N.C. Banking & Realtor Groups Speak Out Against Extending Liens on Leaseholds to Owners

In the second of four meetings, the House Committee on Mechanics’ Liens and Leasehold Improvements of the North Carolina General Assembly heard from representatives of the banking and commercial real estate industries on Monday, February 3.  Both representatives spoke forcefully against extending liens for tenant improvements to the record owner’s underlying interest in the leased property improved.  (For context, you can find my coverage of the committee’s initial meeting here).

Up first was Nathan Batts, Senior Vice President and Counsel for the North Carolina Bankers Association.  Mr. Batts told the committee members that holding property owners responsible for the debts of their tenants would represent a “departure from current law” and would have a “chilling effect” on the landlord-tenant relationship.  He emphasized that extending liens on leaseholds to the owner’s interest in the improved property would be burdensome to banks, particularly those in possession of foreclosed properties.  As alternatives to amending the mechanics’ lien statutes, Mr. Batts suggested criminal penalties to punish tenants who fail to pay their contractors and recommended that contractors secure a deposit from tenants before beginning improvements on their leased premises.

John Linderman of Triangle Commercial Association of Realtors spoke next.  He warned that extending liens for improvements to leased property to the record owner’s interest would have a “profound, chilling effect,” arguing such a legislative change would discourage commercial real estate transactions and impair financing.  Mr. Linderman disagreed with the notion that improvements to leaseholds automatically enhance the value of the owner’s property, arguing that in his experience, an up-fit for one tenant is unsuitable for the next one 95% of the time.  He said allowing contractors to reach the fee simple interest of landlords would represent a “fundamental violation of owner’s rights,” and that contractors who failed to verify the ability of tenants to pay for improvements engage in “reckless business.”  Like Mr. Batts, Mr. Linderman believes the solution is for contractors to secure a deposit for the work they are planning to do for a tenant.

My take?  I wasn’t surprised by the perspectives I heard on Monday.  What is striking to me, however, is the fact that numerous other states have found a way to enact legislation enhancing the rights of contractors who improve leased properties, presumably without significantly impairing those states’ banking and commercial real estate industries.  My commitment to you between now and the next committee meeting on March 3 is to post a summary of those other states’ laws to provide a sense of how other jurisdictions have coped with the liens on leaseholds dilemma North Carolina is now squarely confronting.

Until then, don’t forget to make your voice heard in the poll I posted a couple weeks back in my first blog post covering the committee’s work.  Comments are always welcome, too!