Wang Electric v. Smoke Tree: Liens and Leasehold Improvements
When a commercial tenant contracts for construction work, it creates a complicated situation for subcontractors and their mechanics’ liens
It is rare that a construction lawsuit raises multiple useful lessons for contractors in protecting
their payment rights, but Wang
Electric v. Smoke Tree Resort did just
This article appeared in the November 2012 issue of "The Construction Advisor"
published by Lang & Klain, P.C.
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The 2012 Arizona Court of Appeals case, which was
complicated and confusing even by a construction lawyer’s standards, can be
summarized in part as follows:
Reasonable Time in Serving a Lien. A
must be served within a reasonable time after it is filed. Surprisingly, in Wang
Electric the court considered a 90-day delay to be reasonable but cautioned that
“reasonableness” should be determined on a case-by-case basis.
Without clear time limits, a subcontractor filing a mechanics’
lien should serve copies on every appropriate party as soon after filing the
lien as time permits.
Liens against the Tenant and Owner.
When work is initiated by a tenant, a
mechanics’ lien is effective against the property owner only if the tenant is an
“agent” of the owner. In this case, the tenant was determined to be the owner’s
agent, and the court ruled that service on one was the same as service on the
Since agency relationships are not necessarily clear,
whenever a situation calls for a mechanics’ lien, the lien claimant should serve
the pre-lien on both the tenant and the owner and sort out the agency issues
Too Many Liens?
Subcontractors and suppliers are allowed to “cover their bases” by serving
takeaway: When in doubt as to who to
serve your pre-lien on, it is better to serve too many parties than too few.
Liens against Tenant Improvements.
A mechanics’ lien that is recorded solely
against a tenant’s interest in tenant improvements can survive the lease’s
termination under certain circumstances (discussed below).
takeaway: If you are filing a mechanics’ lien against a leasehold improvement, and your
contract is with the tenant, you will want the tenant to be considered an
“agent” of the owner. A common example of agency is that the tenant is making
improvements at the direction of the owner.
Unjust Enrichment. In case your lien fails, you might be able to make an
unjust enrichment claim, but only if the owner did not pay the general
contractor or engaged in “dishonest conduct” (more below).
takeaway: An unjust enrichment claim is hard to win, and it is no substitute for properly
preserving and enforcing your mechanics’ lien rights.
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This case involves leasehold improvements at a site that long-time Phoenicians
will remember as Dale Anderson’s "The Other Place" restaurant at the Smoke Tree
Resort on Lincoln Drive.
In October 2007, the Smoke Tree leased the vacant restaurant space to REM on
Lincoln. The lease required REM to remodel the space, and Smoke Tree agreed to
reimburse REM for the first $840,000 in remodeling expenses.
REM hired KAI Designs to be the general contractor, and their contract called
for REM to make monthly progress payments to KAI.
KAI then directly subcontracted with Wang Electric, Aero Automatic Sprinkler
Co., Beecroft LLC, Adobe Paint, Adobe Drywall and other subcontractors.
Even though REM’s contract with Smoke Tree called for REM (the tenant) to pay
KAI (the general), and for Smoke Tree (the owner) to reimburse REM, Smoke Tree
paid the first $790,000 in construction costs directly to KAI.
In April 2008, the progress payments stopped, and unpaid
subcontractors filed mechanics’ liens on Smoke Tree’s property and/or REM’s
leasehold interest. Next, subcontractors filed lawsuits against Smoke Tree, REM,
KAI and, in some cases, other subcontractors. All six subcontractors sought
damages for breach of contract (against the general), sought to foreclose their
mechanics’ liens (against the owner and tenant) and, as a Plan B, claimed that
the owner and tenant had been unjustly enriched.
The waters were further muddied by the fact that, at some point during the
controversy, REM’s lease was terminated, exposing the owner to claims that
otherwise would have been focused on the tenant.
The ensuing flurry of claims, cross-claims, motions for summary judgment, etc.,
defies discussion in this simple article. However, while much of the Court of
Appeals’ opinion in this case is devoted to thorny legal questions, the judges
did raise some issues that have practical day-to-day importance to owners,
contractors, subcontractors and suppliers.
Serving a Mechanics’ Lien on the Owner
Arizona law (A.R.S. § 33-993) requires that a copy of a mechanics’ lien be
served on a property owner within a reasonable time after filing. Unfortunately,
the statute doesn’t define “reasonable time.” In Wang Electric, a mechanics’
lien was served on the owner three months after it was filed, and only as an attachment
to a complaint.
