Back to Basics: Tennessee Lien Law PART 3
In a continuing four-part series, LT Construction Lawyer Wally Irvin discusses the Tennessee Lien Law. Wally recently posted Part 1 of 4 on “Speaking the Lien Language” and Part 2 of 4 on “Lien on What?” Wally continues his examination of the Tennessee lien law.
Back to Basics: Tennessee Lien Law
POST 3 of 4 (Notice Requirements)
In the first two posts in this series, Speaking the Lien Language and Lien on What?, I discussed what terms mean under Tennessee lien law and the property to which the lien attaches. As you should know by now, Tennessee lien law provides a lien in favor of a lienor that performs work or furnishes materials to improve real property. In this post, I will address the extent of a lien in Tennessee and the notices that are required to assert the lien.
Extent of Lien
By performing work or furnishing materials in furtherance of an improvement to real property, Tennessee lien law grants a lienor a lien against the real property. The lien extends to, and only to, the owner’s right, title or interest in the real property and improvements on the real property existing at the time of the visible commencement of operations or thereafter acquired or constructed. Tenn. Code Ann. 66-11-105. Accordingly, as discussed in Lien on What?, if the “owner” of the property is a lessee, the lien extends only to the leasehold interest. For instance, commercial entities frequently lease the property on which they construct their business for a term of years, e.g., restaurants. When a contractor performs work for these owners, it is possible the lien attaches only to the leasehold interest (assuming the lessee is not held to be the owner’s agent). If the lease is for a thirty (30) year period, the only interest available to be sold to satisfy the lien, is the interest in the remainder of the lease. In contrast, if the owner holds the fee interest, the entire property may be sold in satisfaction of the lien.
Regardless of what interest the lien attaches to, the claims secured by lien for work, labor, materials, equipment, services, machinery, overhead and profit may not exceed the contract price and extras in the contract between the owner and the prime contractor. Tenn. Code Ann. §66-11-120. Further, a lienor may only assert a lien for the value of the improvement. A lien may not include any interest, service charges, late fees, attorney’s fees or any other amounts the lienor may be entitled to by contract or by law that do not result in an improvement to the real property. Tenn. Code Ann. §66-11-102(e). However, a lienor who is not in default but is prevented from completely performing under the contract is entitled to a lien for work performed in proportion to the total contract price. Tenn. Code Ann. §66-11-102(f). But, how does a lienor actually assert a lien under Tennessee lien law?
Obtaining a lien
A. Prime contractor
Tennessee lien law grants a lien in favor of prime contractors on any piece of real property upon which the prime contractor makes an improvement. Tenn. Code Ann. §66-11-102(a). A prime contractor’s lien depends only upon the existence of an improvement; therefore, a prime contractor is not required to provide any notice to the owner. The reason a notice is not required is that Tennessee courts presume the owner, who is in privity of contract with the prime contractor, knows of its failure to make payment in full. When the project is “complete” or “abandoned,” the prime contractor’s lien continues for one (1) year or until the final decision of any timely enforcement action (discussed in my final post). Tenn. Code Ann. §66-11-106.
B. Remote contractor
Before a remote contract may obtain a lien, the remote contractor must: 1) perform work or furnish materials in furtherance of an improvement; 2) furnish all required notices of nonpayment; and 3) serve a notice of lien, in writing, on the owner and prime contractor within 90 days after the completion of the project. Tenn. Code Ann. §66-11-115(a). Unlike a prime contract, who the owner knows has not been paid, a remote contract must provide the owner notice. The purpose of this notice is to allow the owner an opportunity to ensure the remote contractor is paid before the owner’s property is held liable for the debt. If the remote contractor is not paid after providing the owner notice, the remote contractor may then assert a lien for the unpaid contract price.
There are several important notice requirements that, in general, must be met to perfect a mechanics’ and materialmen’s lien. These include giving notice of lien rights on a residential project, notice of non-payment if the lien is claimed by a remote contractor, and a notice of lien. Each of these notices will be discussed in the following sections.
