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.