PERFORMING CONSTRUCTION SERVICES FOR TENANTS
By Attorney Randall J. Andersen
December, 2018
By Attorney Randall J. Andersen
December, 2018
Disclaimer: The information contained on this page is not legal advice. The information provided on this website is for general informational purposes and is not necessarily updated to account for changes in the law. You should consult with an attorney for legal advice regarding your individual circumstances.
Contractors are often hired by landlords to build out space for tenants. In some instances, the tenant itself enters into the contract with the contractor to build out the leased space.
Contractors should be aware that if their contract is with the tenant rather than with the property owner, then the contractor may have limited avenues for collection in the event the tenant fails to pay amounts owed under the construction contract.
Contractors on private construction projects normally have the ability to file a lien against the subject property for amounts owed for the construction (assuming the contractor complies with the pre-lien notice requirements under Chapter 779, Wisconsin Statutes). However, if the contract is with the tenant rather than the owner of the property, the contractor may only be able to file a lien against the tenant’s leasehold interest (meaning the tenant’s interest in the property under the lease). If the tenant defaults under the lease, the tenant probably will not have any ongoing rights in the property, so a lien against the tenant’s leasehold interest may be of little or no value.
If the tenant acts as the “agent” of the owner in entering into the construction contract, it may be possible to file a lien against the owner’s interest. However, in most cases the tenant will be acting on its own behalf, rather than as an agent for the owner. Therefore, in the event of default, the contractor may for practical purposes be limited to the remedy of suing the tenant for amounts owed, rather than enforcing a construction lien. Collection from a tenant could be difficult if the tenant is a new business organized as an LLC, corporation or other limited liability entity.
In some cases, it may be possible to bring an “unjust enrichment” claim against the landlord. However, tenant-constructed improvements may not be of much value to the landlord, so an unjust enrichment claim may meet with little success.
Therefore, when entering into a construction contract with a tenant, it is recommended that the contractor take care to make sure that the tenant has the ability to pay for the project. This could include confirming that the tenant has financing in place for the build out expense, requiring frequent draw payments, requiring personal guarantees, and requiring that the property owner consent to the improvements and guarantee payment.
Contractors should be aware that if their contract is with the tenant rather than with the property owner, then the contractor may have limited avenues for collection in the event the tenant fails to pay amounts owed under the construction contract.
Contractors on private construction projects normally have the ability to file a lien against the subject property for amounts owed for the construction (assuming the contractor complies with the pre-lien notice requirements under Chapter 779, Wisconsin Statutes). However, if the contract is with the tenant rather than the owner of the property, the contractor may only be able to file a lien against the tenant’s leasehold interest (meaning the tenant’s interest in the property under the lease). If the tenant defaults under the lease, the tenant probably will not have any ongoing rights in the property, so a lien against the tenant’s leasehold interest may be of little or no value.
If the tenant acts as the “agent” of the owner in entering into the construction contract, it may be possible to file a lien against the owner’s interest. However, in most cases the tenant will be acting on its own behalf, rather than as an agent for the owner. Therefore, in the event of default, the contractor may for practical purposes be limited to the remedy of suing the tenant for amounts owed, rather than enforcing a construction lien. Collection from a tenant could be difficult if the tenant is a new business organized as an LLC, corporation or other limited liability entity.
In some cases, it may be possible to bring an “unjust enrichment” claim against the landlord. However, tenant-constructed improvements may not be of much value to the landlord, so an unjust enrichment claim may meet with little success.
Therefore, when entering into a construction contract with a tenant, it is recommended that the contractor take care to make sure that the tenant has the ability to pay for the project. This could include confirming that the tenant has financing in place for the build out expense, requiring frequent draw payments, requiring personal guarantees, and requiring that the property owner consent to the improvements and guarantee payment.