Active Consent – Do you have it and what does it mean for your mechanic’s lien?
Often times a contractor is hired, not by the property owner, but by a tenant that has signed a lease to use the property for a set period of time. These build-out type situations are common and usually do not present a problem as long as the contractor gets paid. But what happens if the contractor does not get paid? Can the contractor file a mechanic’s lien on the entire property even though the actual owner never contractually agreed to pay for the work? The answer, according to Indiana law, depends on whether the property owner has “actively consented” to the work.
So what is “active consent”?
In Indiana, a mechanic's lien cannot attach to property unless "something more than mere inactive consent" is given by the property owner to the person performing the work. Gill v. Pollert
, 810 N.E.2d 1050, 1058-59 (Ind. 2004). "The [mechanic’s lien] statute's absolute first requirement is that the landowner consented to the improvements on which the lien is based." Stern & Son, Inc. v. Gary Joint Venture
, 530 N.E.2d 306, 308 (Ind. Ct. App. 1988). "[T]he lien claimant's burden to prove active consent is especially important when the improvements are requested by someone other than the landowner." This is because absent consent, "a lien claimant can only maintain a lien to the extent of his customer's interest in the land." Id.
In addition, "a person about to improve real estate must take notice of the extent of his customer's rights in the land and of the rights of those in possession."
While the idea of active consent is easy enough to understand, its application is a little more difficult. That is because Indiana courts have elected not to provide a straightforward definition of active consent, opting instead to adopt a balancing test that weighs a number of factors to determine whether active consent has occurred. Those factors include, among others: (1) whether the construction work was contemplated in the property owner’s lease with the tenant; (2) whether the property owner reviewed in detail and/or approved plans for the construction work; (3) whether the property owner helped finance the improvements; (4) whether the property owner objected to the costs of the improvements; (5) whether the property owner interacted directly with the contractor during the construction process; and (6) whether the improvements resembled a directly bargained for benefit to the property owner. Again, these factors are all weighed by the court on a case-by-case basis and the occurrence of one or more of the factors does not necessarily mean that active consent will be found.
How do courts analyze an active consent case?
The case of R.T.B.H., Inc. v. Simon Property Group
, 849 N.E.2d 764 (Ind. Ct. App. 2006) provides a good example of the process that a court might go through to determine whether a property owner has actively consented to a mechanic’s lien. In that case, the Indiana Court of Appeals held that the property owner, Simon Property Group, did not actively consent to work performed in connection with the construction of a Dick's Sporting Goods store, even though Simon approved the store's construction plans and made the construction an express requirement of its lease with Dick's. Dick’s leased space from Simon and its lease agreement specifically contemplated the demolition of an MCL Cafeteria and Service Merchandise store and the construction of a new Dick’s store. Other than partial payment for the demolition and the construction of a courtyard, Dick’s bore the cost of construction of the store. Simon reviewed the contract documents solely for the purpose of “design intent and criteria compliance.” The general contractor subcontracted the window and glass work to R.T.B.H., and after a dispute between R.T.B.H. and the general contractor, R.T.B.H. sued Simon alleging that there was a valid mechanic’s lien on the property.
The court held that Simon did not actively consent to the mechanic’s lien because it had no interaction with the general contractor or subcontractor, reviewed the construction plan for design intent and criteria compliance only, and received no direct economic benefit from the construction. The fact that the building would revert to Simon upon completion of the lease was not a factor because that event would happen anywhere “from twenty to fifty years in the future, [and could not] be fairly construed as a primary bargained-for purpose of the lease or a direct benefit to Simon.” The court concluded that “it is Dick’s, not Simon, who currently is enjoying the direct benefit of the construction performed by [R.T.B.H.].”
What should a property owner consider?
Property owners often have legitimate reasons for wanting to monitor and control tenant construction projects and, in some instances, these reasons might trump any concerns relating to a mechanic’s lien. That said, property owners should be aware that the more involved they are in the process, the more likely it is that a court will find the active consent necessary to allow a mechanic’s lien to be placed on their property (as opposed to just the tenant’s leasehold interest in the property). While weighing these competing interests, property owners should consider the following to reduce the likelihood that active consent will be found:
What should a contractor consider?
limit direct contact with the contractor;
leave contract negotiations with the contractor to the tenant;
require that the tenant enter into the construction contract and make all payments under said contract (no payments by property owner);
include language in the lease stating that the property owner’s knowledge of or credits towards any build-out work does not constitute active consent for the purposes of allowing a mechanic’s lien to attach to the property;
limit construction plan reviews to technical matters, design intent, and criteria compliance;
limit contribution of money or materials to the construction project; and
limit oversight and supervision to perfunctory matters.
Whenever possible, contractors should do what they can to ensure active consent by the property owner. To this end, contractors might consider the following to increase the likelihood that active consent will be found:
What is the take away?
seek to contract directly with the property owner;
if a contract with the property owner is not possible, seek the property owner’s written consent for the work in the construction contract;
keep records of any direct contact with the property owner;
ensure that the construction work provides the property owner with a direct benefit;
keep records of any payments received from the property owner; and
send key plans and documents to the property owner.
Property owners and contractors should be aware that their behavior towards each other in a build-out situation can impact the enforceability of a mechanic’s lien should a tenant fail to pay for the work. While there is no clear-cut definition of active consent under Indiana law, property owners concerned about build-out related mechanic’s liens can reduce the likelihood of a lien attaching by limiting their interaction with the contractor and the construction process. Likewise, contractors can increase the likelihood of having an enforceable lien by engaging the property owner and securing their consent to the work at the beginning of the process.
This article is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.
Gary Dankert and Jason McNiel are partners with Ice Miller LLP. Ice Miller's construction practice (www.icemiller.com/construction/) is ranked as a National Tier 1 Practice in U.S. News & World Reports' Best Law Firms. Dankert practices construction law with a focus on assisting clients in preparing and negotiating construction and design contracts as well as handling construction disputes. McNiel is a litigator focusing on real estate litigation, eminent domain, and zoning/land-use matters. Dankert can be reached at email@example.com or (317) 236-2203 and McNiel can be reached at firstname.lastname@example.org or (317) 236-2300.