What Happens to Your Payment Rights When the Property Changes Hands in the Middle of a Project?

Mechanics lien laws are different in every state, but there are some aspects of lien law that are universal. One universal requirement is that the property owner will need to be identified (after all, a lien is a charge on their property).

When phrases like “owner or reputed owner” are present, they broaden this requirement. So when there’s a mistake of ownership, the mistake may not always be fatal. When a statute does not provide for a “reputed owner,” though, improperly identifying an owner could kill a lien claim. However, there may still be wiggle room.

Struggling to find an owner? We’ve got posts on How to Find The Property Owner, Why Can’t I Find The Property Owner? (in California), and How to Send Notice When You Don’t Know Who The Owner Is.

Finding a Property Owner

In Wisconsin, certain parties must send preliminary notice (we’ve got the details here). When required, the owner must receive preliminary notice from a potential claimant before a lien may be properly filed. But what happens when ownership changes during the course of the project?

When work begins and ownership changes before the lien process begins, things get hairy. If the claimant actually knows that the property has changed hands (which is called “actual notice”), they will be required to send required documents to the new owner. When actual notice is not present, though, a lien claimant still may need to send documents to the new owner if constructive notice of the change in ownership is present.

Wait, What’s Constructive Notice?

Glad you asked! The appellate court in Bayland Buildings, Inc. v. Spirit Master Funding VIII, LLC recently did the same.

For the sake of keeping things short, let’s let the court speak for itself:

“‘Constructive notice’ is a policy determination which ‘under certain circumstances’ treats a person or entity as if it had actual notice.”

That’s a good start…

“Constructive notice exists when a person without knowledge of a fact is subjected on grounds of public policy to knowledge of that fact, as well as the liabilities associated with that knowledge.”

Ok, we may be going in the wrong direction…

“The law assumes that if the person had exercised a reasonable degree of care he would have acquired the knowledge.”

Got it! A common way of expressing constructive knowledge is through the phrase “…knew or should have known.” When someone knew, that means actual knowledge was present. When someone should have known, the knowledge was constructive.

Keep in mind, different states will have different standards.

The Case

Bayland, a GC, was hired by Siren, the property owner, to build an improvement. One month after that contract was signed, Siren “conveyed” the property to Spirit Master Funding IX, LLC (“Spirit”). Prior to the conveyance, Siren and Bayland exchanged emails referring to Spirit as an investor. No language in the emails between Bayland and Siren indicated that Siren would be conveying the entire property to Spirit. There was also a modification made to Bayland and Siren’s warranty.

Fast forward to the completion of the project. Bayland claimed it was owed just over $485,000. When Siren refused to pay, Bayland filed a lien on the property (naming Siren as owner). Once Bayland found out that the property was owned by Spirit, Bayland filed an action against Spirit. At court, Spirit argued that Bayland had constructive notice about the property transfer (via the emails) and that the action should be dismissed. The court found for Spirit.

The Appeal

The appellate court disagreed. The court found that the emails and modification did not put Bayland on notice that Siren had no interest in the property following the “investment.” Bayland’s lien would have been proper if Siren had maintained any interest in the property, so the court looked to determine whether Bayland had actual or constructive notice (again, think “knew or should have known”) that Siren no longer owned any stake in the property.

Bayland knew that Spirit had taken on some interest in the project, but there was no way of knowing that Siren had conveyed all of its ownership interest. I’ll let the court do the talking again:

“The clear inference from the e-mails and modified warranty was that Spirit Master was going to invest in Siren’s project and that Siren was going to remain in some ownership capacity. We construe construction lien laws liberally, and we accept that a lien claimant does not lose its lien rights where the property is sold without notice.”

Takeaway

Finding a property owner can be tough. Seriously – we’ve written about it plenty (see the links at the top of this post). From P3 projects, to complex development agreements, to regular old construction deals, these problems are commonplace in construction. If an owner is intentionally being elusive, or if the owner just fails to properly communicate, it can feel impossible to keep track. That’s why it’s good to know the courts (well, at least in Wisconsin) will protect lien claimants in a situation like this.

Check out our Wisconsin Resources for more on Wisconsin’s construction payment laws.

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What Happens to Your Payment Rights When the Property Changes Hands in the Middle of a Project?
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What Happens to Your Payment Rights When the Property Changes Hands in the Middle of a Project?
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Finding a property owner can be tough when the property changes hands in the middle of a project. However, at least in Wisconsin, courts won't be lax when determining whether a party had constructive notice of the transfer.
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Lien Law News
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