When dealing with commercial real estate, the use of liens can be fairly common. Liens can impact the ability of a business to start from the ground up or continue to grow and expand. Understanding how different types of liens can affect businesses is incredibly important when leasing or purchasing a commercial property.
What is a Lien?
A lien refers to a notice that is attached to assets used as collateral for any potential debts owed. This occurs when a business owner borrows money from a lender. The lender will hold onto the property lien until the debt has been paid in full. Similarly to financing the purchase of a new vehicle, if the business owner defaults on the loan, the lien allows the lender to sell the underlying property to recoup its funds that were borrowed.
The Types of Liens That Affect Commercial Real Estate
There are many different types of liens that can potentially impact businesses in negative ways. The different types of liens a business owner could encounter when leasing space from another include:
Mechanic’s or contractor’s liens
Each state has its own laws allowing contractors, subcontractors, and suppliers to file liens when property owners do not pay for completed construction work or delivered products. This provides additional security for the contractor and/or construction company.
In Texas, to assert a lien a supplier must have an existing contract with the original contractor, builder, or subcontractor. If work is unpaid for, the supplier and/or subcontractor must give written ‘Notice of Intent’ by the fifteenth day of the third calendar month following each month where the material or labor was delivered for which the supplier or subcontractor has not been paid.
In the event, the Notice of Intent goes unanswered; a mechanic’s lien can then be filed in the county where the property sits. Once filed, the lien can be enforced by serving process papers to the property owner or landlord as well as to any other interested parties like property managers, subcontractors, and lenders. If a business is leasing a space within a property that has a lien, the business should be notified.
Situations that could give rise to the need for a mechanic’s lien include:
- Poor quality of work: When a property owner or landlord is unsatisfied with work performed by a contactor, he or she may ask for the work to be redone. The property owner may refuse to pay for the additional costs, or not pay for the remainder of the work if the contractor is not willing to negotiate or believes its work was up to par.
- Poor materials: Contractors can choose to use the cheapest materials possible. Lack of clarity about the quality and type of materials used can result in a dispute, which can lead to a mechanic’s lien.
- Delayed timeline: Contractors might have a delayed timeline due to weather, labor issues, or trouble with suppliers. Landlords or property owners might dispute the cost of work if these delays are excessive or if the contractor includes additional expenses.
- Building errors: If a contractor makes a mistake or error during the building process, property owners may dispute the cost of additional materials or building costs to fix the problem.
Property tax lien
If a landlord has a tax debt, federal, state, and local taxing authorities can place a property tax lien on their commercial property. Much like a mechanic’s lien, the government taxing entity must send a Notice of Intent as well as a demand for payment to inform the property owner they plan to file a tax lien if payment is not received within a specific time period. Once the commercial property owner pays, the lien will be removed; however, the government has the ability to foreclose on properties where the taxes have not been paid.
Determining if a Commercial Property Has a Lien
When a lender files a lien on a debtor’s property, it must file a UCC-1 financing statement. Because of this, it is easy to search for liens against any particular business. Before making the decision to lease an office space, it is important to ensure the landlord has no liens attached to its property.
If a lien does exist and the creditor makes an attempt to foreclose, all businesses within the property will be forced to vacate. In certain cases, the property could then be and sold off at auction.
Houston Real Estate Lawyers
As more businesses move to Texas, the increased development brings increased transactions and contracts. At Feldman & Feldman, we understand the importance of real estate investments and are committed to helping you through each step of the legal process. If your business needs legal assistance with its commercial property, contact the experienced lawyers at Feldman & Feldman today.