was not actually used on the project to diminish the amount of the lien.

Notably, the language in Florida’s Lien Law regarding rental equipment used to provide: “to the extent of the reasonable rental value for the period of actual use (not determinable by the contract for rental unless the owner is a party thereto),” meaning that the onus was on the rental equipment supplier not in privity with the owner to determine actual usage of the equipment on the project and the reasonable value for the period the equipment was actually used on the project. This verbiage has since been removed from Florida’s Lien Law (in 2007), such that burden is really shifted to the owner to prove that the equipment was not actually used on the job site irrespective of when it was delivered and when it was picked-up. While an owner may still argue that the supplier must also prove the “reasonable value” of the equipment actually used on the job site (with the reasonable value differing from the contract rental rate), this argument is based on the statutory language and case law interpreting the verbiage that has since been removed from Florida’s Lien Law. See, e.g., Rosenholz v. Perrine Development Co., 340 So.2d 1264 (Fla. 4^th DCA 1976) (interpreting older version of Fla. Stat. s. 713.01 and finding that contractual rental rate, although unchallenged, did not support the reasonable rental value because the supplier did not introduce evidence of the reasonable, actual use of the equipment required for the lessee’s scope of work). In other words, to the extent the owner wants to maintain this argument, it really should have the burden challenging (a) the actual use of the equipment, perhaps by resorting to daily reports showing the equipment was not actually used and (b) the reasonable rental value should be different than the contractual rental rate based on evidence supporting this position.

Now, even under the older verbiage in Florida’s Lien Law, a rental equipment supplier did not have to jump through hoops in an action against a payment bond for a private project (issued per Florida Statute s. 713.23) to prove both the actual use of the rental equipment and the reasonable rental rate for that equipment. See, e.g., Insurance Co. of N. America v. Julien P. Benjamin Equipment Co., 481 So.2d 511, 513 (Fla. 1^st DCA 1985) (“We distinguish from this [language in the payment bond] the language found in the statute [Fla. Stat. s. 713.01], which, in our view, is substantially more restrictive and clearly requires actual proof of the time of use of rental equipment and the reasonable value thereof unless the owner of the project is shown to have been a party to the rental contract covering such equipment.”).

Therefore, it is important for the rental equipment supplier to keep records documenting the delivery date and pick-up date from the specific project in which it plans to lien. The owner, especially an owner that did not contract for the rental equipment, needs to obtain this information and, to the extent there are daily reports from the lessee (party that rented the equipment), cross-reference the equipment with the daily reports to examine when the equipment was actually used. While the owner may still choose to argue the “reasonable rental value” for the equipment based on “actual usage,” this burden should fall on the owner with evidence supporting the reasonable rental value the owner believes should apply based on actual usage. Sometimes, even though these arguments may have teeth, it may be efficient for the owner to negotiate a resolution with respect to equipment it recognizes was utilized on its project in the performance of the work.

SERVING PRELIMINARY LIEN / PAYMENT BOND NOTICES ON PRIVATE PROJECTS

Posted on June 19, 2014June 19, 2014 by Edward Garber

Subcontractors and suppliers need to know the preliminary notices (such as a Notice to Owner for liens or Notice to Contractor for payment bonds) that need to be served to preserve their lien or payment bond rights on private projects.

A. Obtaining a Copy of the Notice of Commencement

The first thing a potential lienor should do is obtain the Notice of Commencement for the project (or any Amended Notice of Commencement). The Notice of Commencement will be recorded in the official records where the project is located and will provide a potential lienor with a description of the real property, the owner’s information, the contractor’s information, the construction lender’s information, whether the contractor has a payment bond (which should be recorded with the Notice of Commencement), and persons other than the owner that the Notice to Owner needs to be served on.

B. Preliminary Notices for Liens- the Notice to Owner

If there is no payment bond recorded with the Notice of Commencement, then the potential lienor knows it wants to preserve its lien rights. Entities not in privity of contract with the owner will need to serve a Notice to Owner. The Notice to Owner must set “forth the lienor’s name and address, a description sufficient for identification of the real property, and the nature of the services or materials furnished or to be furnished.” Fla. Stat. s. 713.06(2). A statutory form is included in Florida’s Lien Law (Florida States Chapter 713) and set forth at the bottom of this posting. Importantly, the Notice to Owner must be served by the potential lienor “before commencing, or not later than 45 days after commencing, to furnish his or her labor, services, or materials.” Fla. Stat. s. 713.06(2). The key is that the Notice to Owner must be served within 45 days of the entity’s initial furnishing. For instance, a supplier’s initial furnishing is when the materials arrive on site. However, a supplier of specially fabricated material’s initial furnishing is when the supplier started fabrication irrespective of when the materials arrived on site. A company supplying construction rental equipment’s initial furnishing is when the rental equipment arrived on site. And, a subcontractor’s initial furnishing is when it first starts to furnish labor, services, or materials for the project. Again, there is no reason to delay serving the Notice to Owner – it should be served immediately as a matter of course.

