In Florida, when a lease permits or requires a tenant to make improvements to the premises, the tenant’s contractor(s) (as well as any subcontractors or suppliers), if not timely paid, can file a lien against, and ultimately foreclose upon, not only the tenant’s leasehold interest but also the landlord’s fee interest in the property.
By following these 5 tips, landlords can lower or avoid the risk of having to defend these liens recorded by a tenant’s contractors, which can result in costly and time-consuming litigation.
TIP I: Add “Prohibition of Lien” Language to Lease
To avoid foreclosure, the landlord must ensure that its leases contain “prohibition of lien” language that expressly prohibits the landlord’s interest from becoming subject to liens for improvements made by the tenant. Leases should also require tenants to notify their contractors of this prohibition of liens on the landlord’s interest in the property.
TIP II: Record a 713.10 Notice in the Public Records and Comply with other Notice Requirements of 713.10
It is not enough only to include “prohibition of lien” language in the lease. Under Florida Statute Section 713.10, the landlord must also, prior to the date of recording of the Notice of Commencement (NOC) for the tenant’s work, record in the public records either (a) a separate memorandum of the lease for each lease that includes the “prohibition of lien” language; or (b) one statutory “Notice of Prohibitions of Liens” that includes the specific language contained in the various leases prohibiting such liability and a statement that all or a majority of the leases on that parcel of land expressly prohibit such liability. The language contained in the memorandum of lease or Notice of Prohibitions of Liens must mirror the language in the leases exactly.
Contractors are entitled to a copy of the “prohibition of liens” language upon request under Florida Statute Section 713.10. If the landlord receives a demand from any contractor for a copy of the “prohibition of liens” language, the landlord must timely respond to the request to avoid losing the statutory protection.
TIP III: Approve (But Do Not Sign) Notices of Commencement and Other Permit Applications
Landlords should approve any NOC or permit application before filing by a tenant or its contractors to prevent critical errors. The landlord may also consider adding to the NOC the “prohibition of lien” language from the lease to ensure the tenant has notified its contractors of the limitation of liability.
While it is important to review and approve the NOC and permit applications, the landlord should not under any circumstances sign the documents as “owner” or “applicant.” It is a common misperception that landlords must execute these documents. NOCs can be executed and recorded solely by the tenant. Further, most governmental agencies will accept a letter or affidavit from the landlord authorizing the tenant to apply for permits so that the landlord isn’t obligated to sign the application itself.
TIP IV: Require Lien Waivers, Affidavits and Certificates as Conditions to Payment
Before paying any tenant improvement allowance, the landlord should require executed originals of (i) a waiver and release of lien upon final payment from each direct contractor and each other lienor who has given a notice to owner; (ii) a contractor’s final payment affidavit from each direct contractor; (iii) a notice of termination of NOC; (iv) a Certificate of Occupancy for the premises; and (v) an architect’s certification that the work was performed pursuant to the approved plans.
TIP V: Include Other Protective Construction Language in Lease
The landlord can also include additional protections in its leases through various other provisions including requiring bonding of any liens, indemnification of the landlord, and approvals over tenant’s contractors and their contracts. Because lien laws vary between jurisdictions, it is important to seek out the advice of a local attorney when drafting these provisions and others addressed above.