September 21, 2018
Author: Charles \"Chuck\" P. Young
Organization: Emmanuel, Sheppard & Condon
EQUITABLE LIENS AND CONSTRUCTION LENDER RESPONSIBILITIES.
A. Unjust Enrichment Claims.
In certain very limited circumstances, Florida case law allows a person providing materials and/or labor which benefit a property owner to pursue an unjust enrichment claim against the owner and/or the owner's property. As a general rule, a lienor may not, however, use an unjust enrichment theory to avoid such lienor's failure to comply with the requirements of the lien law.
As outlined above, the lien law provides specific time deadlines which must be met in order to properly perfect a lien, and pursue the foreclosure of same. If a lienor fails to comply with the statutory requirements necessary to have a lien, and therefore loses its lien rights, Florida courts will not normally reward such failure through the allowance of an unjust enrichment claim. If, however, someone has supplied labor and materials for the benefit of a landowner and his property, under circumstances where such individual does not have a right to claim a lien, then under the equitable theory of unjust enrichment, a claim against the owner and/or the owner's property may be allowed. For example, a contractor improving leased property where the lease prohibits a lien against the lessor's interest in the property, may be entitled to an equitable lien against the lessor's interest if the contractor can establish that the work unjustly enriched the Owner.
B. Estoppel Claims.
Another theory under which someone supplying materials or labor which benefits an owner's property may in certain circumstances make a claim against the owner or his property, is under the theory of estoppel. As with a n unjust enrichment claim , case law in Florida generally will not recognize a claim of an equitable lien on the basis of estoppel, where the lienor has voluntarily or through negligence failed to pursue the perfection of its lien rights. In certain limited situations, however, where an owner has made representations or promises to a lienor regarding payment, which representations or promises have been relied upon by the lienor to its detriment, then an action based on estoppel may lie in favor of the person against the owner.
C. Undisbursed Loan Proceeds.
Most private construction projects in the State of Florida, as elsewhere, are funded through construction loans from lenders. Lenders will routinely take a first mortgage on the property being improved, which mortgage is recorded prior to the Notice of Commencement for the project. The lender, therefore, has priority over all liens which might be recorded against the project. In instances where there is a default on the part of the owner under the construction loan, many times there is also a default on the part of the owner in failing to pay the contractor which results in subcontractors and suppliers not being paid. A foreclosure on the part of the lender may follow, which in most instances will extinguish any liens filed by the contractor, subcontractors or suppliers.
Notwithstanding such foreclosure on the part of the lender, which extinguishes the construction liens, unpaid lienors may in certain instances make an equitable claim against any retained or undisbursed construction funds held by the lender. Under this unjust enrichment theory, courts have held that where a lender has received the benefit of the value of the improvements constructed with the loan proceeds, the lender should not also receive a windfall of being entitled to retain undisbursed loan proceeds.
Such unjust enrichment claims brought by lienors against a construction lender are most successful in instances where the project has been completed, but the loan proceeds not fully disbursed. In instances where the lender forecloses on a partially completed project, and has to step-in and complete the project, it is many times more difficult to establish that the lender has in fact been unjustly enriched to the detriment of the original contractor and/or subcontractors.
D. Florida Statutory Provisions.
§713.31(1), Florida Statutes, provides a remedy to a lienor against the owner should the owner by fraud or collusion deprive or attempt to deprive the lienor of benefits or rights to which such lienor is entitled under the lien law of the State of Florida. Under this provision, a statutory cause of action is provided to a lienor against an owner where the owner provides false affidavits, invoices, worthless checks, statements, or written instruments to the detriment of the lienor. Such statutory cause of action can include a request for a temporary and permanent injunction, as well as an accounting, in addition to other appropriate legal or equitable remedies. Under the statute, a lienor is not required to establish irreparable damage, nor that he has an inadequate remedy otherwise at law.
E. Construction Trusts.
Under §713.345, Florida Statutes, anyone who receives any payment on account oPersons entitled to construction liens.
