Legal Issues

Protection on Tenant Improvement Projects in Nevada

By Brian Pezzillo

Tenant improvements can be risky. While Nevada recently bolstered the rights of unpaid contractors, it is encumbant upon each contractor to proactively protect their interests.

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Tenant improvements pose unique problems for contractors. On the vast majority of private construction projects, an unpaid contractor may record a mechanic's lien and seek to foreclose that mechanic's lien against the owner. When dealing with a tenant, however, the contractor is performing work for one who only holds a lease interest in the subject property. The landlord, who is typically the owner of the real property, will likely seek to protect its interests by posting a Notice of Non-responsibility, thereby preventing a mechanic's lien from attaching to the real property. The contractor is then left with only the ability to foreclose against the lease.

In 2005 the Nevada Legislature sought to bolster the rights of contractors who remain unpaid after performing work on a tenant improvement. A lessee may not cause a work of improvement to be commenced unless a "notice of posted security" is recorded with the county recorder where the property is located.

When posting the security the lessee must fulfill one of two requirements:
1) Establish a construction disbursement account and: (i) fund the account in an amount equal to the total cost of the work; (ii) obtain the services of a construction control to administer the construction disbursement account; and (iii) notify each person who gives the lessee a notice of right to lien (preliminary notice) of the establishment of the construction disbursement account; or,

2) the lessee may record a surety bond in the amount of the prime contract. Again, the lessee must provide notice to each person who has given the lessee a notice of right to lien.

Accordingly, it is crucial that all contractors and sub-contractors who are providing labor and/or materials to the project provide a "Notice of Right to Lien" to the Lessee as this act triggers the duty for notice to be sent to the contractor. The "notice of posted security" itself provides a wealth of information to contractors as the following information must be included: Name and address of the lessee, the location of the improvement, the nature of the ownership interest held by the lessee in the property as well as the improvement. If a construction disbursement account is established the following information must likewise be included: The name and address of the construction control, the date the construction control was hired and the amount of funds placed in the construction control and the number of the construction control account (if any).

In the event that a surety bond is posted in lieu of the establishment of a construction control account the lessee must provide the name of the surety, the surety bond number, the date the surety bond was recorded in the county recorder's office, the book and instrument number of the recorded bond and a copy of the recorded surety bond.

These changes represent a significant departure from the past where contractors were often left unpaid and with no remedy available to them. It has historically been a common theme wherein a lessee would contract with a contractor to construct a tenant improvement in a shopping center or strip mall. The owner/lessor of the property would often times seek to protect its interest through the recording of a Notice of Non-responsibility, the effect of which was to insulate it from potential mechanic's lien foreclosure actions. The tenant often ran short of money after the construction process began leaving the contractor and his/her subcontractors with only the ability to file a lawsuit against a penniless tenant and no ability to record a mechanic's lien against an owner. The new laws provide for remedies in addition to a source of funds against which to collect.

In the event that a lessee should fail to provide for a "notice of posting of security," a prime contractor who is contracted with that lessee may cease work on the project. The lessee is given 25 days to correct its failure. In the event the issue is not cured and security posted, the prime contractor (and the lower-tiered subcontractors) are permitted to terminate the construction contract and seek damages including all work, materials, equipment and overhead.

Many lessees still do not abide by the requirements of the new law and it is incumbent upon contractors to act proactively and seek out information regarding the posting of security associated with any tenant improvements in which they are involved.

Brian Pezzillo is a managing partner with Pezzillo Robinson, specializing in construction. He serves on the government affairs committee of NAIOP and is a member of the American Bar Association Construction Industry Forum and Public Contracts Section. He is admitted to practice before all state and federal courts in Nevada, New Mexico and the Ninth Circuit Court of Appeal. He can be reached at bpezzillo@pezzillorobinson.com.