Paying for Tenant's Improvements Without Giving Express Consent

  Q:   I signed a lease with a tenant for space that the tenant is responsible for making necessary improvements to. The tenant was required under the lease to hire the contractor, but had to submit plans to me, give me updates through the project, and give me a certificate of completion for the work in order to open for business. It did all of this and opened, but later closed without paying the remainder of what it owed to its contractor. I’m concerned that the contractor will file a mechanic’s lien against me because the tenant is bankrupt. Is it possible that I’ll have to ultimately pay for the work and, if so, why would a court allow this?

A: It’s very possible that you could have a lien for the cost of the work foreclosed against you, rather than the contractor going after the tenant. This will depend on your knowledge of the work, the requirements for the work in the lease, and whether you reaped the benefits of the work in the end. Lien laws differ from state to state, but many follow New York’s laws. A recent case there shows how a landlord, and not the tenant who contracted for work, could be responsible to the contractor.

In that case, a landlord leased so-called vanilla box space to a café tenant. The tenant was required to perform electrical work before it could open. Its contractor, an electrician, completed the work, and the landlord was informed that it had been done so the café could open. The tenant went out of business shortly thereafter, still owing the contractor more than $50,000. The contractor filed a mechanic’s lien against the tenant and landlord.

Despite the requirement in the lease that the tenant had to complete the electrical work and let the landlord know that it was done in order to open, the landlord asserted that it had not consented to the work and that it couldn’t be held responsible for the cost of work it had not expressly agreed to. But the trial court noted that the tenant had completed the improvements according to the lease terms and submitted to the landlord a certificate of completion certifying that the premises were “constructed and completed in accordance with the final design drawings as approved by the landlord.” The lease also provided that any improvements—including electrical work—made to the space would become part of the realty at the end of the lease, giving the benefit of the work to the landlord.

The trial court ruled in favor of the contractor, foreclosing the lien, which obligated the owner to pay. A New York appeals court affirmed the decision of the lower court.

The appeals court concluded that consent, for purposes of the lien law applicable to the case, was “properly inferred from the terms of the lease agreement between the landlord and the commercial tenant and there was no requirement that the landlord had to expressly or directly consent to the improvements.” 

The appeals court further explained that the language of the lease agreement not only expressly authorized the tenant to undertake the electrical work, but also required it to do so and the detailed language made clear that the landlord was to retain close supervision over the work and authorized it to exercise at least some direction over the work by reviewing, commenting on, revising, and granting ultimate approval for the design drawings related to the electrical work. Therefore, the terms of the lease agreement between the landlord and the tenant, taken together, were sufficient to establish the landlord’s consent under the lien law. The appeals court determined that the lower court had appropriately declined to impose a requirement that the landlord either expressly or directly consent to the improvements [Ferrara v. Peaches Cafe LLC, November 2018].