Attention Indiana Commercial Landlords: Mechanic’s Liens Resulting from Tenant-Required Build-Outs Can Affect Your Entire Parcel of Property

Additionally published at https://www.faegrebd.com/Updates

Commercial property leases often require tenants to construct improvements.  Contractors and tradesmen performing that work generally have the right to file a “mechanic’s lien” on the real-property for the value of their materials and services.  The purpose of a mechanic’s lien is to ensure payment.  In Indiana, the general rule is that a mechanic’s lien can be asserted by one who labors to erect, alter, repair, or remove (i.e. improve) a building, which includes an expansive list of professionals such as contractors, subcontractors, journeymen, architects, and engineers.  A mechanic’s lien can be filed against both (1) the improved building and (2) the entire parcel of land the building is situated on, including land not occupied by the building.  Ultimately, whether the lien is valid is a question for a court.  But, commercial landlords generally want to know: when can a mechanic’s lien for materials and services contracted for by a tenant affect or encumber the landlord’s property interest?

In R.T.B.H., Inc. v. Simon Property Group, the Indiana Court of Appeals addressed mechanic’s liens in this commercial landlord/tenant context.  The tenant in the case, a large retail sporting goods chain, contracted with professionals to build-out its store in accordance with the terms in its lease.  A dispute arose during the construction between the tenant-retailer and a commercial window subcontractor.  The subcontractor filed a mechanic’s lien, and then filed suit against both the tenant-retailer and the landlord-owner.

The Court gave the following pronouncements in determining whether a mechanic’s lien resulting from a tenant improvement is valid against the landlord’s underlying parcel of land:

1. For a mechanic’s lien to attach to the landlord’s interest, tenant improvements to the property must be made under the authority and direction of the landlord, and something more than the landlord’s inactive or passive consent is required;

1. A lease calling for tenant improvements—even very detailed improvements—will not prove, in and of itself, the sort of active consent needed to maintain a mechanic’s lien against the landlord;

1. The focus is not only on the degree of the landlord’s active participation in the project decision-making and construction, but is also on how closely the improvements resemble a directly bargained-for-benefit between the landlord and the holder of the mechanic’s lien;

1. The fact that the tenant building will revert to the landlord at the end of the lease cannot fairly be construed as a direct benefit to the landlord; and

1. A landlord’s direct payment (or direct payment arrangement) to the mechanic’s lien holder is a strong indication and frequently cited factor for supporting the validity of a mechanic’s lien against the landlord’s underlying property interest.

Commercial landlords should understand that Indiana courts analyze and determine the above-listed elements on a case-by-case basis, meaning that each individual case presents its own nuances that could affect the outcome or result.  Further, mechanic’s liens are created by state statutes and there are many variances between the states.  Within each state, there are many rules—and exceptions to the rules—regarding mechanic’s liens.  Faegre Baker Daniels has a team of construction law and real-estate advocacy attorneys in Indiana and across the country ready to assist clients in these areas of law.  Commercial landlords should consult an experienced attorney when faced with matters that could affect their property interests.