Florida Statutes § 713.01(17) identifies six categories of potential "lienors." They are:
Material suppliers who contract, with the owner, a contractor, subcontractor or a sub-subcontractor; and Professional lienors.
a. Definition: "A person other than a materialman or laborer who enters into a contract with the owner of real property for improving it, or who takes over from a contractor as so defined the entire remaining work under such contract. The term 'contractor' includes an architect, landscape architect, or engineer who improves real property pursuant to a design-build contract authorized by 489.103(16)." Fla. Stat. §713.01 (8).
1. "Direct contract" is defined as "a contract between the owner and any other person." Fla. Stat. §713.01(9).
2. "Owner" is defined as "a person who is the owner of any legal or equitable interest in real properly, which interest can be sold by legal process, and who enters into a contract for the improvement of the real property. The term includes a condominium association pursuant to Chapter 718 as to improvements made to association property of common elements. The term does not include any political subdivision, agency, or department of the state, a municipality, or other governmental entity." §713.01(23).
3. §489.103(16) is the section of the construction industry licensing statutes dealing with when a design professional such as an architect or engineer may properly act as a "contractor" in design-build contracts.
b. A traditional "subcontractor" is nevertheless considered to be a contractor if their contract is directly with the owner.
c. Further, there may be multiple "contractors" on a project, and the fact that an owner is even performing some tasks itself will not turn one with a direct contract into a "subcontractor."
d. In short, the key to being a "contractor" under the lien law is having a direct contract with the owner (or lessee) of the property.
2. Subcontractors and Sub-subcontractors.
a. Statutory definitions:
1. A "Subcontractor" is "a person other than a materialman or laborer who enters into a contract with a contractor for the performance of any part of such contractor's contract, including the removal of solid waste from the real property. The term includes a temporary help firm as defined in §443.101." §713.01(28).
2. A "Sub-subcontractor" is” a person other than a materialman or laborer who enters into a contract with a subcontractor for the performance of any part of such subcontractor's contract including the removal of solid waste from the real property." §713.01(29).
b. A subcontractor or sub-subcontractor who performs work which
is not within the scope of the contractor's direct contract may
not be entitled to a lien for that work since the only lienable services are those which are for a "part of such contractor's [or subcontractor's] contract."
a. Statutory Definition: A "laborer" is any person other than an architect, landscape architect, engineer, surveyor and mapper, and the like who, under properly authorized contract, personally performs on the site of the improvement labor or services for improving real property and does not furnish materials or !labor service of others. §713.01(15) (2003).
b. A "properly authorized contract" means simply a Contractual relationship between the person claiming to be a "laborer" and the owner, contractor, subcontractor, sub-subcontractor or materialman on the project.
c. Laborers are NOT required to serve a Notice to Owner in order to have an enforceable lien.
a. Statutory Definition: A "materialman" is "any person who furnishes materials under contract to the owner, contractor, subcontractor, or sub- subcontractor on the site of the improvement or for direct delivery to the site of the improvement or, for specially fabricated materials, off the site of the improvement for the particular improvement, and who performs no labor in the installation thereof." §713.01(19).
b. Note that a materialman must have a contract with a contractor, subcontractor, or sub-subcontractor. Thus, a material supplier to a material supplier would not be entitled to a lien.
c. A material supplier who sells, materials "'over the counter" and not specifically designated for delivery to a particular project may not have a lien on the project, despite ultimate incorporation of the materials into 'the project.
5. Professional Lienors.
a. A "professional lienor" includes architects, landscape architects, interior designers, engineers, and surveyors and mappers. Fla. Stat. §713.03(1).
b. Statutory Definitions:
1. An "architect" is "a person or firm that is authorized to p ractice" architecture pursuant to chapter 481 or a general contractor who provides architectural services under a design-build contract authorized by §481.229(3),"
2. An "engineer" is "a person or firm that is authorized to practice engineering pursuant to chapter 471 or a general contractor who provides engineering services under a design-build contract authorized by §471.003(2)G)."
3. "Landscape architect," "interior designer," "surveyor" and "mapper" are not defined by the construction lien law.
"Design-Builders" are entitled to lien rights either as a contractor, or as a professional architect or engineer.
