Owner/Landlords Beware: Your Ownership Interest Can be Liened by Your Tenant’s Contractors

On April 13, 2011 the Massachusetts Supreme
Judicial Court (SJC) rendered a decision that should concern every
owner/landlord. In the case of Trace Construction, Inc. v. Dana Barros
Sports Complex, LLC
, the SJC ruled that two contractors who performed
renovations to the leased space at the former pro basketball star’s camp could
assert valid mechanic’s liens against the owner/landlord’s real property.

The Massachusetts
mechanic’s lien statute expressly provides that a mechanic’s lien may attach to
an interest in real property that is less than an ownership interest (i.e., a
leasehold interest). Accordingly, it was not surprising when the contractors inTrace asserted mechanic’s liens against Barros’ leasehold interest. The
contractors, however, went one step further, and asserted mechanic’s liens
against the owner/landlord’s real property interest as well.

Massachusetts General Law chapter 254, §2 provides that a person who, under a
written contract to perform construction improvements with the owner of any
interest in real property or with any person acting for, on behalf of, or
with the consent of such owner,
shall have a lien on such real property
owned by the party with whom or on behalf of whom the contract was entered
into.

The SJC in Trace focused on the "consent"
issue. The court concluded that, for the purpose of the mechanic’s lien
statute, owner/landlord "consent" means more than just the
owner/landlord’s awareness of the tenant’s intention to perform work, awareness
of actual work being performed, or a failure to object to the work being
performed.

In Trace, the SJC found owner/landlord
consent in that the owner/landlord knew that Barros was
converting the leased space in question from storage space to a recreational
facility. The lease with Barros provided that any leasehold improvements he
made were subject to the owner/landlord’s consent (which could not be
unreasonably withheld). In addition, the lease provided that all of the tenant
fixture improvements to the real property would inure to the owner/landlord’s
benefit. Based upon the totality of these factors, the SJC held that the
tenant’s contractors’ liens against the owner/landlord’s real property were
valid pursuant to M.G.L. c.254, §2.

As a result of the Trace decision,
owner/landlords must be aware of the potential impact that a tenant fit-out
project could have on their real property. To the extent that leases anticipate
owner/landlord’s consent to improvements, and provide that said improvements
ultimately become their property, owner/landlords should consider lease
provisions that mandate that tenants who intend to build out their leasehold
must first provide and record a blanket lien bond in the full value of any
improvement contract. This will ensure that the owner/landlord is not held
liable by way of a mechanic’s lien to a tenant’s contractors in the event the
tenant fails to pay for the improvements.

If you have any questions about this decision,
mechanic’s liens, or any aspect of construction law, please contact Hugh J. Gorman,
III
, the author of this alert. Hugh is chair of Prince Lobel’s Construction Law
Practice Group
. He can be reached at 617 456 8093 or hgorman@princelobel.com.