A copy of the Notice to Owner should be served on the contractor if the potential lienor was not hired by the contractor in addition to the potential lienor’s customer’s customer. In other words: “A sub-subcontractor or a materialman to a subcontractor must serve a copy of the notice on the contractor as a prerequisite to perfecting a lien under this chapter and recording a claim of lien. A materialman to a sub-subcontractor must serve a copy of the notice to owner on the contractor as a prerequisite to perfecting a lien under this chapter and recording a claim of lien. A materialman to a sub-subcontractor shall serve the notice to owner on the subcontractor [potential lienor’s customer’s customer] if the materialman knows the name and address of the subcontractor.” Fla. Stat. 713.06(2). (Lien rights, however, are not automatic in that the further removed an entity is from the owner may impact whether or not that entity has lien rights. For example, a sub-sub-subcontractor does not have lien rights and a supplier to a supplier is not going to have lien rights. On the other hand, sub-subcontractors will have lien rights and a supplier to a sub-subcontractor should also have lien rights.)

C. Preliminary Notices for Payment Bonds-the Notice to Contractor and the Notice of Nonpayment

Now, if there is a payment bond in place, the owner’s property is exempt from liens and the entities should look to the payment bond for payment. In this case, entities not in privity of contract with the general / prime contractor “before beginning or within 45 days after beginning to furnish labor, materials, or supplies…shall serve the contractor with notice in writing that the lienor will look to the contractor’s bond for protection on the work.” Fla. Stat. s. 713.23(1)(c). Similar to the Notice to Owner, this Notice to Contractor of the potential lienor’s intent to look to the bond must be served within 45 days of initial furnishing. A statutory form for this notice is also included in Florida’s Lien Law and further set forth at the bottom of this posting. Importantly, if a lienor is unsure and/or wants to preserve both lien and payment bond rights the lienor can combine the Notice to Owner form with the Notice to Contractor form by calling the Notice to Owner form “NOTICE TO OWNER/NOTICE TO CONTRACTOR.” This is actually common as it kills two birds with one stone in the event the lienor is unsure and wants to preserve both lien and bond rights.

However, unlike perfecting a lien claim, potential lienors looking to recover under a payment bond for a private project must serve a Notice of Nonpayment to the contractor and payment bond surety within 90 days of finial furnishing at the project. (As it relates primarily to subcontractors, “The failure of a lienor to receive retainage sums not in excess of 10 percent of the value of labor, services, or materials furnished by the lienor is not considered a nonpayment requiring the service of the notice provided under this paragraph. Fla. Stat. s. 713.23(1)(d).) This Notice of Nonpayment even needs to be served by the subcontractor/supplier in privity of contract with the general contractor (even though the preliminary Notice to Contractor does not need to be served by the subcontractor/supplier in privity of contract with the general contractor). Final furnishing refers to the last date the lienor furnished labor, services or materials (excluding warranty or punchlist work). With respect to companies that furnish rental equipment, this final furnishing date is measured from the last date the rental equipment was on the project site and available for use.

Understanding the specific preliminary notices that need to be served and the timing of these notices is important to ensure that a subcontractor, supplier, etc. is properly preserving their lien or bond rights.

D. Preliminary Notice Companies

There are numerous companies that cost effectively assist subcontractors and suppliers with serving preliminary notices as a matter of course based on the information provided by the subcontractor and supplier. This is important to ensure the company preserves lien and bond rights!

One such emerging company that can assist with the generation, preparation and service of preliminary notices is FileMyPrelim (www.filemyprelim.com) with its cool, innovative web-based platform called PrelimTracker (www.prelimtracker.com). FileMyPrelim and PrelimTracker have developed a preliminary notice service and tracking platform that adapts to a construction industry that is evolving with the generation and transmission of electronic documentation. What is really cool is that by using FileMyPrelim, the lienor’s data is stored and tracked with PrelimTracker. Because these preliminary notices (whether it is a Notice to Owner, Notice to Contractor, etc.) are linked to PrelimTracker, the general contractor, the owner, and even the owner’s construction lender can universally track those entities that served the preliminary notices jointly on this web-based platform. By doing this, the general contractor, owner, and lender are all on the same page to ensure that those entities that preserved lien rights are properly transmitting releases of lien in consideration of progress payments (so that their lien rights are released through a specified date) and that a final release of lien is given in consideration of final payment to that lienor. In fact, PrelimTracker can generate the lienor’s release of lien based on the information provided by the lienor and transmit it electronically with a secure electronic signature. This allows all of the lienor’s releases to be stored and tracked in a platform accessible to the project team. Even if a lien could not be recorded against the owner’s project because the general contractor furnished a payment bond, PrelimTracker could track the preliminary notices from lienors served through FileMyPrelim preserving payment bond rights to ensure the general contractor is obtaining releases of lien from those entities. (Keep in mind, PrelimTracker provides value as it pulls data compiled in FileMyPrelim to report critical lien related documents.) Check out the website links to learn more about this emerging technology that can serve as a beneficial tool to the entire project team.

