Tenant improvement work is a common source of construction liens. When liens arise out of tenant improvement work, the question is always: does the lien attach to the owner/landlord’s ownership interest in the property, or does the lien attach solely to the tenant’s leasehold estate?
If the owner/landlord contracts for the tenant improvement work itself, the answer to this question is simple—the lien attaches to the owner/landlord’s ownership interest. As the Oregon statutes state, “Any person performing labor upon, transporting or furnishing any material to be used in, or renting equipment used in the construction of any improvement shall have a lien upon the improvement for the labor, transportation or material furnished or equipment rented at the instance of the owner of the improvement or the construction agent of the owner” (ORS 87.010(1)). The Washington statutes also agree that “any person furnishing labor…for the improvement of real property shall have a lien upon the improvement for the contract price of labor, professional services, materials, or equipment furnished at the instance of the owner, or the agent or construction agent of the owner” (RCW 60.04.021).
However, what about the more common scenario when the tenant hires the contractor to perform the tenant improvement work as required by the lease and subject to a tenant improvement allowance in the lease?
In Oregon, the answer is again simple: any lien for tenant improvement work attaches to the owner/landlord’s ownership interest unless the landlord did not know of the work or posts a “notice of non-responsibility.” Regarding the “notice of non-responsibility,” Oregon statutes state that the owner/landlord is responsible “unless the owner shall, within three days after the owner obtains knowledge of the construction, give notice that the owner will not be responsible for the same by posting a notice in writing to that effect in some conspicuous place upon the land or the improvement situated thereon” (ORS 87.030(1)).
While the owner/landlord could argue it did not have actual or imputed “knowledge” of the construction work, that will nearly always be a fact-sensitive, and expensive, question. Moreover, where a lease has a tenant improvement requirement and allowance (which most commercial leases will have) an owner/landlord will be hard pressed to prove it did not have actual or imputed “knowledge” of the tenant improvement work.
The better course is to post notice of non-responsibility. There is no required form, but the following suffices to satisfy the Oregon statues:
Notice of Non-Responsibility
Pursuant to ORS 87.030, [name and address of landowner], the owner(s) of the [description of property] (the "Property") hereby gives notice that any improvement constructed upon, or labor, services, or materials supplied to the Property on behalf of or by order of
[Name of Tenant],
or any other person or entity other than [name of landlord] has not been and is not being constructed at the instance or request of [name of landowner].
[name of landowner] is not and will not be responsible for any labor, material, services, or equipment provided or to be provided in connection with any construction on the Property.
[name of landowner]
The notice should be posted on the door to the premises being improved. The owner/landlord should take a photograph of the posted notice, establishing the date it was posted. All too often owner/landlords fail to post this notice, leaving themselves exposed to a contractor’s lien for tenant improvement work. While the owner can seek indemnity from the tenant, the better course is to post the notice and remove itself from the payment dispute.
By contrast, Washington owner/landlords do not have statutory means to protect themselves from liens arising out of tenant improvement work. Instead, in Washington, the test is whether the tenant may or is obligated to perform the tenant improvement work. The reason being, if the tenant makes the improvements because it is required to do so under the lease, it makes the improvements not only for the tenant’s benefit but also for the landlord’s benefit, thereby making the tenant the landlord’s construction agent for the purposes of the lien.
Thus, in Washington, whether a lien attaches to the owner/landlord’s ownership interest or just the tenant’s leasehold estate depends on the obligations under the lease. A lease requiring a tenant to improve the premises, providing an allowance to do so, will likely mean that the contractor’s lien attaches to the owner/landlord’s ownership interest. Leases that allow, but do not require, tenant improvements may limit the contractor’s lien to just the tenant’s leasehold estate.
The take-away: In Oregon, owner/landlords can protect themselves from liens arising out of tenant improvement work by posting a notice of non-responsibility. By contrast, in Washington, owner/landlords concerned about liens arising out of tenant improvement work, should consider a lease term that allows (but does not require) the tenant to improve the premises. This may avoid the tenant becoming the landlord’s agent for the tenant improvement work. In addition, since Washington owner/landlords do not have the ability to post a notice of non-responsibility, they may consider requiring the tenant to bond the tenant improvement work.
As for contractors, Oregon contractors performing tenant improvement work should keep any eye out for any notice of non-responsibility as it limits the contractor’s lien security to the tenant’s leasehold estate only. If the Oregon contractor’s lien is limited to the tenant’s leasehold estate, the contractor should review its contract with the tenant, which typically has a right to ask for verification of the tenant’s financial resources to pay for the improvements before starting the project or if the owner posts a notice of non-responsibility during the project.
Washington Contractors performing tenant improvement work should review the tenant’s lease, or at least the tenant improvement provisions in the lease, before commencing the work to determine if its lien would be limited to the tenant’s leasehold estate. If so, the contractor should ask for verification of the tenant’s financial resources to pay for the improvements before starting the project.
This article is provided for informational purposes only—it does not constitute legal advice and does not create an attorney-client relationship between the firm and the reader. Readers should consult legal counsel before taking action relating to the subject matter of this article.