Arizona Court Rules Owners Cannot Contract Around Lien Exposure From Tenant Improvements

Arizona’s mechanics lien law provides that a lien is authorized whenever work is furnished at the “instance” of the owner or the owner’s agent. A tenant who acts as the owner’s agent can expose the owner to a mechanics lien claim, and it’s well established in Arizona’s case law that a lease requiring and approving tenant improvements renders a tenant such a qualifying agent of the owner.

The Arizona Court of Appeals were confronted with this scenario in Wang Elec Inc. v. Smoke Tree Resort LLC, but with a twist.

In Wang Electric, the property owner argued it was not exposed to a mechanics lien for its tenants improvements because the lease agreement with the tenant contained a clause that “explicitly provided that ‘no mechanic’s or other lien for any . . . work or materials [furnished to REM] shall attach to or affect [Smoke Tree's] interest in the [p]remises’ and represented that the sole relationship between Smoke Tree and REM was as landlord and tenant.”

The question became whether this explicit contract language could circumvent Arizona’s jurisprudence.  The answer was a quick “no.”

The Court of Appeals explained:

This disclaimer, however, contravenes the legislature’s policy expressed in A.R.S. § 33-981(A) to permit liens against an owner’s interest in property when work is performed or materials furnished at the instance of the owner or its agent. Because the lease establishes that REM served as Smoke Tree’s agent for purposes of the lien statutes, the disclaimer cannot serve to invalidate Wang’s lien. See Liberty Mut. Fire Ins. Co. v. Mandile, 192 Ariz. 216, 220, 963 P.2d 295, 299 (App. 1997) (recognizing that contract provisions contrary to strong public policy are void).

This type of ruling is repeated over and over against across state courts since mechanics lien statutes are typically founded upon public policy considerations and parties cannot contract around public policy. Take, for example, “No Liens” clauses within contracts, which is similar to the lease agreement clause here in Wang Electric.

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