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Construction Concepts Tip #5: Developer Protection Against Tenant-Improvements

Before Contracting to Lease Commercial Space, Be Sure to Protect the Property Against Potential Liens

As multiuse high-rises and commercial buildings are once again springing up in areas of Downtown, Brickell, and Midtown Miami, restaurant, retail, and other commercial-use spaces continue to dominate the street-level landscape.  For developers and owners of these New Miami structures, the income from leases of ground-floor spaces is critical to the overall profitability of the building.  Chic restaurants, inviting cafés, and modern banking centers, among other commercial tenants, are taking advantage of the residential surge in Miami and landlords are reaping the benefits.

But as the visual appeal of Miami’s new restaurants and commercial spaces continues to impress patrons, the build-out costs for constructing the elaborate and often eye-catching interior décor and exterior façades for these spaces can be staggering.  If contractors and subcontractors are not timely paid for their contribution to the construction of the new space, they are going to look to the deepest pocket available in an attempt to recover their costs.  Thus, although the contactors are hired to work for the commercial tenant of the building, the first place they will look for recovery is against the building itself–in the form of a construction lien.

As any commercial developer is keenly aware, construction liens on multiuse and commercial structures are inevitable.  When the lien is for work and materials that were contacted for by a building tenant, however, it is critical that these liens not have any adverse impact on the building itself.  Indeed, Florida courts have held that when a commercial lease clearly anticipates the construction of tenant improvements, the landlord’s ownership interest in the property will be at risk for the cost of those improvements–unless statutory precautions are taken.

Florida law provides the sole mechanism for such protection against tenant build-out liens in section 713.10(2)(b) of the Florida Statutes.  Under this statute, a commercial landlord can protect the building against tenant-improvement liens through careful drafting of the lease and compliance with statutory-recording requirements.

First, the lease must include specific language prohibiting liability for tenant improvements.  Second, the owner must perform one of two required steps.

  1. the owner may choose to record a copy or memorandum of the lease in the Miami-Dade public records before a notice of commencement for the tenant’s construction is recorded (a document containing legally-required details about the project); or,
  2. record a notice, prior to the notice of commencement for the tenant’s project, that expressly includes the owner’s name, the legal description of the property, the specific language prohibiting tenant-improvement liability, and a statement that “all or a majority of the leases entered into for premises on the parcel of land expressly prohibit such liability.”

Florida courts have held that they are bound by a strict interpretation of section 713.10(2)(b).  Provided that the statutory notice and recording requirements are complied with, the landlord will not be liable for the tenant’s remodeling of the premises, and contractors will be forced to look to the tenant as the sole means for payment of construction costs.

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