What You Need to Know About Mechanic's Liens
Contractors, Subcontractors, Architects & Suppliers
Mechanic’s liens are one of the topics I am most often consulted about. This is especially true at the present time with the state of the economy. It is not that the economy brings new kinds of issues, there are just a lot more of the same kinds of issues. Contractors, subcontractors, architects and suppliers are all worried about not being paid and what will happen if co-op and condominium clients or individual shareholders and unit owners cannot pay their loans and in turn, pay them. Similarly, co-ops and condominiums are worried about foreclosures on those mechanic’s liens and how these issues will affect the building.
The first task is to understand what they are. Mechanic’s liens are a creature of statute and the laws vary from state to state. They are basically a notice that is placed on the title to the property, showing that contractors, subcontractors, suppliers or architects claim they are owed money. On commercial property in New York State, they generally must be filed within 8 months of the last date of work. For residential property, they must be filed within 4 months of the last day of work. What constitutes the last day of work can sometimes be open to debate. However, it is important to remember that just filing the lien does not get the contractor or the architect paid or mean that the shareholder or co-op building is going to lose the property in a foreclosure sale. It is an involved process.
If the lien is for a dollar amount where the owner has the financial ability to bond it or deposit the money with the court, it will take a great deal of the pressure off of the owner. The lien then becomes a civil fee dispute and no longer involves the real property itself. However, sometimes the lien is so large that the owner may not be able to bond it. In those situations, there may be no choice, but to deposit the money with either a surety or the court.
Liens which are filed as a result of shareholder improvements present interesting issues because the co-op may or may not have “consented” to the work and it was probably not done for the “benefit” of the building. This might make the mechanic’s lien vulnerable to attack, especially if the shareholder files for bankruptcy. The problem I usually see with liens involving condominiums, is that some lawyers mistakenly place the lien on the entire building, instead of only on the unit. The building should have knowledgeable legal counsel examining the documents, because improperly filed liens can create problems for the building and a good attorney may find a loophole.
Most well-drafted alteration agreements will require the shareholder to remove the mechanic’s lien or risk having the co-op do it and charge the cost back to the shareholder. Most lenders and title companies will want the mechanic’s lien to be removed or bonded before a closing can occur on any loans or refinancing. For smaller liens an indemnity letter may suffice.
The law regarding bonding a mechanic’s lien in the state of New York changed a few years ago and it is now a simpler process that is more “clerical” than anything else. Basically, the lienee has to apply to a bonding company for a bond and show the requisite financial statements to the underwriting department. For your “average” size mechanic’s lien, this should not be a problem for most developers.
However, when there is an enormous mechanic’s lien for hundreds of thousands of dollars or more, the lienee may not be able to show enough liquid assets as security or the underwriter may view it as too great a risk to bond. That can present a problem. Some owners will not be able to bond such a lien. Money may either need to be filed with the court or there may be litigation. Of course, there is also always the possibility of settling. That will be the topic of a future article.
If they are able to obtain a bond, the bonding company immediately issues a bond directly to the company, which is higher than the mechanic’s lien amount. A fee is paid for this bond. The mechanic’s lien bond has to be served by legal counsel on the lienor, then filed with the County Clerk. Companies filing mechanic’s liens should always work with legal counsel very familiar with this process.
Once the mechanic’s lien is bonded, it clears up the title issues so that a closing on a refinancing or a sale can occur. However, it does not eliminate the underlying problem that led to the mechanic’s lien in the first place. The contractor or architect can still sue the owner on a variety of legal theories, including breach of contract. Foreclosure of mechanic’s liens take place in court. However, if there is a contract with a provision requiring arbitration of any disputes, the issues in controversy may have to be arbitrated before the mechanic’s lien issues will be dealt with. It becomes rather complicated. Again, seek legal counsel from someone knowledgeable in this area.
Some contractors and design professionals try to save money and file mechanic’s liens themselves. Others use inexpensive filing services, which may or may not obtain the correct filing information. Consequently, there are mechanic’s liens, which are accepted for filing by the clerk, which may contain fatal errors for purposes of a foreclosure proceeding. Notice of the filing of the mechanic’s lien must be sent to the property owner, but many property owners report that they have never received such notice. None of these problems may be apparent until someone tries to foreclose on the lien
Use a Professional
Mechanic’s liens should be prepared by attorneys experienced in this area of the law. Co-op and condominium buildings on which liens have been filed should immediately seek legal counsel knowledgeable in this area to understand what their options are when they receive notice of a mechanic’s lien. Shareholders and unit owners should seek counsel, as well, to try to resolve the underlying issues and possibly have the mechanic’s lien satisfied before the situation spirals out of control.
C. Jaye Berger, Esq., of the Law Offices C. Jaye Berger, is a Manhattan attorney specializing in real estate, co-op, condo, construction law and litigation.