7. Construction Managers.
There is no provision in the lien law for lien fights for "construction managers" and so such a person's lien rights would have to fit within one of the other definitions, e.g. "contractor" or "professional." This may ultimately depend upon what services are called for and how they are described in the agreement between the owner and the construction manager.
B. Lienable services and materials.
1. Improvement of real property.
a. To be lienable, the labor, services or materials supplied, must have been used in the "improvement" or real property. EXCEPTION: Architects and engineers who are contracting directly with the owner have lien rights for their services REGARDLESS of whether the property is actually improved.
b. "Improve" means to build, erect, place, make, alter, remove, repair, or demolish any improvement over, upon, connected with, or beneath the surface of real property, or excavate any land, or furnish materials for any of these purposes, or perform any labor or services upon the improvements, including the furnishing of carpet or rags or appliances that are permanently affixed to the real property and final construction cleanup to prepare a structure for occupancy; or perform any labor or services or furnish any materials in grading, seeding, sodding, or planting for landscaping purposes, including the furnishing of trees, shrubs, bushes, or plants that are planted on the real property, or in equipping any improvement with fixtures or permanent apparatus." §713.01(14).
c. "Hard wiring" of a kiosk in a shopping mall is not an "improvement" where the kiosk is not of a "permanent benefit" to the mall.
d. Maintenance landscaping service does not constitute an "improvement." However, landscaping which involves planting of trees and shrubs would constitute an "improvement."
e. Unless an item is specially fabricated, or constitutes normal wastage in course of construction, or is used in building the improvement such as tools or equipment, materials furnished must be actually incorporated into the improvement.
2. Real property.
To be lienable, the labor services or materials must have been furnished to improve "real property," which is defined in the lien law as "the land that is improved and the improvements thereon, including fixtures, except any such property owned by the state or any county, municipality, school board, or governmental agency, commission, or political subdivision." §713.01(25) (2003).
3. Furnishing materials.
a. To "furnish materials" is defined in the lien law as follows: [to] supply materials which are incorporated in the improvement including normal wastage in construction operations; or specially fabricated materials for incorporation in the improvement, not including any design work, submittals, or the like preliminary to actual fabrication of the materials; or supply materials used for the construction and not remaining in the improvement, subject to diminution by the salvage value of such materials; and includes supplying tools, appliances, or machinery used on the particular improvement to the extent of the reasonable rental value for the period of actual use (not determinable by the contract for rental unless the owner is a party thereto), but does not include supplying hand tools. The delivery of materials to the site of the improvement is
prima facie evidence of incorporation of such materials in the improvement." §713.01(13).
b. As noted in the statute, the delivery of materials to the job site is prima facie evidence of incorporation of such materials.
c. However, an "over the counter" sale or delivery to the contractor's warehouse will not sustain this burden of proof.
d. Once delivery to the job site is established, the burden of proof shifts to the owner to show that the materials were diverted from the improvement, or were never actually incorporated therein. If the owner shows the materials were never incorporated, the lienor’s foreclosure action is defeated.
4. Subdivision improvements.
a. Under §713.04, a lienor, regardless of privity, who performs services or furnishes materials to improve real property to make it suitable as a site for the construction of an improvement is entitled to a lien. Types of services or materials which are included with "subdivision improvements" include: grading, leveling, excavating, filling, paving of streets, curbs and sidewalks, drainage; and pipes and conduits for utilities, and the repair of any of these items. §713.04(1).
b. When "subdivision improvements" are made to abutting public property by private owners as a result of governmental requirements, the person performing such work is entitled to a lien against the public property as well as the private land.
c. Lienors for subdivision improvements are not required to serve a "notice to owner." Fla. Stat. §713.04. Consequently, the issue of whether a 1ienor has furnished subdivision improvements or not is critical when a non-privity lienor has failed to serve a notice to owner. However, if a lienor performing subdivision improvements serves a notice to owner, they are treated like all other lienors who are required to serve such notices.
