A case decided last week illustrates the scope of liens for tenant improvements and recognizes that contractors can have liens for tenant improvements even where the land where the improvements are made is owned by a county or city.
James B. Pirtle Construction Co., Inc. v. Warren Henry Automobiles, Inc. arises out of a contract between a contractor and an automobile dealership over disputes that arose during the construction of the dealership. Before getting into the details of the dispute, it is critical to point out that the dealership was building on the property as a sub-tenant under a lease agreement with another tenant. One of the landlords of the property was the City of North Miami. As part of the disagreement with the dealership, the contractor recorded a construction lien in the amount of $4,818,455.63. The dealership transferred this lien to a surety bond, and the contractor then amended its lawsuit to foreclose against the bond.
The dealership then moved to discharge the contractor’s lien. In support of this motion, the dealership argued that the property where the construction took place was not “real property” as that term is defined under Florida’s Construction Lien Law. Section 713.02(3), Florida Statutes, states in part that
“[p]ersons in privity with an owner and who perform labor or services or furnish materials constituting an improvement . . . shall have rights to a lien on real property as provided in § 713.05.
Section 713.05 indicates that a ““contractor who complies with the provisions of this part shall . . . have a lien on the real property improved . . . .”
Section 713.01(26), Florida Statutes, defines real property as
“the land that is improved and the improvements thereon, including fixtures, except any such property owned by the state or any county, municipality, school board, or governmental agency, commission, or political subdivision.”
In essence, the dealership argued that because the property was owned by a municipality—the City of North Miami—it was not real property subject to a lien under 713.05, Florida Statutes. The trial court agreed with this argument and discharged the general contractor’s lien. The general contractor appealed this ruling to Florida’s Third District Court of Appeal.
First, the appellate court noted that the trial court erred in applying 713.02(3), Florida Statutes, because that statute applies to persons in direct contract with the property owner. Here, the general contractor was in direct contract with a tenant, the dealership, not the property owner. The appellate court then turned to two other sections of Florida’s Construction Lien Law that applied to circumstances at issue between the dealership and contractor.
The court noted that 713.11, Florida Statutes, expressly stated that no lien shall attach to land in which the contracting party has no interest. Here, the dealership did not have an interest in the real property, only in its tenancy to the property, so no lien could attach to the real property.
The court then examined 713.10, Florida Statutes, which applies to tenant improvements and states:
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.
This statute, combined with language in the lease between the City of North Miami and the tenant that sub-leased the property to the dealership, prohibited the lien from attaching to the real property. Thus the general contractor’s lien only attached to the dealership’s tenancy, and could not be discharged because the underlying property was owned by a municipality. In reaching this conclusion, the appellate court reinstated the contractor’s lien.
There are a couple of takeaways from this case. First, it makes clear that if you’re building tenant improvements, even on land owned by a municipality, your lien can still apply to the tenancy. That is even more important where the lien has been transferred to a surety bond, because the cash value of the bond is worth much more than the tenancy from a practical standpoint.
Second, this case also illustrates the twists in Florida’s Construction Lien Law that can occur when the project involves tenant improvements. Contractors should always be careful about how they manage payment and lien rights on tenant improvements and should ask for copies of the lease to see if it will impact those rights.