With the current lack of supply in the housing market, condominium building is experiencing significant growth.
In the event a developer proceeds forward with a condominium project, all parties, from prime contractors to material suppliers, should be aware that condominiums are a different animal from other projects when it comes to lien rights.
First: Does the Condominium Exist?
The first issue counsel for a potential condominium lien holder should address is whether a condominium exists. A contractor or material supplier may not understand when it enters into its contract that the developer intends to construct condominiums.
For instance, a prime contractor may discover upon a title search that an office and parking structure is really just two units in a condominium development also involving apartments and mixed-use retail space.
Accordingly, in order to fully protect a client’s rights, an attorney should obtain a letter report for the property. This will provide the property’s legal description and reveal whether the project is a stand-alone property or part of a larger condominium project.
If the property is part of a condominium, counsel should also obtain a copy of the Condominium Declaration from a title company. The Declaration will not only identify the units that exist and their boundaries, but also apprise the potential lien holder of what areas may be common space and what particular elements are owned by individual condominium unit owners.
Brian R. Smigelski, Marquette 1987, is a partner with DeWitt LLP, Brookfield, where he practices in civil litigation with an emphasis in construction law.
Pay Attention to These Statutes
Once the potential lien holder determines that the project is a condominium, the boundaries of the condominium units and what constitutes the condominium common elements, counsel should be aware that such liens are not only governed by Wis. Stat. chapter 779, but also by Wis. Stat. section 703.22 (contained in Wis. Stat. chapter 703, governing condominiums).
Pursuant to this statute, once a Condominium Declaration is recorded, “[a]ny construction lien or suppliers’ lien under subch. 1 of ch. 779 arising as a result of repairs to or improvements of a unit by a unit owner shall be a lien only against the unit.”1
Accordingly, a contractor who installs cabinets throughout a condominium project for a developer owning all condominium units at the time of construction will possess lien rights against each condominium unit for only the value of the cabinets installed in that unit.
Thus, if the contractor installs $5,000 worth of cabinets in Unit A and $10,000 worth of cabinets in Unit B, the contractor is only entitled to a $5,000 lien on Unit A, and a $10,000 lien on Unit B. The contractor would not have a single $15,000 lien covering both units.
Proportional Liens
However, a contractor who improves or repairs common elements is treated differently. Pursuant to Wis. Stat. section 703.22(3):
[a]ny construction lien or suppliers’ lien under subch. 1 of ch. 779 arising as a result of repairs to or improvements of the common elements, if authorized in writing by the association, shall be paid by the association as a common expense and until paid shall be a lien against each unit in proportion to the unit’s percentage interest in the common elements.
As a result, a roofing contractor who is hired by the condominium association to install a roof over a condominium building (counsel should confirm by reviewing the Condominium Declaration that the roof is a common element) will be compelled to file a lien against each unit owner if the contractor is not paid. The lien on each unit will only be for a lien amount “in proportion to the unit’s percentage interest in the common elements.”2
While the statute does not specify how this proportional lien is to be determined, the court in Stevens Construction Corp. v. Draper, Hall, Inc.3 addressed this issue under a predecessor statute. In Stevens Construction, the Wisconsin Supreme Court held that:
[i]n this case, where the [35] condominium units are roughly similar in value, and where each unit has the same share of the condominium area, it is reasonable to allocate, as the trial court did, 1/35 of the total lien claim to each of the units in question and enforce the lien to that extent.
Thus, in a typical condominium project involving condominium units of roughly equal value, and possessing the same share of common area, it seems the issue is settled: a common element lien will apply to each unit in a fraction equivalent to one divided by the total number of condominium units.
Depending on the number of units, however, this could create logistical problems in foreclosing or resolving lien claims against each unit owner.
Additionally, this rule leaves unresolved the issue of how to determine a “proportionate share” where the condominium units are not roughly similar in value or for some reason do not have the “same share of the common area.”
Conclusion:
While Wis. Stat. section 703.22 governing condominium liens may leave issues unresolved as to its application in many situations, counsel should be aware of this statute, and carefully analyze it in order to determine and protect a client’s lien rights arising from improvements to an individual condominium unit or the condominium’s common elements.
This article was originally published on the State Bar of Wisconsin's Construction and Public Contract Law Section Blog. Visit the State Bar sections or the Construction and Public Contract Law Section webpages to learn more about the benefits of section membership.
Endnotes
1 Wis. Stat. § 703.22(2). (Emphasis added).
2 See Torke/Wirth/Pujara, Ltd. v. Lakeshore Towers of Racine, 192 Wis. 2d. 481, 531 N.W. 2d 419 (Ct. App. 1995).
3 Stevens Construction Corp. v. Draper, Hall, Inc., 73 Wis. 2d. 104, 242 N.W. 2d 893 (1976).
