Back to Basics: Tennessee Lien Law
Post 1 of 4 (Speaking the Lien Language)
Arguably, the most important aspect of any construction project is not the construction itself but ensuring the contractor receives payment. If a contractor does not receive payment, the contractor may assert a mechanics’ and materialmen’s lien against the project and sell the underlying property to satisfy the debt. However, creating and enforcing a valid lien requires more than simply recording a lien in the local register of deeds office. Further, even if a contractor possesses a valid lien, the contractor must take affirmative steps to preserve and enforce the lien. The Tennessee lien law consists of more than 40 complex statutes. Accordingly, it is important to have at least a working understanding of how to perfect, preserve and enforce a valid lien claim.
Over the course of the next several weeks, Tennessee Construction Lawyers will review tips for avoiding traps of Tennessee’s lien laws from the contractor’s perspective and review the basics to allow a contractor to perfect and enforce a lien in Tennessee. In the coming weeks, Tennessee Construction Lawyers will also analyze Tennessee lien law from the owner’s viewpoint, reviewing applicable defenses and suggestions for discharging the lien.
What is a lien?
A lien is an encumbrance on the title to real property, converting the property into collateral to secure a debt owed to any person who improves the land. Shipley v. Metropolitan Life Ins. Co., 158 S.W.2d 739, 741 (Tenn. Ct. App. 1941). The Act provides what gives rise to a lien, who is entitled to assert a lien and what property is subject to the lien. The Act also sets forth the procedure for acquiring, perfecting and enforcing a lien.
A lien is perhaps the strongest weapon available to contractors in demanding payment. Because an action to enforce a mechanics’ and materialmen’s lien is an in rem action, a judgment validating a lien acts as a judgment against the land. Thus, a contractor may sell the underlying property to satisfy the judgment. Because the lien encumbers the underlying property, the owner must take steps to remove the encumbrance, or post a bond to release the lien, prior to obtaining financing or transferring the property to a subsequent purchaser.
Talking the talk
Before diving into the Tennessee lien law, it is important to understand the meaning of important terms. Although the definitions for some terms track their common meaning, the Tennessee lien law includes additional definitions for each term that may affect, to some extent, the validity or enforceability of a lien.
A lien encumbers real property upon which a person makes an improvement, but only to the extent the person who improved the property is not paid. Thus, the lien in Tennessee can never exceed the contract price. Tenn. Code Ann. §66-11-120. The Contract Price is the amount the contracting parties agree a person will be paid for performing work or furnishing material in furtherance of an improvement to the property, increased or diminished by the price of extras or breach of contract, including defects in workmanship or materials. Tenn. Code Ann. §66-11-101(2). If the contracting parties do not agree to a price, the contract price is equal to the reasonable value of the work or materials. Id.
Tennessee lien law provides a lien in favor of any person who improves real property. Tenn. Code Ann. §66-11-102(a). A Lienor, therefore, is any person who has the right to claim a lien. Tenn. Code Ann. §66-11-101(7). The term lienor encompasses general contractors, subcontractors and suppliers, regardless of tier. Nevertheless, Tennessee lien law distinguishes between those contractors who have a contract with the owner of the underlying property and those who have a contract with another contractor. A Prime Contractor is a person who is in direct privity of contract with an owner, or the owner’s agent, of the improvement. Tenn. Code Ann. §66-11-101(12). In contrast, a Remote Contractor is a person who enters into a contract with a person other than an owner or the owner’s agent. Tenn. Code Ann. §66-11-101(14). The Act defines the Owner is defined to include: 1) the owner in fee, or of a less estate, of the underlying real property; 2) a lessee for a term of years; 3) a vendee in possession under a contract for the purchase of real property; and 4) any person who has any right, title or interest, legal or equitable, in real property, that may be sold under process. Tenn. Code Ann. §66-11-101(8).
A Contract is any agreement for improving real property, written or unwritten, express or implied. Tenn. Code Ann. §66-11-101(8). The contract also includes any extras and changes authorized by the owner but not included in a prior contract. Tenn. Code Ann. §66-11-101(3). Most importantly, a lienor may obtain a lien regardless of whether the lienor’s contract is oral or written, formal or informal.
To obtain a lien, a lienor must either perform work or furnish materials in furtherance of the improvement. An Improvement is broadly defined to include the result of any action or any activity in furtherance of:
1) constructing, erecting, altering, repairing, demolishing, removing, or furnishing materials or labor for any building, structure, appurtenance to the building or structure, fixture, bridge, driveway, private roadway, sidewalk, walkway, wharf, sewer, utility, watering system, or other similar enhancement, or any part thereof, on, connected with, or beneath the surface;
2) the drilling and finishing of a well, other than a well for gas or oil;
3) the furnishing of any work and labor relating to the placement of tile for the drainage of any lot or land;
4) the excavation, cleanup, or removal of hazardous and nonhazardous material or waste from real property;
5) the enhancement or embellishment of real property by seeding, sodding, or the planting on real property of any shrubs, trees, plants, vines, small fruits, flowers, nursery stock, or vegetation or decorative materials of any kind;
6) the taking down, cleanup, or removal of any existing shrubs, trees, plants, vines, small fruits, flowers, nursery stock, or vegetation or decorative materials of any kind then existing; excavating, grading or filling to establish a grade;
7) the work of land surveying, as defined in § 62-18-102;
8) the performance of architectural or engineering work, as defined in title 62, chapter 2, with respect to an improvement actually made to the real estate, except for one or two-family detached unit homes.
Tenn. Code Ann. §66-11-101(5); Tenn. Code Ann. §66-11-102(c)(3).
Most of the work that constitutes an improvement is self-explanatory; however, the phrase “Furnish Materials” deserves some discussion. A lienor furnishes material by supplying materials that are intended to be, and are, incorporated in the improvement. Tenn. Code Ann. §66-11-101(4)(a)(i). However, a lienor may furnish materials even if the materials are not used into the improvement. If a lienor specially fabricates materials for use in the improvement and the materials are not readily resalable, the lienor furnishes materials regardless of whether the lienor delivers the materials to the project site. Tenn. Code Ann. 66-11-101(4)(a)(iii). Nevertheless, regardless of whether the materials are specially manufactured, the delivery of materials to the site of the improvement is prima facie evidence of their incorporation in the improvement. Tenn. Code Ann. §66-11-101(4)(b).
In the next 3 posts, Tennessee Construction Lawyers will review more of the Tennessee lien law and discuss what property is subject to a lien, what is required to preserve and assert a lien and the steps necessary to enforce the lien to ultimately receive payment.