The Massachusetts Supreme Judicial Court (SJC) recently decided a matter of significant importance to the construction industry. In Trace Construction v. Dana Barros Sports Complex, LLC¸ 459 Mass. 346 (2011), the SJC considered the mechanic's lien claims asserted by two general contractors and several subcontractors who made improvements to a sports complex operated by former Boston Celtics star, Dana Barros. The contractors asserted mechanic's liens on the leasehold interest held by the tenant, Dana Barros Basketball Camp, LLC (the "Camp"), as well as the underlying "fee" interest of the owner/lessor, Richard J. Madigan, Trustee of Oxford Realty Trust ("Madigan").

Five separate cases were consolidated for trial, and the trial judge ruled that the contractors had all established valid liens against the leasehold interest held by the Camp, but not against Madigan's fee interest as owner/lessor. All parties appealed the decision and the SJC transferred the case from the Appeals Court on its own initiative. The SJC held that the two general contractors had in fact established valid mechanic's liens against Madigan's fee interest, but that the subcontractors could not do so given the language of the Massachusetts lien statute. With respect to liens against the Camp's leasehold interests, however, the SJC found that none of them survived the Camp's surrender of its lease back to Madigan.

The decision is significant because it clarifies when, and to what extent, a contractor can establish lien rights under the Massachusetts mechanic's lien statute (General Laws Chapter 254) when performing work in the context of a leasehold. The decision also has practical implications for all players in the industry, including property owners, contractors and subcontractors alike.

Background

The property at issue consisted of a 70,000 square foot building located on two adjoining parcels. On September 1, 2004, Madigan and the Camp entered into a five-year lease agreement. They discussed the fact that Barros was interested in making improvements to the space for the purpose of operating the Camp. Prior to that time, and for the 21 years preceding, the property had been either vacant or used as a warehouse. The lease agreement made it clear that the Camp intended to make physical improvements to the property, in order to convert the space to an athletic complex. Any permanent improvements, however, were expressly for Madigan's benefit and not the property of the Camp. The lease agreement also required Barros to obtain Madigan's written consent prior to proceeding with any construction.

Extensive alterations and improvements began just two months later in November 2004, including the installation of new plumbing, lighting, HVAC and electrical work. The Camp hired two general contractors for the work through its agent and affiliate, Dana Barros Sports Complex LLC (the "Complex"). Madigan was well aware of the construction, as he passed the facility daily on his commute to work and visited the site on numerous occasions. The project didn't last long, however, and the Camp was soon unable to meet its monthly payment obligations to the two general contractors it had hired to perform the work. Indeed, by March 2005, construction had stopped and each of the contractors was pressing for unpaid invoices. The Camp had other troubles, too; for the next 12 months it repeatedly failed to make timely lease payments to Madigan. By April 2006, Barros and the Camp ultimately surrendered the property back to Madigan who then leased the property to a fitness club.

The general contractors and subcontractors filed and recorded their mechanic's lien claims and instituted suit to enforce their rights. Each claimed a lien on the Camp's leasehold, as well as on Madigan's underlying fee interest in the property as owner/lessor.

Analysis

A General Contractor's Lien Can Attach the Underlying Property Interest

The SJC found that a general contractor, hired by a lessee, could lien both the leasehold interest and the underlying fee interest of the owner/lessor. The general contractor will have this opportunity so long as the lessor consents to the work through affirmative words or deeds – and not merely by failing to object despite knowing that the work was being performed.

To reach this conclusion, the SJC gave a new and expanded reading to Section 2 of the mechanic's lien statute. In a technical decision, the Court parsed through the language of the statute and relied heavily on legislative history to find that general contractor liens under the statute are broadly intended to include the project property interests of persons consenting to the work, even if such persons are not the "project owner" who entered into the prime contract.

A general contractor can only benefit from this ruling, however, if the owner/lessor consents to the work in question. Such consent, however, must be something more than the failure to object. In this case, the lynchpin for Madigan's consent arose from the lease agreement itself. The agreement stated that the premises could only be used as a "recreational facility" even though, at the time of the lease-signing, it was an empty warehouse. The lease agreement also included express statements that improvements would ultimately be for Madigan's ownership and benefit. Madigan knew that construction would be required and was therefore consenting to the work upon executing the lease agreement. These facts, together with Madigan's testimony that he priced the property lower to entice Barros into making improvements, convinced the court that Madigan had consented. It was on these actions, and not merely his knowledge of the project and occasional visits, that persuaded the SJC of Madigan's consent for the work to move forward.

A Subcontractor's Lien Is Limited to the Lessee's Property Interest

The SJC declined to extend such a broad reading for subcontractors. Once again, parsing through the statute and taking legislative history into account, the SJC explained that Section 4 of the mechanic's lien statute (applicable to subcontractors) is wholly different from Section 2 (applicable to general contractors). The Court seized on that part of Section 4 providing that a subcontractor shall have a lien upon property "owned by the party who entered into the original contract." G.L. c. 254 § 4 (emphasis added). Unlike Section 2 for general contractors, there is simply no express right under Section 4 to lien project property owned by those not a signatory to the prime contract. Here, the party that "entered into the original contract" with the general contractors was the Complex – who commissioned the work for the Camp, but otherwise had no ownership rights in the property whatsoever. The subcontractors' liens were therefore void as to Madigan's underlying fee interest as owner/lessor.

All Liens on the Leasehold Extinguished Upon Camp's Surrender

The SJC then ruled that all liens on the Camp's leasehold interest (by the general contractors and subcontractors alike) were extinguished as a result of the involuntary surrender of the lease in April 2006. The SJC explained that once the lease rights ceased to exist in the Camp, so did the liens that attached to them.

Industry Impact

With the ability to lien the underlying property interest where the consent of the owner/lessor can be shown, a general contractor can gain additional security and possibly trigger a breach of the lessee's lease covenants – thereby creating additional pressure for payment. To ensure such leverage general contractors are well advised to inform themselves, if at all possible, of all applicable lease details and to obtain lessor consent if not evident in the lease.  

Given the relative clarity of Section 4, subcontractors are technically in no worse position after Trace Construction – except for the fact that there is now clear case law confirming the limited reach of their lien rights in the leasing context. All contractors are well advised, however, to assert the applicable protections of Massachusetts' Prompt Pay Act, which protects any party with lien rights under General Laws Chapter 254.

Owners are left in a more precarious position. The Trace Construction decision makes it clear that Massachusetts courts will examine issues of landlord consent to construction work very closely and on a factual, case-by-case basis. Owners/lessors are therefore well advised to include adequate indemnity language and security requirements in their lease terms to protect themselves in the event a lien attaches to the underlying property. Moreover, like in Trace Construction, owners can also prevent a contractor's lien from remaining on the property after the lease ends if it can be shown that the lease termination was involuntary. To do this, owners might require a representation from the tenant during the up-front lease negotiation that any surrender due to default is involuntary. Gaining such clarity would help to avoid the costly litigation that occurred in Trace Construction.