A. Notice of Nonpayment
Before a remote contractor may assert a lien, Tennessee lien law requires the remote contractor to serve a notice of nonpayment on the owner and the prime contractor. Tenn. Code Ann. §66-11-145. Remote contractors must serve a notice of nonpayment within ninety (90) days of the last day of each month within which the remote contractor performed work or furnished materials. The notice of nonpayment must contain:
- the name of the remote contractor or laborer and the address to which the owner and the prime contractor in contractual relationship with the remote contractor may send communications to the remote contractor;
- a general description of the work, labor, materials, services, equipment or machinery provided;
- the amount owed as of the date of the notice;
- a statement of the last date the claimant performed work and/or provided services or materials in connection with the improvements; and
- a description sufficient to identify the real property against which a lien may be claimed.
In CMT, Inc. v. West End Church of Christ, 1996 WL 64003 (Tenn. Ct. App. 1996), the Tennessee Court of Appeals examined the notice of nonpayment required by Tennessee lien law. The issue in CMT was whether the Act required a remote contractor to send a notice of nonpayment within the statutory time period for each month in which services or supplies were provided. The CMT court held the legislative history of the Act supported a construction that required multiple notices. Therefore, a notice of nonpayment must be sent to the owner of the real property within the statutory time period, currently ninety (90) days, from the end of each month in which the remote contractor provides labor or materials and is unpaid. Accordingly, if a remote contractor performs work each month on a one-year project, but is not paid for the work performed in January, May or July, the remote contractor cannot simply provide one notice in August regarding the entire unpaid balance. Instead, at least two notices are required. The first, pertaining to the work in January, must be sent within 90 days of the last date in January. Therefore, the remote contractor must send the initial notice by May 1.
Despite the holding in CMT, most construction attorneys believe one notice may cover multiple months, provided the notice is sent within 90 days of the last day of the first month to which the notice applies. Accordingly, a single notice could cover the work performed in May and July, provided the notice is sent within 90 days of the last day in May, August 29. Because the remote contractor provided timely notice, albeit in a single notice of nonpayment, the remote contractor satisfied the statutory purpose of providing timely notice. Thus, the Tennessee Supreme Court would likely allow the remote contractor to claim a lien for the entire amount in this situation.
Tennessee lien law states a remote contractor who fails to provide a notice of nonpayment in compliance shall have no right to claim a lien. Tenn. Code Ann. §66-11-145(b). As indicated in the example pertaining to the second notice above, timing is everything. It is imperative that remote contractors forward notices of non-payment for each month in which labor is performed or materials are furnished and that those notices are timely.
In Vulcan Materials Co. v. Gamble Construction Co., 56 S.W.3d 571 (Tenn. Ct. App. 2001), the Tennessee Court of Appeals dealt with the additional issue of whether a notice of nonpayment could be delivered by hand delivery, as opposed to service by registered or certified mail, return receipt requested. A remote contractor argued hand delivery constituted super compliance with the statute and that hand delivery served the purpose of Tenn. Code Ann. §66-11-145; to provide an owner and prime contractor with notice that the remote contractor has not been paid, allowing the parties an opportunity to cure the nonpayment. The Vulcan Materials court, however, noted that the statute does not merely require notice, but, requires notice in a certain, express way.
Nevertheless, following revisions in 2007, Tennessee lien law now allows a party to serve any notice, including a notice of nonpayment, by any one of the following means:
- registered or certified mail, return receipt requested;
- hand delivery, evidenced by a sworn statement, properly notarized, confirming delivery; or
- any other commercial delivery service that provides written confirmation of delivery.
Thus, the dilemma faced in Vulcan Materials no longer impedes the enforcement of an otherwise valid lien.
