Can You Lien that Lease, or Is It a Usufruct?

Since 1913, Georgia courts have recognized that a contractor or supplier can attach a lien upon “every interest in real and personal property [that] can be seized and sold.” James G. Wilson Mfg. Co. v. Chamberlin-Johnson-Dubose Co., 79 S.E. 465 (Ga. 1913). Pursuant to Georgia case law, leasehold interests are among those property interests that may be liened. See Underground Festival, Inc. v. McAfee Eng’g Co., 447 S.E.2d 683 (Ga. App. 1994). There are, however, different types of leasehold interests, and some leasehold interests that can be encumbered with a lien while others cannot. Specifically, a contractor or supplier may properly file a lien against a lessee’s interest in an estate for years, see Bennett Iron Works, Inc. v. Underground Atlanta, Inc., 204 S.E.2d 331 (Ga. App. 1974), but a contractor or supplier may not attach a lien to a usufruct. See Jones v. E. I. Rooks & Son, 52 S.E.2d 580 (Ga. App. 1949). The question then becomes what is exactly an estate for years, and what exactly is a usufruct, and how are they different? The Georgia Court of Appeals addressed this question in the recently decided case of Pinnacle Properties V, LLC v. Mainline Supply of Atlanta, LLC, 2012 WL 5974867 (Ga. App. Nov. 30, 2012).

In Pinnacle Properties, a materials supplier brought suit seeking to foreclose upon a claim of lien that it had filed against a developer’s leasehold interest in a building. The developer had leased the property for four years and eleven months from a public development authority under an option contract whereby the public development authority could purchase the improvements from the developer or the developer could purchase both the improvements and the land. The issue before the Georgia Court of Appeals was whether the developer’s leasehold interest constituted an estate for years or a usufruct.

In analyzing this issue, the Pinnacle Properties’ Court first elaborated on the distinction between an estate for years and a usufruct. “[A]n estate for years is essentially a lease by which one person acquires a right to use real estate of a finite period ‘in as absolute a manner as may be done with a greater estate,’ so long as neither the property nor the person entitled to the reversionary interest in it is injured by that use.” Id. (citing O.C.G.A. §§ 44-6-102 to -103). “A usufruct, by contrast, is created when the owner of real estate grants to another person the right to use and enjoy the property for a fixed time or at the will of the grantor, as in a landlord-tenant relationship, but no property interest arises in the grantee.” Further, a usufruct is often referred to as a “license to use” and does not convey property interest to the tenant. A lease for less than five years creates a rebuttable presumption that the lease is a usufruct, but the parties’ intent is the ultimate determining factor in whether a lease is an estate for years or a usufruct.

In determining the parties’ intent, the Pinnacle Properties’ Court considered several provisions of the developer’s agreement with the public development authority. For instance, the developer was required to purchase insurance for the property. The developer was also required to pay ad valorem property taxes on the improvement and bore the risk of loss if the improvements to the property were damaged or destroyed. Furthermore, in both its answer to the complaint and its appellant reply brief, the developer admitted that it held a property interest in the improvements to the property. Accordingly, the Pinnacle Properties’ Court held that the developer owned an estate of years in the improvement and the material supplier could attach and enforce a lien against that interest, subject to the conditions of the lease.

Bottom line: As illustrated by Pinnacle Properties, a contractor or supplier cannot attach a lien to every leasehold interest in Georgia. This is especially true when the lease is for less than five years because a rebuttable presumption arises in favor of a usufruct. Nevertheless, strong contractual provisions indicating ownership of a property interest by the lessee can overcome this presumption and permit an unpaid contractor or supplier to file a lien. So, the next time you consider placing a lien on a leasehold interest, you should first ask yourself this question: Is this a lease or a usufruct?

Author: Daniel Murdock