Co-Author: Richard Byron Peddie, Esq.
- Question: I manage commercial real estate. If one of our tenants doesn’t pay the tenant’s finish contractor, can the contractor collect from my client, the landlord?Answer: The Colorado Supreme Court recently agreed to review the Court of Appeals decision in the case of D.C.B. Construction v. Central City. This case is of great importance to commercial landlords (and their managers) whose tenants contract for tenant-finish or other improvements. The case addresses the mechanic’s lien and general liability of landowners for work commissioned by tenants. If the Supreme Court reverses the Court of Appeals, landlords will need to vigilantly monitor known and “unknown” tenant construction projects.I. Facts
“Landlord” owned a small lot in Central City improved with a two-story historic building zoned for commercial use. After gambling was legalized in 1992, “Tenant” leased the property, planning to modify it for casino operations. The lease made the tenant responsible for all repair and maintenance, and provided that Tenant would “promptly pay for the costs of all such alterations and additions regardless of the cost.” The lease provided that any alterations or additions would become the property of Landlord upon termination of the lease.
Tenant engaged “Contractor” to remodel the property. Landlord posted the statutory notice disclaiming any liability under the construction contract and notifying Contractor that the building would not be subject to any lien for the work. The estimate for the work to be performed was initially $200,000, but construction costs ultimately exceeded $300,000. Contractor took direction from Tenant directly. Landlord did not direct or control the work, although Landlord visited the property to inspect the work on several occasions.
Contractor ceased work in November of 1992 because Tenant failed to pay installments under the construction contract. In early 1993, Landlord evicted Tenant because Tenant failed to pay rent.
Contractor asserted claims against Landlord for amounts left unpaid by the Tenant. Contractor went to trial against Landlord on a theory of unjust enrichment. At trial, the court found for Contractor and entered a monetary judgment for over $300,000 against Landlord.
Landlord appealed to the Colorado Court of Appeals, arguing that, given the facts, there could be nounjust enrichment as a matter of law. The appellate court agreed with Landlord and reversed the judgment of the trial court.
Under Colorado law, a landlord is generally not liable to contractors or materialmen unless the obligation is rooted in some form of contractual or quasi-contractual relationship. On the other hand, where there is such a relationship, even the posting of the statutory notice of non-liability will not protect the landlord from lien liabilities.
In DCB Construction, Contractor asserted that Landlord was liable under a theory of unjust enrichment. Under the theory of unjust enrichment, the law will imply contractual obligations in favor of the plaintiff even in the absence of written or tacit understandings if: (1) a benefit was conferred upon the defendant; (2) the defendant appreciated the benefit; and (3) the benefit was accepted by the defendant under circumstances making it unjust for defendant to retain such benefit without paying its value to the plaintiff.
Unjust enrichment is an extraordinary remedy, allowing the imposition of liability even where the defendant has not agreed that it will pay for goods or services. The extraordinary nature of this remedy is tempered because it will only be available in those limited circumstances where all three conditions are met.
The crux of the unjust enrichment claim is the third requirement that retention of the benefit be “unjust.” Retention of a benefit will be unjust where the benefit was conferred as a result of mistake, coercion, or fiduciary breach. Retention without payment is also unjust where a plaintiff conferred the benefit at the request of the defendant or in order to protect some interest held by the defendant or a third party affiliate. The mere conferral of a valuable benefit is not enough. The Contractor in DCB Constructionwould like to do away with this third prong entirely.
If the Colorado Supreme Court agrees with Contractor’s argument, let landlords beware: Landlords who have no contractual or quasi-contractual relationship to contractors (or even knowledge of their presence) may be liable to them if the tenant absconds or otherwise defaults in its obligations under the construction contract. This will be true regardless of whether the landlord has posted the statutory notice of non-liability.
It is unclear how landlords will avoid liability if the Supreme Court rules in favor of Contractor in DCB. Indemnifications from defaulting tenants provide little comfort. For security, it will probably be necessary for landlords to frequently monitor the premises to obtain written waivers from contractors and subcontractors. Landlords will not only need to monitor known construction activities, but they will also need to frequently inspect properties to verify that there are no unknown construction activities.
Richard Byron Peddie is no longer with Frascona, Joiner, Goodman and Greenstein, P.C., a Colorado law firm