Even if there were no blatant title issues found on your net lease acquisition, there are other steps you’ll want to take to block against any future liens. For example, if your tenant fails to complete payment on their tenant improvements, you may be susceptible to getting a mechanic’s lien tacked onto the property.
As discussed in Part I, property liens can produce difficulty during escrow by delaying or even killing a future sale when you choose to sell it.
So, after the close of escrow on your net lease property, remember these points in protecting against potential liens.
Although net lease properties are viewed more as a hands-off investment, investors need to be aware of what their tenants do and don’t do — such as pay contractors for their interior work.
For example, if a franchisee has ordered some remodeling, the work has been completed, and the contractor claims to have not received payment, the contractor has the right to file a lien against the site and the tenant’s interests. This can affect the landlord — even if the landlord was not aware of the outstanding bill.
Typically, if there is no contract with the landlord, there should be no liability. But that is not always the case or it will still need to be proven that the landlord is not liable.
What makes this a cloudy situation is that the landlord is liable if the TI allowance conveys a landlord agreement to make payments to a contractor (even if it didn’t specify which). That grants the contractor the ability to prove consent to the improvements by the landlord.
As an owner, you should familiarize yourself with how pre-liens work. A pre-lien document is often used by contractors over the course of a construction project and can serve as a warning if money is owed. Many states may require these preliminary notices in order for a construction lien to be filed.
In short, the purpose of this preliminary notice is for the contractor to describe in writing the kind of work and materials that will be used for the project. This instrument is used to protect the contractor, which may be unable to carry out filing a lien if necessary later on, depending on the state.
Also, note that pre-liens are referred to as various names, such as a Notice to Owner, Notice of Furnishing, Notice of Delivery of Materials or Labor, or Notice of Non-payment.
Tips for Protection
After you’ve purchased the property, the simple way to avoid a lien is to ensure payments are made, including from the general contractor (GC) to the subcontractors. Easier said than done, but here are some helpful tips.
This option is the most common in guarding against future liens. When a contractor or supplier provides a lien waiver document, it serves as a statement that payment has been fully satisfied and future lien rights are surrendered.
To use this as a tool, a GC must identify all the subcontractors and itemize the amounts owed to each. Ideally, if the affidavits keep record of what has been paid, the property owner may use it as evidence of payment.
An example of a contract that would fall under this category would be an AIA Document A201-2017 General Conditions in Indiana, which requires the GC to indemnify the owner from damages of any lien by any subcontractor.
Lease Language for TI's
Certain verbiage can also help protect against the aforementioned scenario regarding tenant improvements (TIs). Ensure the lease states the tenant shall not allow any mechanic’s liens to be filed against the landlord’s property. Additionally, in the event a lien does file, the lease should require tenant to discharge it quickly. Then, the landlord should be free from any liability following tenant’s failure to pay.
It’s important to realize the risk of a lien being filed against your commercial property does not go away after the Purchase and Sale Agreement has been signed. Refer to this blog post as a reminder of the possible implications of liens due to tenant improvements or pre-liens.
What about the tips to know before the close of escrow?
Check out Part I to be proactive in your next project.