Arizona Court of Appeals Division One Holds That (1) A Contractor Hired By A Tenant To Make Improvements To Leased Property Can Recover From The Property Owner Under A Theory of Unjust Enrichment Only When The Owner Engaged In Improper Conduct, (2) A Lease Agreement Cannot Disclaim An Agency Relationship For Purposes Of The Lien Statutes, A.R.S. §§ 33-981 to -1008, and (3) A Mechanic’s Lien On A Leasehold Interest May Survive The Lease Termination If Tenant Serves As Owner’s Agent For Purposes of The Lien Statutes.

The opinion concerns consolidated appeals from three lawsuits relating to a construction dispute among a property owner (“Smoke Tree”), a tenant, (“REM”), a general contractor (“KAI”), and subcontractors — Wang Electric, Inc. (“Wang”), Aero Automatic Sprinkler Co. (“Aero”), Allied Acoustics, Inc. (“Allied”), Beecroft, and Adobe Drywall, LLC and Adobe Paint, LLC (“Adobe”).   Smoke Tree and REM had entered into a lease agreement for a restaurant space.  The lease required REM to remodel the restaurant and Smoke Tree was required to reimburse a specified sum of the expenses.  REM hired KAI as general contractor, and KAI entered into subcontract agreements. 

When payments to the subcontractors stopped, Wang, Aero, Beecroft, and Allied filed mechanic’s liens on Smoke Tree’s property.  Adobe filed mechanic’s liens on REM’s leasehold interest in Smoke Tree’s property.  The subcontractors filed separate (and later-consolidated) lawsuits seeking damages for breach of contract against KAI, to foreclose their mechanic’s liens, and, alternatively, a money judgment against REM and Smoke Tree for unjust enrichment.

The trial court granted summary judgment in favor of Smoke Tree on each of the mechanic’s lien claims, holding that the requirements for a mechanic lien were not followed.  The trial court granted summary judgment in favor of the subcontractors and against Smoke Tree on the unjust enrichment claims.  Appeals and cross-appeals followed.

The Court of Appeals reversed the entry of summary judgment in favor of the subcontractors on the unjust enrichment claims and remanded with instructions that judgment be entered in favor of Smoke Tree.  Adopting the reasoning and holding of DCB Construction Co., Inc. v. Central City Development Co., 965 P.2d 115 (Colo. 1998), the Court of Appeals held “a contractor hired by a tenant to make improvements to leasehold premises, or subcontractors retained by that contractor, can recover unpaid monies for making tenant improvements from the property owner only when that owner has engaged in improper conduct.”  The Court found no evidence to suggest that Smoke Tree engaged in improper conduct, noting directly that Smoke Tree’s approval of the construction plans for the restaurant was not “improper conduct.”  

The Court of Appeals, however, reversed the summary judgment in favor of Smoke Tree on the claims to foreclose mechanic’s liens of Wang, Aero, and Allied.  The mechanic’s liens statutes, A.R.S. §§ 33-981 to  -1008, set forth the requirements of a lien, which, in brief, require a Laborer to provide timely notice of the lien, to perfect the lien, and to file an action within six months to foreclose the lien. 

With regard to the mechanic’s liens filed on Smoke Tree’s property, Smoke Tree challenged the validity of the liens on a variety of grounds: 

• Smoke Tree argued (as to Wang’s lien and Aero’s lien) that REM was not Smoke Tree’s agent and therefore a lien against Smoke Tree’s interest in the property was invalid because it had not requested the improvements to the restaurant.  The lease agreement between Smoke Tree and REM contained a disclaimer that provided the sole relationship between Smoke Tree and REM was as landlord and tenant.  The Court held that this disclaimer contravenes the legislature’s policy to permit liens against an owner’s interest in property when work is performed for the owner or its agent.  Therefore, despite the disclaimer, the Court held that the lease agreement established REM was Smoke Tree’s agent for purposes of the lien statutes.  The subcontractors were entitled to have a lien against Smoke Tree’s interest in the property and properly served Smoke Tree with the preliminary lien notice. 
• Smoke Tree argued (as to Wang’s lien and Aero’s lien) that notice of the lien was not served within a reasonable time period.  Ariz. Rev. Stat. § 33-993(A) requires a Laborer serve a copy of the notice and claim of lien on the owner “within a reasonable time” after recording the lien.  The Court, however, refused to hold as a matter of law that “service of the notice and claim of lien approximately three months after recordation was not within a reasonable time.”  Summary judgment on this issue was simply not appropriate on the record before the Court.
• Smoke Tree also argued that Wang failed to include an acknowledgment in the lis pendens.  The Court quickly dismissed this argument, agreeing with the reasoning of two recent Court of Appeals’ decisions that rejected the argument.
• Smoke Tree challenged the validity of Aero’s lien by contending that the notice identified REM (as opposed to Smoke Tree) as the owner.  A preliminary notice, however, had been served on Smoke Tree as the owner.  The Court, therefore, found that Smoke Tree received notice to investigate the claim, and therefore the purpose of the statute was fulfilled.
• Smoke Tree also challenged the legal description in Aero’s notice and claim of lien.  Ariz. Rev. Stat. § 33-993(A)(1) requires that “the legal description of the lands and improvements to be charged with a lien” be stated in a notice and claim of lien.  A Laborer must substantially comply with this requirement.  The Court held that the listing of a street address and description of the restaurant are not sufficiently formal to comply with the requirement.  Aero’s lien however also included the assessor parcel number and incorporated by reference records associated with the parcel, and the Court held this was sufficient to substantially comply with § 33-993(A)(1).  The Court took judicial notice of the records setting forth the resort’s legal description.

The Court also reversed the summary judgment in favor of Smoke Tree on the claims to foreclose mechanic’s liens of Adobe and remanded with instructions to enter judgment in favor of Adobe on that claim.   Because Adobe had filed a mechanic’s lien on REM’s leasehold interest in Smoke Tree’s property, Smoke Tree argued that the lien was extinguished when the lease terminated.  The Court disagreed, reasoning that mechanic’s lien survived the lease termination because REM served as Smoke Tree’s agent for purposes of the lien statutes.  The Court further held that service on REM’s managing member was sufficient to foreclose the lien.

 The Court awarded attorneys’ fees to Adobe but denied the fee requests of Smoke Tree, Wang, Aero, and Allied. 

Judge Timmer authored the opinion; Judges Portley and Gould concurred.