Notice of Lien
A. Prime contractors
The lien of a prime contractor continues in existence for a period of one (1) year from the date the improvement is completed or abandoned; no written notice of lien is necessary to enforce the lien. Green v. Williams, 21 S.W. 520 (Tenn. 1893); Jonate v. Gill, 39 S.W. 750 (Tenn. Ct. App. 1897). Nevertheless, if the prime contractor does not provide notice to the general public, the lien will lose its priority as to subsequent encumbrances. The goal in asserting a lien is to preserve the lien’s priority as to other encumbrances. If a lien is recorded prior to another encumbrance (e.g., mortgage) or transferred, the lienor’s interest in the property is prior to the subsequent encumbrance or property interest. Accordingly, the lienor may sell the property and receive any proceeds notwithstanding the fact another party has an interest in the property.
To preserve the lien as to subsequent purchasers and encumbrances, a prime contractor must record a notice of lien in the Register of Deeds Office in the county where the real property lies within ninety (90) days after the improvement is completed or abandoned. Tenn. Code Ann. §66-11-112. By recording the notice of lien, the prime contractor puts the world on notice of the fact the property is encumbered by the prime contractor’s lien. Requirements of a prime contractor’s notice of lien are identical to the requirements of a remote contractor’s notice of lien.
B. Remote contractors
Unlike a prime contractor, remote contractors must provide a notice of lien to the owner and the prime contractor. Tenn. Code Ann. §66-11-115. Remote contractors must serve a notice of lien on the owner within 90 days after the project is completed or abandoned. Id. See also Cooper v. Hunter, 569 S.W.2d 852 (Tenn. Ct. App. 1978) (The statute of limitations for filing a notice of a mechanic’s lien begins to run when the subcontractor’s work is substantially complete). [Future posts will address the term “completion.” Note, however, that other Tennessee courts have found the term “completion” means 100% completion, not merely “substantial completion.”] However, the Act does not require remote contractors to wait to send notice until completion of the project. Remote contractors may serve notice at any time after completion of their scope of work. The fact the remote contractor serves notice before completion of the project will not render the notice premature. Bassett v. Bertorelli, 22 S.W. 423 (Tenn. 1893).
A notice of lien must contain the amount due, a description of the work performed or the materials furnished and a description of the real property upon which the lien is claimed. Tenn. Code Ann. §66-11-115. The notice must also contain a sworn statement that verifies the amount due and the property description. In re Viking Co., 389 F. Supp. 1230 (E.D. Tenn. 1974).
The Act does not require a lienor to describe the property in any specific form. A lienor must only describe the property in a way to allow a person of ordinary intelligence to identify the property on which the lien attached. If a lienor fails to particularly describe the property or makes a mistake in the property description, the lienor may correct the error through an amendment to the notice of lien, provided the lienor amends the lien within the time frame allowed for serving the lien. Tenn. Code Ann. §66-11-119;Southern Blow Pipe Roofing Co. v. Grubb, 260 S.W.2d 191 (Tenn. 1935).
A remote contractor’s lien continues for a period of ninety (90) days from the date of the notice and until the termination of any suit brought within that period for enforcement. Provided the remote contractor complies with requirements for notices of nonpayment, the filing of an action and proper service of process within the statutory time constitutes sufficient notice of lien.
C. Form of notice of lien
Lienors should draft a notice of lien in the form of an affidavit, describing the property, the work performed or the materials furnished and the amount owed. The lienor must swear to the statement and should have their signature acknowledged by a notary. Because a notice of lien is not legal process, the notice of lien may be served by any person or by registered or certified mail. Tennessee lien law also allows a lienor to serve the notice of lien through a commercial delivery service, provided the delivery service furnishes written confirmation of delivery. To aid lienors, statutes under Tennessee’s lien law provide a form notice of lien, which is found below:
Notwithstanding the fact Tennessee lien law provides a form notice of lien, I along with the other Tennessee Construction Lawyers highly recommend any contractor seek legal counsel prior to asserting a lien to ensure all of the statutory requirements are met. Tennessee lien law contains numerous traps, any one of which could invalidate the lien and leave the lienor without recourse. But, if a lienor provides the required notices, the contractor will be in a position to take the next steps to actually enforce the lien, which I will address in my final Back to Basics: Tennessee Lien Law post.
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