Commercial tenants commonly request approval from their landlords to perform tenant improvements or alterations and hire their own contractors to do so. Often times, the landlord will allow the tenants to cause such work to be performed with the understanding that the tenants are accepting all liability for the work including making all payments to any contractor or material supplier working on the project. Landlords will then file and post a notice of non-responsibility to protect themselves from a mechanics lien filed against the property as a result of the tenants’ failure to pay any contractor or material supplier. Unfortunately, a notice of non-responsibility is frequently used incorrectly by landlords when protection is available, and in instances that do not provide any protection from mechanics lien claims in the first place.

Pursuant to California law, contractors, subcontractors, laborers and materialmen can place a mechanics lien on real property upon which they have improved by furnishing labor and materials with the consent of the property owner or owner’s agent. A mechanics lien creates a security interest in the real property, and if the mechanics lien claimant is not paid, the claimant can file a lawsuit to foreclose on the lien and force a sale of the property. The proceeds from the sale are used to satisfy the amount of the lien. (See California Civil Code §§8460-8470.)

A notice of non-responsibility advises anyone furnishing labor and/or materials to a work of improvement that the property owner (a) did not authorize the improvement; and (b) did not contract for the services or materials. (See California Civil Code §§8442-8444.) California Civil Code Section 8444 requires that the notice of non-responsibility comply with and contain the information required by California Civil Code §§8100-8118, as well as the following information:

1. Nature of the owner’s title or interest;
2. Name of a purchaser under contract (if any) or lessee (if known); and
3. Statement that the person giving the notice is not responsible for claims arising from the work of improvement.

The property owner must sign and verify the completed notice, record the notice in the county records, and post copies of the notice conspicuously at the site within ten days after the date on which the owner first obtained knowledge that substantial, observable work had commenced. (California Civil Code §8444(e).) A notice given before actual construction has begun will be held ineffective.

While these requirements seem to be clear and straightforward, landlords often misuse notices of non-responsibility when they are not available for protection. Specifically, a notice of non-responsibility is unavailable for protection when: (a) the landlord does the work; (b) the landlord enters into an agreement requiring the tenant to do the work; or (c) the landlord is a participating owner or an owner who reserves oversight powers over the tenant’s work such as approving plans or the contractor.

California Civil Code §8444(a), which provides that an owner that did not contract for the work of improvement may give a notice of non-responsibility, is often misinterpreted by landlords who mistakenly believe that since the tenant contracted for the work, the notice of non-responsibility is automatically available. Rather, courts have held that landlords do in fact contract for works of improvement when their lease agreement (or any other agreement) with the tenant either authorizes or requires that the tenant perform work on the property. In these circumstances, the tenant is deemed to be the landlord’s agent and the notice of non-responsibility will be deemed invalid. Additionally, whether a landlord has timely satisfied the ten-day statutory period for posting and recording the notice of non-responsibility is often successfully challenged by lien claimants who use the lease or other applicable agreements to demonstrate that the landlord had knowledge of the work more than ten days prior to recording and posting the notice.

As such, it is critical that landlords know that a notice of non-responsibility will likely be unavailable to them whenever the lease agreement provides for or controls tenant improvements. In these instances, landlords should implement alternative protections for mechanics liens such as requiring the tenants to provide a surety payment bond or other form of security in favor of the landlord, requiring appropriate mechanics lien releases, especially if the landlord is paying for the work through a tenant improvement allowance, and requiring that the tenant provide landlord with paid invoices from all contractors and subcontractors.

Since many commercial leases provide for or control tenant improvement work, it is critical that landlords be cognizant of the need to implement these alternative protections since in these circumstances, a notice of non-responsibility will often not be available as a defense to mechanics lien claims.