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Georgia: General Condition Costs Are Not Lienable
On private construction projects, contractors ordinarily have the right to file a mechanic's or materialman’s lien under applicable state law to collect unpaid sums due on a construction contract. However, on July 11, 2012, the Georgia Court of Appeals ruled in 182 Tenth, LLC v. Manhattan Construction Company (2012 WL 2819414) (“182 Tenth, LLC”) that lien claimants such as contractors, subcontractors, and materialmen, may not foreclose on a lien that includes unpaid general condition costs. By way of example, these non-lienable costs may include the following: overhead, administrative, preconstruction, mobilization, phone/water, power, job site trailer, safety, job toilets, office supplies, computers, tools, fuel and oil, temporary roads, blueprints, job site copier, record drawings, progress photos, postage/courier, sidewalk barricades, job site communications, temporary fences, job signage, clean-up crews, dumpster rentals/pulls, final clean up, unit certifications, and premiums for builder’s risk and general liability insurance.
In 182 Tenth, LLC, Manhattan Construction Company, the general contractor, entered into a $36.5 million construction contract with Midtown Atlanta Properties for the construction of a condominium complex. 182 Tenth, LLC owned the real property on which the condominiums were to be built. After construction was underway, Manhattan stopped work on the project, citing the developer’s inability to secure financing and failure to issue payments of the amounts certified by the architect as being properly due and owing. Manhattan filed a claim of lien against 182 Tenth’s real property for furnishing labor, services, and material on the construction project. Thereafter, Manhattan filed suit asserting claims for breach of the construction contract against Midtown Atlanta Properties and foreclosure of the lien against the property.
Manhattan secured default judgment against Midtown Atlanta Properties for $4,886,606.00, which included the sum of $2,126,148.00 for unpaid amounts due under the contract based on certified payment applications. The issue regarding foreclosure on the special lien against the property owner went to a jury trial. The jury awarded Manhattan judgment on the special lien in the amount of $1,750,000.
On appeal, the Georgia Court of Appeals reversed the jury award, finding that “items of general conditions costs described in the payment applications were not lienable because they were not labor, services, or materials which actually went into and became a part of the property.” The court based its holding on case law premised “upon the theory that the work and material or machinery for which the lien is sought [must] have increased the value of the realty by becoming a part thereof.” Since general condition costs do not become part of the property, the same are not lienable. The court went on to separate the general condition costs from the construction costs; however, and ultimately remanded the case for a new trial.
At first glance, the appellate court’s decision appears to merely confirm, or clarify, general maxims of Georgia lien law. A lien is an encumbrance on one person's property to secure a debt the property owner owes to another person. In a construction context, lien claimants are permitted to lien material and labor because all their materials and labor are "buried" in the real estate, having become part of and benefited the real property. However, if certain construction costs do not improve the property they are not lienable.
Effect of Contractors
182 Tenth, LLC, however, goes further than merely clarifying general maxims of lien law. From the contractor’s point of view, especially those who do not self-perform much of the project work, the decision substantially lessens the value of liens in Georgia. Typically, general contractors do not itemize general conditions as a separate cost. Accordingly, when a lien is filed, the issue of lienability is often not at issue. Now “lienability” is brought to the forefront. Now, a contractor may not rely upon the agreed-upon amount in its contract in a lien suit. Stated differently, just because a contractor was not paid the agreed-upon amount in the contract does not mean the contractor has lien rights over those same amounts. Further, even if a contractor obtains a judgment for non-payment under the contract, a contractor may not foreclose upon a lien in that amount. In Georgia, a contractor now must separate out its general condition costs from any judgment, and then prove that the lien amount it seeks is attributable to costs attributable to increasing the value of the real property.
What to Expect?
What can construction professionals working in Georgia expect from this decision? First, expect owners and developers to require at risk construction managers and general contractors to itemize their general condition costs. In turn, expect at risk construction managers and general contractors to require subcontractors to itemize their respective general condition costs. This will assist the upstream party in reducing lien rights – or at least in making it easier to prove that a specific cost is not lienable. Second, expect increased costs of litigation. Now, in any lien suit, owners will defend by stating that the entire lien is invalid, unless the lien claimant can prove what is (or is not) attributable to general conditions. In turn, lien claimants and counsel will be required to affirmatively prove that all costs are attributable to labor or material.
What can contractors do to protect themselves? A contractor should avoid itemizing its general conditions costs in its payment applications. If the owner requires the general contractor to itemize general conditions, the same will be used as evidence that the cost is non-lienable under Georgia law.
In the end, this decision is both positive and negative, depending on what role your company plays in the construction process. However, regardless of what role your company plays, all are affected by this decision and should be mindful of itemizing general conditions in the contract, or tracking them in case of litigation involving lien claims in Georgia.
©Smith, Currie & Hancock LLP
Kirk D. Johnston
Member of the State Bars of Georgia