New Lease Provisions to Avoid Liens

The Kentucky General Assembly recently wrapped up its 2023 Legislative Session. There was no movement on most of the bills that would have been detrimental to rental owners, but one bill was passed into law that is concerning. 

KRS 376.010 is known as the Mechanic's Lien Statute. You can read it here. It lays out the terms under which a contractor has the right to put a lien on real estate because he provided labor or materials to improve the property but was not paid for his work. Liens were available if the contractor provided the labor or materials under an agreement with the owner, a different contractor or subcontractor, architect, or an authorized agent of the owner. Tenants were not considered authorized agents of the owner. As a result, liens could not be placed on your property because the tenant hired a contractor to provide services, then failed to pay the contractor. But that may have changed.

The legislature unanimously passed 23RS HB 83, and the Governor signed it on April 6. It will take effect near the end of June 2023. You can read the bill in its entirety at this link. Here's what it does:

1. It adds "lessee" to the list of people whose contracts for labor or material can result in liens on the owner's property. In other words, if a tenant contracts to have labor or material provided to improve your property but doesn't pay the contractor, the contractor may put a lien on your property. That's not good.

2. Here's where it gets tricky. The next section states that a lessee is not an authorized agent of the owner unless the owner has designated in writing that the lessee is an authorized agent for the purposes of entering into contracts. Some will argue that this precludes a contractor from putting liens on property as a result of a contract with a tenant unless the owner has stated in writing that a tenant is an authorized agent. I do not think this is a correct interpretation. 

3. A later section states that "when improvements are made by a lessee in accordance with an agreement between the lessee and his or her lessor, the lien shall extend to the interest of the lessor." This section indicates that a tenant may put a lien on your property if you contract with the tenant to make improvements to the property, then don't pay the tenant for the work.

4. Section 3(b) of the new law provides some help, but the help is limited. It provides that if your lease states that your interest in the property "shall not be subject to liens for improvements made by the lessee", your tenant will be required to disclose that fact to the contractor, who could then void the contract at his (the contractor's) option. The question that remains to be answered is whether putting this language in your lease will avoid the lien. There's a good argument for that, because why else would the contractor be allowed to void the agreement with the tenant if not because he wouldn't have lien rights to the property if the tenant doesn't pay him? Still, this law would be much more tolerable if it had made it clear that such language in the lease removes the contractor's lien rights. I pushed for that language to be included, but the bill sponsors were not willing to include it.

So, what do rental owners and managers need to do as a result of these changes? Two lease provisions are needed, although they may be combined if you prefer.

1. "The tenant is NOT the authorized agent of the Owner and has no authority to enter into any agreements or contracts regarding the Owner or the Owner's property and has no authority to bind the Owner or the Owner's property."

2. "To the fullest extent allowed by law, the parties agree that the Owner’s interest in the leased premises shall not be subject to any liens for labor, material, or improvements of any kind pursuant to any contract between the Tenant and any third party. The Tenant agrees to indemnify the Owner against any and all such liens and the claims underlying any and all such liens, and to reimburse the Owner for any costs incurred as a result of any and all such claims or liens."

Are these provisions guaranteed to avoid liens on your property from contracts between tenants and contractors? No. But it's the best you can do right now. Stay tuned for more updates.

In the meantime, if you need help with a legal issue or want to check out my lease package, reach out to me at smarshall@tripleslaw.com or (859) 685-0035.