When working with contractors, sometimes there is a dispute about the work. Contractors need to get paid, though, and they have a legal remedy called a mechanic’s lien to force payment. What exactly is this?
A mechanic’s lien is statutory protection given to contractors and their suppliers that entitles them to file a lien in the county clerk's office stating the amount owed for a given job. The lien has the status of a judgment without trial, which is why it gets in the way for both co-ops and condos in transacting business.
How does it get in the way?
After filing, a contractor has a year to go to court and commence a full-scale foreclosure proceeding, just like a bank foreclosure. That creates issues for co-ops and condos on several levels. First of all, the property is at risk. And secondly, ordinary business, such as refinancing a mortgage, sales and transfers, are affected because title companies need assurances that they will be paid. So boards and individuals have the right to dispute what's owed. The statute provides that a building or an individual can purchase a bond from a surety company securing up to 110% of the amount claimed in the lien. The cost of the bond is 10% of the lien amount. Then that bond and an affidavit or affirmation stating that a bond is being recorded is given to the county clerk's office. So when the contractor goes to foreclose that lien, they are no longer foreclosing on a property but on a monetary obligation.
Is a bond the only way a board can protect itself?
There are court procedures to terminate or remove a lien, but they’re time consuming. We have been successful in terminating liens that were incorrectly or improperly filed, but it literally takes months to go to court and to wait for an answer. The best thing to do is settle the dispute and pay. But that takes two willing parties. So I would advise condo boards to buy a bond. That way you can fight with the contractor for as long as you like, and nobody's at risk.
What’s the situation with co-ops?
It’s a bit different because shareholders don't own their apartments. When a contractor files a mechanic’s lien in a co-op, it’s against the entire building. So co-op boards need to be involved and make sure that the proprietary lessee bonds the lien. Shareholders who do significant work generally have an alteration agreement, which also provides to bond the liens. Some agreements say the contractor must waive the right to file a lien, but in my opinion, that's going to be unenforceable. It's contrary to statute.
Should an alteration agreement include language about mechanic’s liens?
It should impose upon the shareholder doing the work the obligation to bond any liens of which it receives notice. But generally feuds don't arise before the alteration agreement. They usually arise while the work is in progress or there’s a lack of progress. A board has to be vigilant. Normally boards take deposits, so that's one way they can at least cover their cost in terms of enforcing the obligations of the alteration agreement.
What’s the takeaway, both for condos and co-ops?
For condos, whether a contractor files a mechanic’s lien against the unit-owner or the against the condo itself for work done in the common elements, the condo board has to be proactive. If they're not going to settle the dispute, which is their prerogative, they need to bond the lien. They need to engage counsel familiar with mechanics’ liens who have contacts with surety companies to purchase the bond and do the legal work required to file the bond. To not bond a lien puts the board at risk because all purchase contracts provide that a buyer take the apartment lien-free. So the day a unit-owner loses a buyer because of a mechanic’s lien, the board is liable. It breached its fiduciary duty to the unit-owner. So I don't see condo boards having a way out.
For condos, the main thing with bonding a lien is that they may have more issues posting collateral. But co-ops usually have equity in their buildings, so posting collateral is less of an issue for them. Still, I think co-op boards are exposing themselves to liability, including personal liability, without a bond. Mechanic’s liens don’t arise for work done by the corporation, but in the context of a shareholder alteration. So again, I think boards need to be vigilant. Generally boards sign off on the work after it’s completed, but before they do so they could put a provision in the alteration agreement that a shareholder has to give evidence that all amounts have been paid and no liens have been filed. There’s a form where a contractor will certify that he has received everything he’s owed.
Let’s say a shareholder doesn’t pay his vendor, the vendor files a lien, and the shareholder still refuses to do anything. Where does that leave a co-op board?
Because the corporation owns real estate, it has the right to purchase a bond and bond the lien. And since standard proprietary leases provide that the shareholder would become responsible for the costs incurred by the board, that would include the cost of the bond, the recording fee, possibly some sort of return on any collateral posted by the board and, obviously, the legal fees. The co-op would have the right to collect those costs from the shareholder under the terms of the proprietary lease.