Tennessee Construction Lien Law Todd E. Panther Tune, Entrekin & White, P.C

Tennessee Construction Lien Law

Todd E. Panther

Tune, Entrekin & White, P.C.

Topics to Cover

• Lienable properties

• Amount of lien

• Perfection

• Enforcement

• Defenses

Liens on Certain Property

Is the Project Lienable?

• Three types of projects immune from liens– Public property

• Including quasi-governmental entities

– Residential real property in some cases– Property that is protected by a performance

bond for 100% of prime contractor’s price

Is the Project Lienable?Residential Real Property

• Two definitions• Tenn. Code Ann. §66-11-146(a): “a building

consisting of one (1) dwelling unit in which the owner of the real property intends to reside or resides as the owner’s principal place of residence…”– Includes buildings consisting of up to 4 dwelling units

so long as owner resides in one of the units

• Only prime contractors have lien rights for this type of property

Residential Real Property

• Examples of residential property immune from a remote contractor’s lien under §66-11-146:– Custom built house– Residential remodeling project

• Examples of residential property not immune from a remote contractor’s lien under §66-11-146– Speculative home– Pre-sold home– Vacation home


• Tenn. Code Ann. §66-11-146(b)(1)(A): a building constructed “consisting of one (1) dwelling unit intended as the principal place of residence of a person or family”– No requirement that owner intends to live there

• §66-11-146(b)(2): where owner and general contractor are one and the same (or entities controlled by same person), only persons who contracted with the general contractor have lien rights

Is the Project Lienable?Performance Bond

• Tenn. Code Ann. §66-11-124(c) bars liens by remote contractors where:– Owner or owner’s agent provides payment

bond equal to 100% of prime contractor’s contract price

– Bond must be in favor of remote contractors– Must be issued before work begins– Must be recorded

Is the Project Lienable?Leased Property

• Lien permitted on fee estate only if lessee is determined to be fee owner’s agent. Tenn. Code Ann. §66-11-102(d).

• Court determines whether owner has right to control conduct of lessee with respect to improvement, and to consider:– Whether lease requires lessee to construct specific improvement

on fee owner’s property;– Whether owner pays for improvement through offsets in amount

of rent lessee pays;– Whether owner maintains control over improvement; and– Whether improvement becomes property of fee owner at end of

lease• Codifies previous case law

Is the Project Lienable?Condominiums

• Tenn. Code Ann. §66-11-118(c) governs liens on condominiums:– No lien against common elements– If improvement contracted by association of unit

owners, lien attaches to all units for which association acts

• Exception: attaches to specific units if association notified lienor at contract that lien may only attach to units for which improvement was made

– If improvement contracted by unit owner, lien only attaches to that owner’s unit

AMOUNT OF THE LIEN

• Tenn. Code Ann. §66-11-102(a) clarifies what lien secures: the contract price

• “Contract price” defined to include:– Amount agreed upon for work, labor, furnishing

materials, equipment, services, overhead and profit (if in contract), increased or decreased by price of extras, breach of contract, defects in workmanship or materials

– If no agreed upon price, reasonable value of all work, labor, materials, services, overhead and profit

Furnishing Materials

• Redefined in Tenn. Code Ann. §66-11-101(4), means to:– Supply materials intended to be and are incorporated into

improvement;– Supply materials intended to be and are delivered to site and

become normal wastage in construction;– Specially fabricate materials for use in improvement and, if not

delivered to improvement, are not readily resalable by lienor; – Supply materials used for construction and do not remain in

improvement, subject to diminution in salvage value; or– Supply tools, equipment, machinery as permitted by §66-11-

102(g)

Furnish Materials

• Tenn. Code Ann. §66-11-102(g): Tools, equipment or machinery lienable as follows:– Reasonable rental value for period of actual

use and any reasonable period of non-use; or– Purchase price, but only if used in course of

particular improvement and have no substantial value to lienor after completion of improvement for which they are used

Non-Lienable Items

• Tenn. Code Ann. §66-11-102(e), following not lienable:– Interest– Service charges– Late fees– Attorney fees– Other items that do not result in an improvement to property– Other items not otherwise permitted by statute

• Consequential damages

• §66-11-102(f), limit on lienable profit:– If lienor terminated, without default, before completion, has lien

for profit for as much of contract price as lienor has performed in proportion to contract price as a whole

– Not entitled to profit for work not performed

PERFECTING THE LIEN

With Whom did the Claimant Contract?