5. Specially fabricated materials.
a. Normally, materials furnished to a construction project must be actually incorporated into the "improvement" to be lienable. However, if materials are specially fabricated for that particular project, a lien may be claimed for them, even though never incorporated into the real property. §713.01(12).
b. "Design work, submittals, or the like preliminary to actual fabrication of materials" is not encompassed in "furnishing" specially fabricated materials. In other words, to have a lien for specially fabricated materials, the actual fabrication process must be underway.
c. Materials which are simply "specially ordered" or could be used elsewhere, they do not qualify as specially fabricated materials. The materials must have little or no value if not used for the particular improvement.
d. If the materials are not used, the reasons for their not being used must come from the owner in order to preserve a lien for such materials.
6. Extras and change orders.
a. A lien may also be claimed for work which is outside the scope of the original direct contract(s), if such work qualifies as an "extra or change order" because extras or change orders are deemed to increase the "contract price."
b. "Extras or change orders" are defined as "labor, services, or materials for improving real property authorized by the owner and added to or deleted from labor, services, or materials covered by a previous contract between the same parties." The key is authorization by the owner.
c. If work which a lienor performs is outside the original scope of their contract, but is not an "extra or change order" then the work is not lienable. Thus, if extra work is being performed, the better practice is always to document such extra work to preserve lien rights as to such work. However, work performed essentially as a volunteer, without authorization or direction from the owner will not qualify as an "extra or change order."
d. The test for determining whether "extras" are lienable is whether the work was performed in good faith, within a reasonable time, and pursuant to the terms of the contract, and whether the work was necessary to finish the job.
7. Delay damages.
Unless some provision is made for them in the contract, it is improper to claim a lien for any delay damages incurred by the lienor.
8. Finance Charges. Finance charges may be included in a lien if provided in the lienor’s contract.
9. Substantial performance.
a. A lienor who has fully performed its contract is entitled to a lien for the full contract amount.
b. A lienor who has "substantially performed" its contract, is entitled to assert its lien for the full amount of its contract.
1. Substantial performance of a contract is that performance of the contract which, although less than full performance, very nearly is equivalent to that which was bargained for.
2. A lienor who has substantially performed is entitled to collect the contract price less the cost to the owner of repairing deficient or defective work and less other damages sustained by the owner as a result of the contractor's failure to perform completely.
3. The doctrine is not applicable when a contractor materially or intentionally has breached the terms of the contract.
4. A contractor who has not substantially performed a material part of its contractual responsibilities, without waiver or excuse, may not be entitled to a construction lien.
5. If a lienor is prevented from substantially performing its contractual responsibilities or is improperly terminated, the lienor is entitled to assert a lien for either its contract damages (i.e. a reasonable profit plus actual costs and expenses of his materials, labor or services in partial performance), or for quantum meruit, (the reasonable value of his labor or services).
10. Professional lienors.
a. A professional's lien may be claimed for their professional services in improving real property, supervising others in the improvement of real property, even if the property is not actually improved.
b. The professional services, though, must be "rendered in. accordance with his or her contract and with the direct contract."
c. Service as an expert witness in a construction dispute does not qualify the professional for a lien. Such services are not "directed to the ultimate improvement of real property" and therefore not lienable.
11. Unlicensed persons.
a. Fla. Stat. §713.02(7) provides that "notwithstanding any other provision of [the construction lien law]..., no lien shall exist in favor of any contractor, subcontractor, or sub-subcontractor
who is unlicensed as provided in §489.128 or §489.532."
b. Similarly, services by a professional who is not licensed in the State of Florida are not lienable.improving real property must apply such portion of any payment to the payment of all amounts then due and owing for services or labor which were performed on, or materials which were furnished for, such improvements prior to receipt of the payment. A knowing or intentional violation of this provision carries both criminal and civil penalties.
In addition, under §713.346, Florida Statutes, any person who receives a payment for constructing or altering improvements to real property, must pay, in accordance with the contract terms, the undisputed contract obligations for labor, services, or materials provided on account of such improvements. Violation of this "prompt pay" provision makes available a fast track procedure for an unpaid person, and allows an accounting, temporary injunction, pre-judgment attachment, and other legal or equitable remedies, including attorney's fees.
Neither §713.345, nor §713.346, require, however, payment to be made when there is a bonafide dispute regarding payment between the parties involved.