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Commercial Tenant Fails to Pay Contractor for Tenant Improvements: Now What?

I am frequently asked this question by both contractors and commercial property owners. Generally, owners of commercial property (at least in Missouri and Kansas) will not be liable for contracts entered into by their tenants unless the tenant is acting as an agent of the owner, or the lease requires the tenant to make certain improvements that enhance the value of the property.

For instance, it is not uncommon for the tenant to be responsible for HVAC repair and/or replacement. Should the tenant fail to pay the contractor for either the equipment or the labor, then theoretically the contractor could place a mechanic’s lien on the real property, the improvements installed, and the tenant’s leasehold interest.

When a tenant contracts for new improvements or erections without acting as an agent of the owner, the contractors who perform the work will acquire a lien only to the tenant’s leasehold interest and the improvements furnished or placed on the real property, not to the real property itself. In addition, the provision or repair of a tenant’s personal property subjects said property to a mechanic’s lien. The contractor must still comply with the requirements of RSMo. §§ 429.005 to 429.360 in order to assert a mechanic’s lien against the interests of the tenant.

From the contractor’s perspective, it may be impossible to know during the applicable lien time if the tenant is being directed by the owner to install the improvements. All most contractors know is that they performed work on the property and that payment is due. Given this common set of facts, a contractor should include the underlying real property and the tenant’s leasehold interest in the contractor’s mechanic’s lien claim. If it is later determined that the tenant was not acting as an agent of the owner, then the contractor can remove the real property from its petition to enforce the mechanic’s lien.

Owners trying to protect themselves from mechanic’s liens caused by their tenants may want to consider requiring tenants to post a payment bond or a letter of credit before allowing the tenant to begin any improvements on the property. Most commercial leases contain a provision requiring the tenant to immediately remove any mechanic’s liens asserted on the property; however, this provision may have little value if the tenant is strapped for cash. Given this reality, a letter of credit or a payment bond may be the owner’s best protection from mechanic’s liens caused by its tenant.