• Perfection requirements significantly differ depending on who claimant contracted with

• Two types of contractors, prime and remote– Tenn. Code Ann. §66-11-101(12), “Prime contractor”

is any person who supervises or performs work or labor or furnishes material and who is in direct privity of contract with the owner or owner’s agent

– Tenn. Code Ann. §66-11-101(14), “Remote contractor” is any person who provides work, labor, furnishes material under a contract with a person other than the owner

Perfection Requirements: Prime Contractors

• Typically not required to record lien in order to perfect as to owner– Exception: notice of completion

• Tenn. Code Ann. §66-11-112, required to record to perfect as to subsequent purchasers and encumbrancers

Tenn. Code Ann. §66-11-112

• Recording preserves lien over subsequent purchasers or encumbrancers, but only if:– Recorded in county where property (or part of property) lies;– Sworn and acknowledged statement of amount claimed;– Describes property; and– Recorded no later than 90 days from improvement’s completion

or abandonment

• Such lien not extinguished by conveyance of property before lien recorded, if recorded within 90 day period

• Statute provides a form

Notices of Completion

• If notice of completion recorded and served, prime contractor must serve notice of lien– Must be written, served on person designated in notice of

completion for receiving notice of claim– State amount of claim and certify that claim does not include

amount for any other job or contract– Only if lien or contract not previously recorded

• Time for service:– 1-4 family residential units, must be served within 10 days from

date of recording notice of completion– All other projects, served within 30 days of recording of notice of

completion• Failure to record within timeframe results in lien’s

expiration

Perfection: Filing Suit

• Must file suit within one year of project’s completion or abandonment, or lien is lost, Tenn. Code Ann. §66-11-106– Begins at substantial completion

• Luter & Daniel v. Cobb, 41 Tenn. 525 (1860)– Begins to run when work substantially finished, even if

minor work remains to be done• Bristol Goodson Electric Light & Power Co. v.

Bristol Gas, Electric Light & Power Co., 99 Tenn. 371 (1897)– Material suppliers: date of delivery of last materials

(excluding replacements for defective materials)

Tests for Substantial Completion

• Use and occupancy permit– Not conclusive, as date of use and occupancy permit often not

same as actual completion– Harrison v. Knafle, 161 S.W. 1003 (Tenn. 1913)

• Construction contract for installation of sprinkler system not substantially complete until state-required inspection completed

• Intended purpose– Most common definition– Substantially complete on date where building (or portion

thereof) can be used for its intended purpose– See, Tenn. Code Ann. §28-3-201; AIA General Conditions to

Standard Form of Agreement (A201-1997), ¶ 9.8.

Substantial Completion: Other Issues

• Voightman v. Southern Railroad, 131 S.W. 982 (Tenn. 1910)– Year begins to run from date prime contractor

substantially completes its work, not from date entire improvement completed

• Abandonment, Tenn. Code Ann. §66-11-112(b):– Where work stops for a period of 90 days and owner

or prime contractor intends to cease work permanently or indefinitely, one year period begins to run

Perfection Requirements: Remote Contractors

• First, must serve notice of nonpayment under Tenn. Code Ann. §66-11-145

• Liberal vs. strict compliance– No appellate authority on what substantially

complies for a notice of nonpayment– Under old statute, failure to strictly comply,

lien forfeited

Form of Notice of Nonpayment

• Tenn. Code Ann. §66-11-145, must include:– Name of claimant and address to which owner and

prime contractor may reach claimant;– General description of work, labor, materials, etc.

provided;– Amount owed as of date of notice;– Statement of last date claimant performed work

and/or provided labor or materials; and– Description of property against which lien is claimed

• §66-11-145(d) provides a form

Form of Notice of Nonpayment: Tips

• Lien claimant’s name should be the same as name on contract, purchase order, etc.

