Protection against a mechanic’s lien

Tenants occasionally contract for improvements to be constructed on the premises they have leased. Any mechanic’s lien by a contractor for nonpayment initially attaches to the tenant’s leasehold interest in the property. [Calif. Civil Code §8442(a)]

However, the mechanic’s lien for unpaid labor and materials may also attach to the fee simple interest held by the landlord if the landlord or the landlord’s property manager:

  • acquires knowledge the construction is taking place; and
  • fails to post and record a Notice of Nonresponsibility. [See RPI Form 597]

A Notice of Nonresponsibility is a written notice which needs to be:

  • posted in a conspicuous place on the premises within ten days after the landlord or their property manager first has knowledge of the construction; and
  • recorded with the county recorder’s office within the same ten-day period. [CC §8444]

However, the landlord who becomes aware of the construction and fails to post and record the Notice of Nonresponsibility is not personally liable to the contractor. Rather, the contractor can only lien the landlord’s interest in the real estate and foreclose on their mechanic’s lien to collect for unpaid labor and materials delivered to improve the property under contract with the tenant. [Peterson v. Freiermuth (1911) 17 CA 609]

Nonresponsibility on mandatory improvements

Further, if the lease requires the tenant to make mandatory improvements,  a mechanic’s lien attaches to the landlord’s interest even when the landlord has posted and recorded a Notice of Nonresponsibility.

For example, a lease states the tenant is to make certain improvements as a condition of renting the property. Since the improvements are mandatory improvements rather than permissive improvements, the tenant is deemed to be the landlord’s agent. The tenant is contracting for the construction of the mandated improvements on behalf of the landlord.

Thus, the mechanic’s lien incurred by the tenant will attach to both the tenant’s and the landlord’s interest in the property, despite any posted and recorded Notice of Nonresponsibility. [Los Banos Gravel Company v. Freeman (1976) 58 CA3d 785]

Had the lease merely authorized the tenant to make nonmandatory (permissive) improvements, the tenant will not be acting as an agent for the landlord. In that case, the landlord’s interest in the property is not subjected to a mechanic’s lien if the Notice of Nonresponsibility is timely posted and recorded on discovery of the tenant improvements. [Baker v. Hubbard (1980) 101 CA3d 226]

Removal of fixtures by contractor

Additionally, a mechanic’s lien cannot be recorded against the landlord if the improvements are removed by the contractor recording the lien.

For example, a tenant contracts to have air conditioning installed in the building the tenant rents. The contractor sells the equipment to the tenant under a conditional sales contract. The contractor retains title to the equipment as security until the sales contract debt is paid.

The landlord’s consent to the improvements is not obtained by the tenant, but the landlord has knowledge the work has commenced. The landlord does not post a Notice of Nonresponsibility.

Later, after the air conditioning units are installed, the tenant vacates the property.

The contractor is not paid and files a mechanic’s lien against the landlord’s fee interest in the property. Further, the contractor repossesses the air conditioning units and resells them at a loss. The contractor then seeks to recover their losses under the mechanic’s lien.

However, by electing to repossess the units, the contractor waived their right to pursue the mechanic’s lien to foreclosure.

Whether the air conditioning units are considered a removable fixture due to the financing, or a property improvement permitting the recording of a mechanic’s lien, is no longer an issue after their removal. The contractor  removed the units and chose to treat the units as personal property. Thus, the contractor lost their lien rights for nonpayment. [Cornell v. Sennes (1971) 18 CA3d 126]

Failure to perfect a lien

Consider the tenant who leases a property containing tanks for holding gasoline. The tenant negotiates a reduced rental payment in exchange for installing fuel pumps free of any liens.

The tenant purchases the pumps on credit and the pumps are installed. The supplier of the pumps does not receive a Uniform Commercial Code (UCC-1) financing statement from the tenant. Thus, the supplier does not file a UCC-1 with the Secretary of State, a requisite to perfecting the supplier’s lien on the pumps.  [See RPI Form 436-1]

Later, the pump supplier claims title to the pumps due to the unpaid installation debt and seeks to repossess them.

However, the landlord owns the pumps as fixtures which became part of the real estate. The landlord gave consideration in the form of reduced rent to acquire the pumps. More importantly, the pump supplier failed to perfect its lien on installation of the pumps. [Southland Corp. v. Emerald Oil Company (9th Cir. 1986) 789 F2d 1441]