E. Preliminary Notice Forms

Preliminary Notice for Liens

WARNING! FLORIDA’S CONSTRUCTION LIEN LAW ALLOWS SOME UNPAID CONTRACTORS, SUBCONTRACTORS, AND MATERIAL SUPPLIERS TO FILE LIENS AGAINST YOUR PROPERTY EVEN IF YOU HAVE MADE PAYMENT IN FULL.

UNDER FLORIDA LAW, YOUR FAILURE TO MAKE SURE THAT WE ARE PAID MAY RESULT IN A LIEN AGAINST YOUR PROPERTY AND YOUR PAYING TWICE.

TO AVOID A LIEN AND PAYING TWICE, YOU MUST OBTAIN A WRITTEN RELEASE FROM US EVERY TIME YOU PAY YOUR CONTRACTOR.

NOTICE TO OWNER

To (Owner’s name and address)

The undersigned hereby informs you that he or she has furnished or is furnishing services or materials as follows:

(General description of services or materials) for the improvement of the real property identified as (property description) under an order given by____________.

Florida law prescribes the serving of this notice and restricts your right to make payments under your contract in accordance with Section 713.06, Florida Statutes.

IMPORTANT INFORMATION FOR

YOUR PROTECTION

Under Florida’s laws, those who work on your property or provide materials and are not paid have a right to enforce their claim for payment against your property. This claim is known as a construction lien.

If your contractor fails to pay subcontractors or material suppliers or neglects to make other legally required payments, the people who are owed money may look to your property for payment, EVEN IF YOU HAVE PAID YOUR CONTRACTOR IN FULL.

PROTECT YOURSELF:

–RECOGNIZE that this Notice to Owner may result in a lien against your property unless all those supplying a Notice to Owner have been paid.

–LEARN more about the Construction Lien Law, Chapter 713, Part I, Florida Statutes, and the meaning of this notice by contacting an attorney or the Florida Department of Business and Professional Regulation.

(Lienor’s Signature)

(Lienor’s Name)

(Lienor’s Address)

Copies to: (Those persons listed in Section 713.06(2)(a) and (b), Florida Statutes)

Preliminary Notices for Payment Bonds

NOTICE TO CONTRACTOR

To (name and address of contractor)

The undersigned hereby informs you that he or she has furnished or is furnishing services or materials as follows:

(general description of services or materials) for the improvement of the real property identified as (property description) under an order given by (lienor’s customer) .

This notice is to inform you that the undersigned intends to look to the contractor’s bond to secure payment for the furnishing of materials or services for the improvement of the real property.

(name of lienor)

(signature of lienor or lienor’s representative)

(date)

(lienor’s address)

NOTICE OF NONPAYMENT

To (name of contractor and address)

(name of surety and address)

The undersigned notifies you that he or she has furnished (describe labor, services, or materials) for the improvement of the real property identified as (property description) The amount now due and unpaid is $___.

(signature and address of lienor)

LIEN RIGHTS FOR SPECIALLY FABRICATED MATERIALS

Posted on June 6, 2014June 6, 2014 by Edward Garber

Specially fabricated materials are those materials that are specially manufactured, designed, or fabricated for a particular project and are not materials that can be universally used on all projects. Specially fabricated materials have been described as those materials “not generally suited for nor readily adaptable to use in a like improvement.” Odolite Industries, Inc. v. Millman Const. Co., Inc., 501 So.2d 655, 656 (Fla. 3d DCA 1987) (quotation omitted). For instance, the Florida Supreme Court in Stunkel v. Gazebo Landscaping Design, Inc., 660 So.2d 623, 625 n.2 (Fla. 1995), noted that trees the owner specifically selected for a project were not specially fabricated because they could be used on other projects; whereas, in Lehigh Structural Steel Co. v. Joseph Langer, Inc., 43 So.2d 335, 338 (Fla. 1949), the Court noted that structural steel fabricated for a specific building was specially fabricated materials. (Notably, furnishing specially fabricated materials does not include “design work, submittals, or the like preliminary to actual fabrication of the materials.” Fla. Stat. s. 713.01(13).)