• Description of work should be informative enough that someone not familiar with project would understand claimant’s scope of work

• Last day of work does not include corrective work, minor work, punch list, etc.– Last day of substantial work

• Property description: description on building permit presumed to be correct– Otherwise, enough description such that no misunderstanding as to

what property claim attaches– Need not be perfect description or completely accurate, but a positive,

unambiguous description of wrong property is inadequate

Notice of Nonpayment: Service

• Must be sent to the owner and the prime contractor in privity with the remote contractor– Identity of parties addresses, on building permit presumed to be

correct, Tenn. Code Ann. §66-11-145(a)

• Tenn. Code Ann. §66-11-149, notice must be sent by:– Certified mail, return receipt requested;– Hand delivery, evidenced by notarized sworn statement

confirming delivery; or– Any other commercial service that provides delivery confirmation

• Time for service, Tenn. Code Ann. §66-11-145(a):– Must serve within 90 days of last day of each month within which

work, labor, materials, etc. furnished

Remote Contractors: Notice of Lien

• Tenn. Code Ann. §66-11-115 remote contractor has lien, if:– complies with notice of nonpayment requirements; and– Records and serves notice of lien on property owner within 90

days after improvement completed or abandoned– Substantial completion determined just as for prime contractors

• Different deadlines if notice of completion recorded– 1-4 family residential units, must be served within 10 days from

date of recording notice of completion– All other projects, served within 30 days of recording of notice of

completion– Remote contractors typically do not have lien rights for 1-4 family

residential properties• Can use same form provided in Tenn. Code Ann. §66-

11-112(d)

Remote Contractors: Service of Lien

• Tenn. Code Ann. §66-11-149(c), service of lien is complete upon:– Receipt by party being served by hand

delivery– Within 3 business days of mailing if served by

certified or registered mail – One business day after commercial delivery

Perfection: Filing Suit

• Tenn. Code Ann. §66-11-115(b), must file suit within 90 days of service of notice of lien– Failure to file suit results in lien forfeiture

ENFORCING THE LIEN

Deadline for EnforcementPrime Contractors

• Tenn. Code Ann. §66-11-106:– A prime contractor’s lien shall continue for

one (1) year after the date the improvement is complete or is abandoned, and until the final decision of any suit properly brought within that time for its enforcement

Starting Point of Tenn. Code Ann. §66-11-106

• One year begins to run from date of substantial completion

• Luter & Daniel v. Cobb, 41 Tenn. 525 (1860)– Begins to run when work substantially finished, even if

minor work remains to be done

• Bristol Goodson Electric Light & Power Co. v. Bristol Gas, Electric Light & Power Co., 99 Tenn. 371 (1897)– Material suppliers: date of delivery of last materials

(excluding replacements for defective materials)

Tests for Substantial Completion

• Use and occupancy permit– Not conclusive, as date of use and occupancy permit often not

same as actual completion– Harrison v. Knafle, 161 S.W. 1003 (Tenn. 1913)

• Construction contract for installation of sprinkler system not substantially complete until state-required inspection completed

• Intended purpose– Most common definition– Substantially complete on date where building (or portion

thereof) can be used for its intended purpose– See, Tenn. Code Ann. §28-3-201; AIA General Conditions to

Standard Form of Agreement (A201-1997), ¶ 9.8.

Substantial Completion

• One year begins to run after improvement is completed or abandoned

• Voightman v. Southern Railroad, 131 S.W. 982 (Tenn. 1910)– Year begins to run from date prime contractor

substantially completes its work, not from date entire improvement completed

Stopping Point of Tenn. Code Ann. §66-11-106

• Stopping point is the date when suit to enforce the lien is brought– Will be discussed in more detail below

Deadline for EnforcementRemote Contractors

• Tenn. Code Ann. §66-11-115(b):– The lien shall continue for the period of ninety

(90) days from the date of service of notice in favor of the remote contractor, and until the final termination of any suit for its enforcement properly brought pursuant to §66-11-126 within that period.

Starting Point of Tenn. Code Ann. §66-11-115(b)

• 90 day period beings to run “from the date of service of notice.”

