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By Kamy Molavi
On July 11, 2012, the Georgia Court of Appeals issued an opinion in the case of182 Tenth, LLC v. Manhattan Construction Company (2012 WL 2819414). The Court ruled 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 decision on an interpretation of prior case law to the effect that liens apply only to “work and material or machinery [which] have increased the value of the realty by becoming a part thereof.”
Further, the Court found that “interest due on the unpaid payment applications was not a lienable item.” Previously, the Court had held that interest may be recoverable.
The case related to a contract for the construction of a condominium complex. The parties to the contract were Manhattan Construction Company and 182 Tenth, LLC, which was not the owner of the property. Manhattan received some payment for its work under the contract, but apparently it stopped work after seven (7) of its applications for payment, in the combined amount of $2,126,148, were unpaid. Manhattan obtained a default judgment against 182 Tenth, LLC for $4,886,606, which included $2,126,148 for unpaid amounts due under the contract.
The Court of Appeals ruled that the amount of the default judgment merely provided a maximum amount for the lien, and shifted the burden to the owner to prove that the default judgment included an amount that was not lienable. Surprisingly, the Court nonetheless held that, “[e]ven though the amount of Manhattan’s judgment against [the property owner] was proved and not contested, this was not conclusive or prima facie proof of Manhattan’s right to a lien in the full amount of the judgment. The burden remained on Manhattan to prove the lien amount to which it was entitled by producing evidence of lienable items included in the judgment against [the property owner].” Presumably, at the end of that sentence the Court intended to refer to the judgment against 182 Tenth, LLC. The Court went on to exclude from the claim of lien those amounts it attributed to general conditions costs.
This case has significant implications. If it is not challenged and overturned, a general contractor will not be able to rely on the agreed amount of its contract to file a mechanics lien in Georgia. It will be required to parse the amount owed under the contract to exclude general conditions costs and possibly other amounts. Moreover, there is no apparent basis to exclude subcontractors from this outcome. The implications for construction managers could be monumental.
Although the Court did not address certain other costs, the logic upon which the opinion was founded could suggest there is no lien for the contractor’s profit or for other costs such as testing, safety, engineering services, preparation of shop drawings, and the like. Items such as freight and vendor discounts may be questioned. This is because those costs, although traditionally included in the contract price, may not constitute “work and material or machinery [that] increased the value of the realty by becoming a part thereof,” according to the Court.
For more information, contact Kamy Molavi at 770.818.1416 or[email protected].