In response to the owner’s argument that three months was unreasonably long, the
Court of Appeals ruled that, in this case, 90 days was not unreasonable but
offered no standard for future notifications, stating that reasonableness should
be determined on a case-by-case basis.
As a practical matter, subcontractors should disregard the 90-day lag period
that the court allowed here. Rather, in the absence of clear time limits, a
subcontractor filing a mechanics’ lien should serve copies on every appropriate
party as soon after filing the lien as time permits.
Preliminary 20-Day Notice Requirements
As a general rule, on commercial projects it is wise to serve a
20-day notice (or “pre-lien”) on all responsible parties, including the property
owner or the owner’s agent.
However, when work is initiated by a
tenant, a mechanics’ lien typically attaches only to the leasehold interest and
tenant improvements. The property itself is subject to the lien only if the
tenant is found to be an “agent” of the owner. Since agency relationships are
not always clear, it is a good practice to serve the pre-lien on both the tenant
and the owner.
the owner (Smoke Tree) argued that a mechanics’ lien was invalid because the
subcontractor served a pre-lien on the tenant (REM) but not on the owner
directly. The court ruled that, in this case, the tenant was an agent of the
owner because the lease required the tenant to extensively remodel the property
in accordance with plans and specifications approved by the owner. Thus, for
lien purposes, service upon the tenant was the same as service upon the owner.
On a related issue, the owner challenged another mechanics’ lien on the grounds
that the subcontractor sent too many pre-liens. The sub had sent three pre-liens
– to the owner, to the tenant, and to an agent of the two parties. The court
rejected the owner’s challenge, noting that “a Laborer may ‘cover its bases’ by
serving multiple preliminary 20-day lien notices naming different owners and
reputed owners as long as such service is timely.” The moral is, when in doubt
as to who to serve your pre-lien on, better to serve too many parties than too
Mechanics’ Liens against a Terminated Leasehold Interest
When a commercial tenant contracts for construction work, it creates a complicated
situation with respect to the mechanics’ lien. As mentioned earlier, the
termination of REM’s lease exposed Smoke Tree to claims that normally would have
been aimed at the tenant.
In Wang Electric, all of the subcontractors except one had lien rights
against the owner’s interest because the tenant was ruled to be an “agent” of
the owner. The exception, Adobe Drywall, had lien rights only against the
leasehold estate. That became a problem when the tenant’s lease was terminated.
Adobe Drywall argued that, despite the lease termination, it still had a right to
claim a lien against the improvements that REM left behind. The court found that
a mechanics’ lien, recorded solely against a tenant’s interest in improvements
made to a leased property, will survive the lease’s termination if:
the landlord does not have an ownership interest in the improvements; or
the landlord does have an ownership interest in the improvements, but the
tenant acted as the landlord’s agent in contracting with the party filing the
If you are filing a mechanics’ lien against a leasehold improvement, and
your contract is with the tenant, you will want the tenant to be considered an
“agent” of the owner. Again, that occurs
most often when the owner directs the tenant to make improvements.
Claims of Unjust Enrichment as an Alternative to a Lien Claim
When a mechanics’ lien does not hold up, it is not uncommon for the lien
claimant to fall back on an “unjust enrichment” argument. Such was the strategy
of some subcontractors in the Wang Electric case. In reviewing those claims, the
court noted that unjust enrichment cases “fall into two categories: ones in
which the owner has fully paid the general contractor and ones in which the
owner has not.” The court went on to affirm that:
“[R]ecovery under ... unjust enrichment is not available in the former category,
because the owner is not unjustly enriched if it fully paid its obligation. But
when the owner has failed to fully pay its obligation ... recovery for unjust
enrichment is available."
Historically, in Arizona, an unjust enrichment claim had to meet five
a connection between the enrichment and impoverishment,
the absence of justification for the enrichment and impoverishment, and
the absence of a remedy provided by law.
However, the Wang Electric court considered an additional component:
“[F]or a tenant's contractor to attach liability upon an owner of property under
an unjust enrichment claim, the contractor must be able to show that the
landlord has engaged in some form of improper, deceitful, or misleading
It is impossible to tell from the court’s opinion what exactly constitutes
“improper, deceitful, or misleading conduct,” and clarification will probably
require the arrival of another unjust enrichment claim at the Court of Appeals.
Thus, if your lien fails, an unjust enrichment claim may be your last hope
against the owner, but only if (1) the owner has not fully paid the general
contractor for the work performed, and (2) you can prove that the owner engaged
in dishonest conduct. However, you should assume that such a claim will be dicey
at best, and it is no substitute for Plan A (i.e., preserving and enforcing your
mechanics’ lien rights).