• Tenn. Code Ann. §66-11-149(c), service of lien is complete upon:– Receipt by party being served by hand

delivery– Within 3 business days of mailing if served by

certified or registered mail – One business day after commercial delivery

Stopping Point of Tenn. Code Ann. §66-11-115(b)

• The stopping point is the date when suit to enforce the lien is brought

Methods of EnforcementTenn. Code Ann. §66-11-126

• Lien claimant must: – File the lawsuit under oath – Seek a writ of attachment – Set forth the facts – State the amount due – Describe the property– Serve the owner– Remote contractors have discretion to serve contractor with

whom they contracted

• Lawsuit timely brought if seeks writ of attachment within applicable time

• Must provide bond of $1,000 or lien amount, whichever is less

Amount of Attachment

• Must attachment so much of property that is sufficient to satisfy the amount due

• See, Tenn. Code Ann. §§26-6-120, 29-6-128, and 29-6-157.

Methods of EnforcementTenn. Code Ann. §66-11-126

• No attachment required where:– a payment bond – contractor’s bond – bond to discharge

• Bond must be recorded• Lawsuit still must

– Be filed under oath – Set forth the facts – State the amount due– Describe the property

• Must serve the owner and the surety

Methods of EnforcementComplaint Under Oath

• Arises out of attachment statutes– Proper affidavit/verification required, or

attachment is void

• Defects in form can be cured by amendment

• Substantive defects that cannot be cured by amendment:– Lack of signature/verification– Lack of appropriate grounds

Lien Claimant’s Leverage

• Over owner– No contractual privity required– Can force owner to pay even if paid original contractor in full

• Over subsequent purchasers– Only if records lien within 90 days of improvement’s completion

or abandonment– Only if lien in valid form: verified under oath and acknowledged– Owens Lumber & Millwork, Inc. v. National Equity Corp., 940

S.W.2d 66 (Tenn. Ct. App. 1996)• A timely filed lien is not extinguished by a conveyance to a

subsequent purchaser prior to the lien being filed

– Tenn. Code Ann. §66-11-112 contains a form

Lien Claimant’s LeverageAgainst Lenders

• Tenn. Code Ann. §66-11-104: all liens relate back and take effect upon the visible commencement of operations

• Williams Lumber & Supply Co. v. Poarch, 428 S.W.2d 308 (Tenn. 1968): all liens superior to mortgage if visible commencement of operations occurred before mortgage recorded– Includes liens for work commenced after mortgage

recorded

Visible Commencement of Operations

• Defined in Tenn. Code Ann. §66-11-101(16):– [T]he first actual work of improving upon the land or

the first delivery to the site of the improvement of materials, that remain on the land until actually incorporated in the improvement, of such manifest and substantial character as to notify interested persons that an improvement is being made or is about to be made on the land…

– Excludes: demolition, surveying, excavating, clearing, filling or grading, placement of sewer or drainage lines or other underground utilities, temporary security fencing

Priority Over MortgageTenn. Code Ann. §66-11-108

• Lien claimaint has priority over mortgage where:– Serves mortgagee with written notice before work

begins– No particular form of notice is required– Mortgagee consents by certified or registered mail

• Consents if fails to serve written objection by certified or registered mail within 10 days of receipt of notice

• Priority regardless of date of visible commencement of operations

Enforcement – Arbitration

• Must file suit to enforce lien, but what if contract has arbitration clause?

• File lawsuit to enforce lien requesting that, upon answer, court stay litigation and refer to arbitration

• File motion to stay the litigation and compel arbitration

• After moving to compel arbitration, file demand with appropriate entity

• Upon adjudication in arbitration, move for court to enter judgment in accordance with award

Winning an Enforcement Action

• Lien is means of securing payment, not right of payment

• Common defenses:– Work is defective– Work does not comply with the plans and

specifications– Work is not timely completed

• Defenses are often raised after the work is complete and the lien is served


• Keep good records and give appropriate notice– Job reports, photographs, correspondence– Notify of circumstances/events that could affect right

to payment/payment amount• Changes in the scope of the work• Delays• Directives regarding means and methods of construction• Codes violations

• Experts– Not required, but often helpful– Independent assessment– Earlier the better


• Client assistance– Prepare to spend more time than anticipated– Prepare to spend more money than anticipated– Prepare to be more annoyed than anticipated– Prepare to feel more at risk than anticipated

• Settlement– Parties control outcome– Cost savings– “You can’t always get what you want, but if you try

sometime, you just might find, you get what you need.”

