November 22, 2016

Illinois Appellate Court Ruling Has Far-Reaching Implications for Construction Participants in Wind Energy Projects

A landmark opinion issued by the Second District Illinois Appellate Court on November 9, 2016, contains vital information for construction industry participants involved in Illinois wind energy projects. In AUI Construction Group, LLC v. Louis J. Vaessen, et al., 2016 IL App (2d) 160009, the Court ruled that a subcontractor who performed over $5 million of work to construct the foundation and tower supporting a wind turbine could not assert lien rights under the Illinois Mechanic’s Lien Act. The decision sheds new light on whether Illinois wind project construction should be classified as lienable land improvements or non-lienable trade fixtures, and, as such, is instructive for construction industry participants considering whether to engage in this work.

In AUI Construction Group, the circuit court dismissed the subcontractor’s complaint to foreclose on an over $3 million mechanic’s lien filed against the real property on which the wind energy park was located on the basis that the foundation and tower are trade fixtures, not lienable land improvements. The Appellate Court agreed and affirmed the lower court decision, despite having received several amicus curiae briefs filed in support of the subcontractor’s position by entities including the American Subcontractors Association, Associated General Contractors of America, Builders Association, Central Illinois Builders of AGC, Fox Valley Associated General Contractors and Southern Illinois Builders Association.

The central question on appeal was whether the subcontractor’s work, which involved features of typically lienable construction work (i.e. concrete, rebar, electrical conduit, and other ordinary building materials), was lienable under the Act, which only permits a lien to be filed when the work constitutes an improvement to real property. In making this determination, Illinois courts evaluate three factors: (1) the nature of its attachment to the realty; (2) its adaptation to and necessity for the purposes to which the premises are devoted; and (3) whether it was intended that the item in question should be considered part of the realty. The Court in this case emphasized that the preeminent factor is intent, while the other factors are merely evidence of intent.

The Court’s decision hinged on the fact that, in the agreement between the landowner and the wind energy park developer, only an easement permitting use and access was granted (i.e. the exclusive right to erect, install, construct, replace, maintain, repair and operate wind energy conversion systems on the property), the developer retained ownership of all property installed by the developer (i.e. the tower, foundation and electrical lines), and upon termination of the parties’ agreement, the developer was obligated to dismantle and remove all such property. The Court viewed these facts as a clear indication that the landowner and developer intended the work to be removable, and it went on to state that “[a]s the intent of the parties is the most important factor in determining whether an item is a removable trade fixture or a permanent improvement, the easement agreement establishes that the tower was a trade fixture.” 

In response to arguments that the tower was a permanent improvement because its removal would be impractical and cause damage to the real property, the Court stressed that Illinois jurisprudence contemplates that an improvement that the parties consider to be temporary will be found to be temporary unless that improvement truly cannot be removed. “To hold otherwise would essentially transfer ownership rights in the property when the parties themselves did not intend to transfer such rights,” the Court added. This is true even though, in this case, the Court recognized that “bombs would have to be used to remove the tower.”  The Court went on to find no unfair prejudice to the subcontractor because its contract included a reference to the fact that the developer would continue to own the wind-powered electrical generation facility.

The decision serves as a stark warning to construction industry participants involved in Illinois wind projects that they must carefully consider the nature of the agreement between the landowner and the developing entities to determine whether their work will be lienable under the Act in the event of a payment default. Given the importance of the issues and parties involved, the Illinois Supreme Court will likely have an opportunity to review the case. Faegre Baker Daniels’ construction lawyers will continue to monitor any developments and report on any activity by the high court.

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