Preserving lien rights under Florida’s Lien Law for specially fabricated materials is different than other materials (or non-specially fabricated materials).

Because specially fabricated materials are specifically fabricated for a particular project, these materials do NOT have to be actually incorporated into the project for the supplier / fabricator to have lien rights. Aquatic Management, Inc. v. Paramount Engineering, Inc., 977 So.2d 600 (Fla. 4^th DCA 2007). If the materials are not specially fabricated, the materials do need to be actually incorporated into the project. Id. This is a major difference.

And, because specially fabricated materials do not have to be actually incorporated for a supplier / fabricator to have lien rights for those materials, a notice to owner / intent to look to the payment bond (if there is a payment bond) needs to be served within 45 days from the start of actual fabrication and NOT from when the materials are actually delivered to the job site (since the materials do not actually have to be delivered and incorporated for lien rights for these materials). See Odolite Industries, 501 So.2d at 656; Fla. Stat. 713.01(13). This means that a supplier of specially fabricated materials not in privity with the contractor needs to absolutely serve its notice to owner immediately and no later than 45 days from when fabrication begins.

Also, if the supplier / fabricator is owed money: “Materials specially fabricated at a place other than the site of the improvement for incorporation but not so incorporated and the contract price or value thereof shall be separately stated in the claim of lien.” Fla. Stat. s. 713.08(1)(c).

DON’T FORGET TO TIMELY FORECLOSE THE CONSTRUCITON LIEN IN COURT!

Posted on May 22, 2014May 22, 2014 by Edward Garber

A Notice of Contest of Lien under Florida Statute s. 713.22 is a vehicle that will shorten the statute of limitations for a lienor to foreclose on a recorded construction lien from one year to 60 days from the date the lien is contested. A copy of a Notice of Contest of Lien is identified below. An unwary lienor that fails to timely foreclose on its claim of lien in court will be deprived of its lien rights!

The recent decision in Snell v. Mott’s Contracting Services, Inc., 39 Fla. L. Weekly D1053a (Fla. 2d DCA), illustrates such an unwary lienor. In this case, a contractor recorded a claim of lien on a residential project. The owner then filed a lawsuit against the contractor and the contractor moved to dismiss or stay the action based on an arbitration provision in the contract. The owner then filed a Notice of Contest of Lien to shorten the contractor’s statute of limitations to foreclose on the lien to 60 days. The contractor, however, never moved to foreclose its lien in court; the court compelled the dispute to arbitration.

The contractor prevailed in arbitration and the arbitrator found that the contractor was the prevailing party under Florida Statute s. 713.29 that entitles a prevailing party in a lien action to its attorney’s fees (i.e., a party that prevails on the significant issues in the action).

However, the two issues on appeal were: (1) whether the contractor could be entitled to its attorney’s fees under s. 713.29 when it failed to timely foreclose on its lien in court after it received the Notice of Contest of Lien and (2) whether the arbitrator, absent express agreement of the parties, had authority to determine entitlement to attorney’s fees.

As it pertains to the first issue, the Second District found that because the contractor failed to comply with s. 713.22 by foreclosing on its lien in court within 60 days after the lien was contested, the contractor was not entitled to attorney’s fees pursuant to s. 713.29. Stated simpler, the contractor was not entitled to attorney’s fees because it no longer had lien rights since it failed to timely foreclose on its lien in court within 60 days after the lien was contested by the owner.

As it pertains to the second issue, the Second District found that an arbitrator has no authority / jurisdiction to determine a party’s entitlement to attorney’s fees unless the parties to the arbitration expressly waive the right to have a court determine entitlement.

This cases raises a few important points:

Even if there is an arbitration provision in a contract, it is still imperative that a lien foreclose action be filed in court! File the lien action and simultaneously move to stay the lien foreclosure action pending the arbitration.

If you receive a Notice of Contest of Lien, do not forget that it operates to shorten the statute of limitations to foreclose on the lien to 60 days. Otherwise, the lien will not be enforceable.

If you want an arbitrator to determine the entitlement to attorney’s fees, it is good practice to ensure that the parties to arbitration expressly agree to grant the arbitrator this authority and waive the court’s authority to determine entitlement.

NOTICE OF CONTEST OF LIEN

To: (Name and address of lienor)

You are notified that the undersigned contests the claim of lien filed by you on ___, (year) , and recorded in ___ Book ___, Page ___, of the public records of ___ County, Florida, and that the time within which you may file suit to enforce your lien is limited to 60 days from the date of service of this notice. This ___ day of ___, (year) .

