While a Notice of Non-responsibility is an important step for property owners to take in order to protect themselves from a mechanics lien brought forward by improvements made by tenants, it is only a possible means of defense against a mechanics lien. It is very beneficial to understand the parameters of the notice of non responsibility and under which circumstances you may be protected from becoming liable for a mechanics lien filed against your property.
Let’s take a look at an illustration:
A Tenant receives approval from his Landlord (Property Owner) to make tenant improvements to the unit he is leasing in order to improve his business. He is the owner of a Hair Salon located in the leased property and has contracted to install new sinks, chairs, and stylist work stations. He understands that he will be liable for all payments to any of the trades or materials suppliers who participate in this project. The Property Owner, with the understanding that the tenant is accepting all liability for this tenant improvement, agrees to allow the tenant to make these changes.
In order to protect himself from any payment defaults on the part of the tenant, which may be cause for mechanics liens being filed against the property, the Property Owner files a Notice of Non-Responsibility. This notice of Non-Responsibility is posted at the leased property to communicate to all contractors that he bears no legal liability for the project, and that should they have any issues collecting money owed for improvements made or materials supplied, they should direct their collections efforts exclusively with the tenant and refrain from filing any mechanics lien against the Property Owners interest in the leased property.
Ensuring the effectiveness of your Notice of Non-Responsibility
In order to be effective, a Notice of Non-Responsibility must be prepared, recorded and posted properly, which requires strict adherence to the statutes set forth by the state in which the lease property is located. For example in California if you prepare, record and post the notice correctly – but fail to complete the process within 10 days from the day you first became aware of the pending tenant improvements, the notice may be unenforceable to protect you from a mechanics lien.
Strengths and Weaknesses
It is possible that the tenant may elect to forgo his lease and abandon the property before the project is completed. Leaving all of the contractors and materials suppliers with unpaid invoices for this project. This could result in the Property Owner being named in a mechanics lien for unpaid balances due to tenant improvements made to his property. Many are surprised when this happens because they believed the Notice of Non-Responsibility would serve to prevent anyone from filing a mechanics lien. Unfortunately, this is not always the case.
In order for the Property Owner to not be found liable for the improvements, they will have to prove that the property did not benefit from any of the changes made, and that the work done was solely for the benefit of the tenant.
For example, if the Property Owner has re-leased the same property to a lessee who will benefit from the improvments made to the property, the property owner may be found to be benefitting from the improvements and can be held liable in court to pay what is owed. Alternatively, if they wish to re-lease the unit to be used for a different kind of business, and therefore must undo all of the work that was done, they may be able to have any mechanics liens discharged for lack of cause. Keep in mind, that if any part of the project is found beneficial to the Property Owner long term, such as new electrical wiring or improved plumbing, they may still be asked to make good on monies owed, or a portion thereof. If the Property Owner has received upon the initial leasing of the unit certain licensing fees, special payments, or an additional month’s rent – they may be asked by the court to use these funds to pay the mechanics lien holders.
From a standpoint of “Best Practices”, a Notice of Non-Responsibility is a smart solution to position the property owner from becoming liable to a mechanics lien. However, it is important that you understand that the notice of non-responsibility is only a possible means of defense and due diligence should be exercised when granting a tenant permission to make tenant improvements which may impact the property owners exposure.
If you would like to speak have someone who understands the process of the notice and/or would like to discuss your specific situation in further detail with an expert at CRM Lien Services, please contact us today for a free consultation.