Foreclosing the Lien

• Governed by Tenn. Code Ann. §§29-6-101, et seq.• Lien extinguished by foreclosure of superior lien

– Leftover funds are divvied up according to priority and parity rules

• Priority and parity, Tenn. Code Ann. §66-11-107– Laborer’s liens have priority over all other liens– All other liens on a parity

• Parity determined by proportion of claim to contract price– Total contract price / total lienable claims (paid and unpaid)– Apply percentage to each outstanding claim

Bankruptcy IssuesPerfection

• 11 U.S.C. 362(a)(4): stays any “act to create, perfect, or enforce any lien against property of the estate.”

• 11 U.S.C. 362(b)(3) exception to automatic stay for “any act to perfect, or to maintain or continue the perfection of, an interest in property…”– Because lien relates back to visible commencement, trustee

cannot avoid lien– 90 day period for recording lien not tolled by automatic stay

• The holder of an unperfected lien may serve and record the notice of lien post-petition without violating the automatic stay

• Because the automatic stay does not prohibit service and recording of a notice of lien, the lien claimant must serve and record its notice of lien

Bankruptcy IssuesEnforcement

• Action to enforce lien is stayed by bankruptcy filing• 11 U.S.C. 108(c) tolls time to file suit to enforce until later

of: statute of limitations or 30 days after notice of termination of automatic stay

• 11 U.S.C. 546(b)(2), where seizure of property or commencement of action required to maintain interest in property, and such action has not occurred before bankruptcy petition, interest perfected and maintained by claimaint giving notice to bankruptcy court

• Lien claimant has 30 days after automatic stay lifted to enforce lien, provided lien claimaint gave notice to bankruptcy court under 11 U.S.C. 546(b)(2)

What if the Lien Claim Fails?

• Prime contractors: may still have claims for breach of contract and/or unjust enrichment against owner

• Remote contractors: may still have claims for breach of contract and/or unjust enrichment against prime contractor, and claim for unjust enrichment against owner

• Unjust enrichment claim not very strong– “[I]f the land owner has given any consideration to any person

for the improvements, it would not be unjust for him to retain the benefit without paying the furnisher.” Paschall’s, Inc. v. Dozier, 407 S.W.2d 150, 155 (Tenn. 1966) (emphasis added)

DEFENSES AGAINST LIEN CLAIMS

Is the Project Lienable?

• Three types of projects immune from liens– Public property

• Including quasi-governmental entities

– Residential real property in some cases– Property that is protected by a performance

bond for 100% of prime contractor’s price


• Two definitions• Tenn. Code Ann. §66-11-146(a): “a building

consisting of one (1) dwelling unit in which the owner of the real property intends to reside or resides as the owner’s principal place of residence…”– Includes buildings consisting of up to 4 dwelling units

so long as owner resides in one of the units

• Only prime contractors have lien rights for this type of property

Residential Real Property

• Examples of residential property immune from a remote contractor’s lien under §66-11-146:– Custom built house– Residential remodeling project

• Examples of residential property not immune from a remote contractor’s lien under §66-11-146– Speculative home– Pre-sold home– Vacation home


• Tenn. Code Ann. §66-11-146(b)(1)(A): a building constructed “consisting of one (1) dwelling unit intended as the principal place of residence of a person or family”– No requirement that owner intends to live there

• §66-11-146(b)(2): where owner and general contractor are one and the same (or entities controlled by same person), only persons who contracted with the general contractor have lien rights

Is the Project Lienable?Performance Bond

• Tenn. Code Ann. §66-11-124(c) bars liens by remote contractors where:– Owner or owner’s agent provides payment

bond equal to 100% of prime contractor’s contract price

– Bond must be in favor of remote contractors– Must be issued before work begins– Must be recorded

Are all Amounts of the Claim Lienable?

• Lien secures contract price

• “Contract price” is the amount agreed upon by the parties for the work, labor, services, equipment, etc.– Includes overhead and profit– Increased by price of extras– decreased by damages from breach of

contract

Limits on Lien Amount

• Following not lienable:– Cost of repairing defective workmanship or materials (Tenn.

