Body
Bar, LLC, desired to open an upscale Pilates studio and juice bar in Plano,
Texas. So Body Bar signed a lease for commercial property owned by Regency
Centers. It was Body Bar’s responsibility to construct the studio and bar.
Regency was obligated to pay $25,000 of the cost after successful completion.
Body Bar
engaged Denco CS Corp as its general contractor.
Denco’s
completion was delayed due to the City of Plano’s determination that portions
of the construction plans failed to meet Plano’s health code ordinances. To
complete on time, Denco’s employees, contractors and subcontractors worked
overtime and on weekends. Those efforts increased the cost of the project by ~
$29,000.
Denco
sent Body Bar a bill for the excess. Body Bar refused to pay. Denco recorded
mechanic’s liens in Collin County. Body Bar sued Denco for breach of contract,
improper “cloud on title” by recordation of wrongful Mechanic’s Lien Affidavits,
and other theories.
Denco
responded by filing counterclaims of its own against Body Bar, seeking to
recover its added $29k in cost overruns through a legal theory of unjust
enrichment, and asking the District Court to allow Denco to foreclose its
liens.
The
Collin County District Court ruled for Body Bar and entered Judgment accordingly.
Denco appealed.
Part of
the appeal was based on Denco’s request to foreclose its liens. And that, dear
reader, is the purpose of this article. Denco claimed it had two valid liens:
one based on the Texas Constitution, the other based on Texas statutes.
The
Appellate Court analyzed the lien affidavits and compared them to the facts
presented. Evidently the affidavits claimed liens only against the
owner’s fee simple interest in the property. Not Body Bar’s leasehold estate.
That’s a
big difference.
The
Appellate Court first determined that in order to perfect a Texas Constitutional
lien on the property owner, there must be a direct contract between the lien
claimant and the property owner. There was no such direct link. Recall that
Denco was engaged directly by Body Bar. Not Regency.
Next,
the Appellate Court determined that in order to perfect a Texas statutory
lien on the owner’s fee simple interest as an “original contractor,” there also
must be a direct contract between the lien claimant and the property owner. Again,
there was no such direct link. See above.
Denco
then argued that Body Bar was acting as the agent for the property owner. Since
liability imputes from agent to principal, this would have the desired effect
of binding the property owner to the construction contract. And if that is
true, then the lien affidavits were valid because Denco was dealing with the
agent for the owner. And the actions taken by an agent bind the principal,
absent unusual circumstances not at issue in this case.
Unfortunately
for Denco, they submitted no evidence on that point for the Appellate Court to
consider.
No
surprises here. Not yet anyway. Here comes the surprise.
The
Appellate decision implies that the lien affidavits should have attached to
Body Bar’s leasehold estate. That would be consistent with Texas law and
appellate decisions. And then for some reason not explained in the Opinion, the
Court does not indicate that Denco’s liens were valid, but only as against Body
Bar’s lease.
Perhaps
the lien filings were made late. Perhaps statutory notice of the filings
weren’t timely served. Maybe the lien filings made clear that Denco was only
interested in a lien against the property owner’s title, not Body Bar’s lease. Maybe
the Court did not feel the need to explain leasehold lien attachment theory
further, since Denco was not going to be allowed to foreclose anyway. Perhaps I
misread the Opinion. All of this is unclear.
The
Appellate Court mostly agreed with the tenant Body Bar, but also gave Denco some
relief too. See Denco CS Corp v. Body
Bar, LLC; No. 06-14-11122-CV; Texas Court of Appeals, 6th
District; January 8, 2015.
Lessons
learned:
1. Contractors engaged by tenants routinely file
liens when they get stiffed. Those liens, if completed properly, sent to the
tenant timely, and if they otherwise satisfy all statutory requirements, are
valid and attach to the tenant’s leasehold estate.
2. Contractors
or their lawyers will argue that the liens also attach to the property owner’s
fee simple estate. The theory is that since the improvements ultimately benefit
the property owner, then the tenant was merely acting as the agent for the
principal. And the principal was the landlord.
3. Practice
Point: Whether
representing a Texas landlord or tenant, know that payment and performance
bonds can be purchased by the contractor to avoid a lien filing from attaching
to any interest in land. Typically the cost is low, ~ 2% of the full
construction cost. Either (or both) the landlord or the tenant might consider
requiring their contractors to obtain and deliver the bonds before the
contractors commence work at the job site. These could be obligations contained
in the Lease and construction contracts.
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
