You should still take extra precautions to safeguard yourself from future liens, even if no obvious title problems are discovered during your net lease acquisition. For example, if your tenant fails to pay for their tenant improvements, you may be subject to a mechanic’s lien being tacked onto the property.
Property liens, as discussed in Part 1, can cause problems during escrow by delaying or killing a future sale if you decide to sell it.
So, keep these points in mind after closing escrow on your net lease property to protect against potential liens.
Tenant Enhancements
Although net lease properties are viewed as a hands-off investment, investors must know what their tenants do and do not do — for example, pay contractors for interior work.
For example, if the franchisee orders remodeling, the work is completed, and the contractor claims not to have been paid, the contractor has the right to file a lien against the site and the tenant’s interests. It can impact the landlord, even if the landlord was unaware of the outstanding bill.
There should be no liability if there is no contract with the landlord. However, this is not always the case, proving that the landlord is not liable.
What complicates matters is that the landlord is liable if the TI allowance conveys a landlord agrees to pay a contractor (even if it does not specify which). It allows the contractor to demonstrate the landlord’s approval of the improvements.
Pre-Liens
As a property owner, you should understand how pre-liens work. Contractors frequently use pre-lien documents during a construction project to serve as a warning if money is owed. Many states may require these preliminary notices before filing a construction lien.
In summary, the purpose of this preliminary notice is for the contractor to describe in writing the type of work and materials used for the project. This instrument protects the contractor, who may be unable to file a lien later on, depending on the state.
Pre-liens are also known by different names, such as a Notice to Owner, Notice of Furnishing, Notice of Delivery of Materials or Labor, or Notice of Non-payment.
Tips for Security
Following the purchase of the property, the simplest way to avoid a lien is to ensure that payments are made, including payments from the general contractor (GC) to the subcontractors. It’s easier said than done, but here are some pointers.
WAIVERS OF LIENS
It is the most common method of protecting against future liens. A contractor or supplier provides a lien waiver document as proof that payment has been made in full and that future lien rights have been waived.
AFFIDAVITS OF CONTRACTORS
A general contractor must identify all subcontractors and itemize the amounts owed to use this as a tool. If the affidavits keep track of what has been paid, the property owner can use it as proof of payment.
CONTRACTS FOR CONSTRUCTION
An example of this type of contract would be an AIA Document A201-2017 General Conditions in Indiana, which requires the GC to indemnify the owner from any lien damages caused by any subcontractor.
LEASE LANGUAGE FOR TI’S
Particular language can also help protect against the tenant mentioned above improvement scenario (TIs). Ensure that the lease states that the tenant will not permit any mechanic’s liens to be filed against the landlord’s property. Furthermore, if a lien is filed, the lease should require the tenant to discharge it as soon as possible. The landlord should be free of liability due to the tenant’s failure to pay.
It is critical to understand that the risk of a lien being filed against your commercial property does not go away once the Purchase and Sale Agreement is signed. This blog post serves as a reminder of the potential consequences of liens due to tenant improvements or pre-liens.
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