Code Ann. §66-11-101(2))– Interest (Tenn. Code Ann. §66-11-102(e))– Service charges (Id.) – Late fees (Id.)– attorneys’ fees (Id.)– Any other amount that does not result in an improvement to the

property (Id.)• Limits on profits, Tenn. Code Ann. §66-11-102(f):

– If lienor is prevented from completing work, entitled to lien for contract price (including profit) for proportion of work actually performed

– Not entitled to lien for work (and profit) not performed

Has the Claimant Fulfilled all Statutory Requirements?

• Lien law to be liberally construed to secure benefits of the lien– Substantial, not strict, compliance required– No appellate authority as to what constitutes

substantial compliance– Effective so long as nonprejudicial errors or omissions

• Use checklist for all requirements for Notice of Nonpayment (§145), Notice of Lien (§§112, 115), Apportionment (§118), and Complaint (§§106, 126)

Statutory RequirementsNotices of Nonpayment

• Tenn. Code Ann. §66-11-145– Did remote contractor serve notice of nonpayment?

• Served within 90 days of last day of each month work was performed?– To whom sent?

• Owner• Prime contractor who contracted with claimant

– How sent?• Certified/registered mail, return receipt requested• Hand delivery with sworn statement• Overnight commercial delivery

– Contain correct information?• Name and address of claimant• General description of work/services/material provided• Amount owed• Date claimant last performed work or provided services/materials• Description of property

Statutory RequirementsNotice of Lien

• Tenn. Code Ann. §66-11-115– Serve notice of lien in accordance with §66-

11-112?• Sworn statement of amount owed• Description of property• Served on owner of property,

– via certified/registered mail, return receipt requested– Hand delivery with sworn statement– Overnight commercial delivery

– Served within 90 days of project’s completion or abandonment?

Statutory RequirementsApportionment

• Tenn. Code Ann. §66-11-118, must apportion lien where:– Work performed on multiple lots, tracts, etc. under

same contract, but improvement not to be operated as a single improvement

• Separate notice of lien required for each lot, tract, etc.

– Multiple buildings on a single or continguous property that are not to be operated as a single improvement

• Separate notice of lien required for each building

– If improvement to be operated as a single improvement across multiple lots, tracts, etc., no apportionment required

Statutory RequirementsComplaint to Enforce Lien

• Format of complaint, Tenn. Code Ann. §66-11-126– Sworn statement– Amount due– Describe property– Seeking an attachment– Attachment issued?

• Was complaint timely?– Prime contractors: one year from substantial

completion (Tenn. Code Ann. §66-11-106)– Remote contractors: 90 days from date of service of

lien (Tenn. Code Ann. §66-11-115)

Cutting off Liens:Notices of Completion

• Tenn. Code Ann. §66-11-143, cuts off lien rights if notice of completion recorded and contractors do not timely record liens– Liens for residential property (up to four units) must be served within 10

days of recording notice of completion– Liens for all other property served within 30 days of recording of notice

of completion• Improvement must be 100% complete, Davis v. Smith, 650 S.W.2d

47 (Tenn. Ct. App. 1983), or notice of completion ineffective– Substantial completion not acceptable

• Must be served:– Upon any lien claimant that served a notice of nonpayment– Upon the prime contractor, unless the owner acts as the general

contractor

Cutting off LiensWaivers

• Tenn. Code Ann. §66-11-124(b):– Any contract provision that purports to waive any right

of lien under this chapter is void and unenforceable as against the public policy of this state.

• AG Opinion 05-184: – Prohibits waivers in contracts as a condition to being

awarded the contract– Does not prohibit waiver when work already

performed at time of payment, or other circumstances that are free from duress

Protecting PropertyBonds

• Tenn. Code Ann. §66-11-136

• Owner has right to demand bond after made payment to prime contractor– If owner pays remote contractor on lien claim,

has judgment for that amount on the bond– Prime contractor has right to contest

legality/amount of claim before prime contractor liable

Collateral Attack

• Lien is only a form of security rather than right to payment

• No lien rights if claimant not entitled to amount due

• Contract defenses:– Defective construction– Deviation from contract documents

• Licensure defenses– Unlicensed contractor entitled only to actual

documented expenses

Documents

Tennessee Construction Lien Law Todd E. Panther Tune, Entrekin & White, P.C