Signed: (Owner or Attorney)

For more information on Notice of Contests of Lien, please see: https://floridaconstru.wpengine.com/oh-no-a-lien-is-recorded-what-are-some-of-my-options/.

OH NO! A LIEN IS RECORDED! WHAT ARE SOME OF MY OPTIONS?

Posted on April 11, 2014April 11, 2014 by Edward Garber

You are an owner and a construction lien is recorded on your property. Or, you are a general contractor required to indemnify the owner for construction liens and a subcontractor you are in a dispute with records a construction lien (or one of the subcontractor’s suppliers or subcontractors records a lien). What are your options (other than paying the lienor in consideration of a satisfaction of lien) to extinguish the lien or transfer that lien to another form of security other than the real property?

(1) Notice of Contest of Lien – This is an efficient, cost effective strategy that I oftentimes prefer to use to truly determine whether a lienor (entity that recorded lien) actually intends on foreclosing on the lien. Recording a Notice of Contest of Lien pursuant to Florida Statute s. 713.22 shortens the statute of limitations to foreclose on the lien to 60 days after service of the Notice; if the lienor neglects to do so, the lien is extinguished. (A construction lien is otherwise good for one year from its recording.) Section 713.22 provides that an owner or an owner’s attorney can record a Notice of Contest of Lien in the official records (same official records where the lien is recorded). The Notice is a statutory form (see form below). Once it is recorded, the clerk serves it on the lienor at the address in the lien putting the lienor on notice that it must foreclose within 60 days. Notably, because the statute says an owner or owner’s attorney should record this, if representing the general contractor, I typically suggest that the general contractor get the owner to sign the Notice (or, get the owner’s permission that it is acceptable for the general contractor to sign as a representative for purposes of the Notice).

(2) Filing a Lawsuit to Show Cause – Another approach to shorten a lienor’s statute of limitation to foreclose on the lien is to file a complaint pursuant to Florida Statute s. 713.21 where the clerk issues a special summons “to the lienor to show cause within 20 days why his or her lien should not be enforced by action or vacated and canceled of record.” Fla. Stat. s. 713.21. Any interested party can file this lawsuit and the lawsuit is typically accompanied with a fraudulent lien claim against the lienor. When a lienor receives this lawsuit, it MUST foreclose on its lien within 20 days from service or else its lien should be discharged by the court. However, this requires drafting of the lawsuit and the special show cause summons, filing the lawsuit, and serving the lawsuit, so it certainly is not as cost effective as the first option. Also, sometimes, by the time the lawsuit is drafted, filed, and served, the 20 day show cause period would be pretty close to the expiration of the 60 days if the Notice of Contest of Lien was recorded. Every situation is different and there are circumstances where filing this lawsuit is a more attractive option than recording the Notice of Contest of Lien.

(3) Transferring the Lien to Alternative Security such as a Lien Transfer Bond – Sometimes, an owner needs the lien off of its property immediately and wants the lien transferred from the real property to alternative security such as a lien transfer bond. This is done pursuant to Florida Statute s. 713.24 where cash or a surety bond is posted with the court “in an amount equal to the amount demanded in such claim of lien, plus interest thereon at the legal rate for 3 years, plus $1,000 or 25 percent of the amount demanded in the claim of lien, whichever is greater, to apply on any attorney’s fees and court costs that may be taxed in any proceeding to enforce said lien.” Fla.Stat. s. 713.24. Typically, no one wants to post and tie up cash in the amount of the lien, plus 3 years of interest, plus another 25% of that lien amount to cover potential fees/costs. And, obtaining a surety bond is not always easy without posting collateral or cash to the surety, etc., so that the surety’s risk in posting the bond in the event the lienor prevails is mitigated. Now, a lien can be transferred to a lien transfer bond at any time including during the pendency of a lawsuit. For example, let’s say you elect option (1) or (2) above and the lienor does timely foreclose on the lien; the option of transferring the lien is still available. The major difference is that if a lien foreclosure lawsuit is underway and the lien transferred to a bond (or cash), the lienor has one year from the date of the transfer to amend its lawsuit to assert a claim against the bond. If the lien is transferred before the lien foreclosure lawsuit, then the one year to foreclose on the lien from the date the lien is recorded still applies.

An attorney should be consulted to assist you to determine the best option and strategy for you if a lien is recorded based on your circumstances.

NOTICE OF CONTEST OF LIEN

To: (Name and address of lienor)

Signed: (Owner or Attorney)