Now You Lien It - Then, You Won't

I've been reading long, gas-baggy recorded documents like Declarations of Easements and Restrictive Covenants for so long that my eyes instinctively roll back, revolting at their recognition of the familiar stack of paper. These instruments are particularly prevalent in shopping centers and office and industrial parks, and mixed use projects that incorporate varieties of commercial product types. They mandate owner maintenance and repair, cleanup after a fire or other casualty, insuring each lot's common area, and other assorted obligations pertaining to their respective parcels. The declarations customarily make, courtesy of the Declarant, dire threats for non-compliance with this and that obligation, including an owner's failure to reimburse the Declarant or another intervening owner (called an "intervenor" here) if it must step in and do the work of maintenance, repair, cleanup, payment of delinquent taxes or special assessments, affording of liability insurance, and so forth. The instrument typically provides that the failure to reimburse the intervenor for fixing the mess neglected by the uncooperative or disengaged land owner will constitute grounds to impress a lien for reimbursement against the miscreant's parcel that "may be foreclosed in the manner of a mechanic's lien." Here's one illustration:

Any sums remaining unpaid in accordance with Article [number] or Section [number], together with interest calculated at three percent (3%) above the prime rate charged by Wells Fargo Bank, N.A., or any successor thereto, or at the then-highest annual interest rate allowed by law (whichever is less), may be secured by a lien on the parcel of the owner in default and may be perfected in accordance with the laws of the State of Arizona, which lien shall retain the priority of title of this Agreement and may be foreclosed upon within one (1) year of the date that the lien is perfected.

Sounds awfully impressive, even though that text fails to describe the type of lien contemplated. I'm thinking, however, that this is wholly unenforceable claptrap, noble statement of remedial purpose notwithstanding. Item First: the manner of lien perfection goes unexpressed, perhaps with good reason. There are only two means in Arizona to perfect a lien on commercial real property (excluding fixtures filings, and a certificate of purchase creating a lien for the repayment of "funded" real property taxes and assessments) validly held by a non-governmental entity-via the mechanic's lien statutes and the mortgage/trust deed statutes. I can dispose of the latter avenue for a wannabe lien in a few words. A consensual lien against real property must be signed by its owner or someone authorized by law to do so on behalf of that owner. Merely participating in a larger development of property governed by CC&Rs--however assertive these may be--does not constitute a grant of authority by a land owner sufficient to constitute an intervenor his attorney-in-fact to legitimize recording a foreclosure-worthy, mortgage-type lien.

Item Second: One assumes, since there's no "proxy deed of trust" available to a fellow owner in a "restricted" commercial development, that someone contemplated a lien like that perfect-able and executable under our State's mechanic's lien regime found in Chapter 7 of Title 33 of the Arizona Revised Statutes. On the surface, one further assumes that the aggrieved intervenor procedurally first records a Notice and Claim of Lien, followed by a suit to be brought within the period set forth in the Declaration after the date of recording that Notice. Whoops. Apollo 13 to Houston-we have a problem.

Issue One: The mechanic's lien statutes [A.R.S. §33-992.01(B)] require, "as a necessary prerequisite to the validity of any claim of lien," that a preliminary 20-day notice be served upon the owner, any general contractor or any construction lender. See also A.R.S. §33-981(D). There's one, tiny, very limited exception to this requirement-the subcontractor who's physically out on the parcel where the work is being done. So say the declaration requires, in the event of casualty, that the affected owner of that damaged lot has to make repairs or "scrape the improvements" to eliminate an eyesore. If the neglectful owner doesn't do it, and the intervenor takes care of the matter, unless the helpful owner was physically performing the work on the lot himself, there's no mechanic's lien enforcement rights, no matter what the declaration says. Have a look at Performance Funding, LLC v. Arizona Pipe Trade Trust Funds, 203 Ariz. 21, 49 P.3d 293, a 2002 Arizona Court of Appeals decision, for the (currently) final word on that limited exception to satisfying the state's 20-day notice service statute.

Issue two implicates the timing aspect of the enforcement of the wannabe lien described in the declaration; while the CC&Rs drafters can choose any deadline they wish by which the intervenor can pursue reimbursement against the miscreant owner, Arizona courts won't indulge the claimant unless he hews to the mechanic's lien enforcement deadline-assuming that the intervenor even gets that far, which I doubt it will. In Arizona Department of Water Resources v. Rail N Ranch Corporation, 156 Ariz. 363, 752 P.2d 16 (1987), our Court of Appeals filleted DWR when it tried to foreclose, after two years had lapsed, under a wannabe lien under a state statute providing that "the [department's] lien shall have the force and effect of a mechanic's lien" and "may be foreclosed in the same manner." Yeah, sure, ruled the court-even if Arizona's legislature can "incorporate by reference" certain provisions of the mechanic's lien statutes, DWR doesn't get to substitute its own period of limitations on enforcement, inconsistently with the "incorporated" statutory scheme. If you don't file your suit within 180 days after recording your lien claim, as the mechanic's lien enforcement statute provides, you've snoozed too long. (Note, however, the appeals court did not declare the DWR lien to be void from its inception; it just dismissed the department's untimely enforcement of its purported lien.)

Issue three is whether it's fantastic to believe an intervenor can use the lien rights in Chapter 7 of Title 33 at all. You don't have to be a licensed contractor to avail yourself of the right to lien under A.R.S. Sections 33-983(A) or -987 (subject to compliance with the 20-day notice, etc.) for this fundamental reason: Both statutes provide that "a person who labors" upon someone else's lot can impress a lien. The words "contractor" and "subcontractor" and "architect"-licensed persons, appear throughout Chapter 7; so the legislature understood the distinction between licensed and unlicensed individuals and companies. That is what the Court of Appeals held in Performance Funding, LLC v. Arizona Pipe Trade Trust Funds; the union's funds did not have to be licensed to impress the lien, although they could not enforce what they filed.

So can you do something about this CC&Rs mess, and breathe life into what seems an unenforceable provision in your declaration? Well, do you need to do anything more in Arizona, if, as declarant or another owner subject to the CC&Rs, the intervenor can obtain a money judgment on a claim of failure to reimburse, and can record that judgment lien against the miscreant owner, to encumber its title until the intervenor is paid? It is not sufficient just to let a "declaration lien" (assuming the intervenor records an instrument reciting in the lien notice that it is based upon A.R.S. Sections 33-983(A) or -987, and that service of the 20-day notice was appropriately done, together with the text of the declaration) ride as a cloud on title to the other owner's property. Under the common law, once the lien is stale (after six months without filing suit), it will be deemed unenforceable-and becomes a "groundless lien" under the provisions of A.R.S. Section 33-420.

Mike Widener has practiced law in Arizona for 25 years, and is a Certified Specialist in Real Estate Law, according to the Board of Legal Specialization of the State Bar of Arizona. Mike is listed in SuperLawyers (2008 Southwest Edition) and in 1000 People to Know in [Arizona] Commercial Real Estate, 2008-09. Mike's real estate portfolio contains holdings in the States of Florida, Arizona, Tennessee and the Commonwealth of Virginia. You can contact him at (602) 274-1100 or at mnwidener@gmail.com. Check out our blog at http://www.TerraIncogito.com

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