Benjamin Tracy, Braverman Greenspun
Let's say a co-op hires a vendor to do facade work, who damages the building’s in the process. The board decides to hold back a significant sum and gets slapped with a mechanics lien. How is that going to affect the building?
The filed lien becomes what's commonly known as a cloud on the title or the chain of title for that real property. And it travels with the land. And what that means is that the lien would be transferable to any subsequent purchaser, and then the subsequent purchaser of the property would take that property subject to the lien.
Would the lien pop up in the purchaser's application to a bank and is it possible they won’t get financing because of it?
It would pop up. As for financing, it would depend on the amount of the lien, meaning a low five-figure sum probably would not be too controversial. If it’s $1 million or more, it may give a potential shareholder and their bank pause before they actually sign the proprietary lease. Oftentimes, they'll say the issue has to be resolved before finalizing any transaction and actually take on the shares.
Does having a mechanic's lien on your building affect insurance rates?
Again, it depends on the scope of the liability. But any sort of liability will at a minimum trigger insurance review, which would probably have an impact on the insurance premiums if the lien amount is significant.
Let’s take a step back. What exactly should a board do when a vendor puts a mechanics lien on their building?
So obviously, because it's a legal document, you're going to want to consult with your. counsel. I always like to say with the mechanics lien issues, a board should be both proactive and reactive. When I say proactive, I mean that any time you enter into a contract with a supplier or contractor, you're going to want to make sure it has a requirement for the distribution of a lien waiver. A lien waiver is basically an attestation by the contractor or supplier that will say: "Provided you tender payment for these services or supplies, there will be no liens filed, because the payment will be in full satisfaction of all work performed."
Would a waiver apply if a contractor damaged the building and the board refused to pay?
No. In your specific example of the window damage issue, the waiver of liens would not necessarily apply because ultimately payment is just being withheld. So this is a scenario where we can pivot to the reactive positions a board can take. The first consideration is business centric, meaning is it cheaper to pay the lien or bring on litigation counsel to fight it?
Another consideration is that the mechanic's lien is a claim of debt, meaning that the lienor is saying that the property owner owes money for certain materials or services provided, and it's on file with the county clerk. It's filed as a security interest, meaning the debt is secured by the chain of title filing. The board can obtain a bond, typically at a fraction of the cost of the total lien amount, from a bonding company, and file that bond with the county clerk. That way, you’re substituting the bond as the security interest. The bond is held by the county clerk until the resolution of the lien, but your chain of title is cleared. It's a much cheaper alternative to paying the total debt claimed.
Of course the contractor still wants to be paid, so somehow there has to be a resolution. But the bond buys you some time.
Exactly. There is a statute of limitations, meaning a contractor has to file the notice of lien within eight months from the last date that services were performed or materials were supplied. If the contractor is late, the lien should be canceled as a matter of law. So it's really important for the co-op and their counsel to review the lien to make sure that there's no technical defects like that statute of limitations issue because if there is, that's a quick and easy way to get the lien canceled.
I always recommend that once you have a lien, the board should demand that the contractor provide a detailed, itemized accounting of what comprises the debt amount set forth in the lien within five days. If the contractor fails to do that, the board could go to court and seek an order either canceling the lien or directing that itemized statement be provided. Without the itemized statement, you won’t have a full understanding of what you're going to be faced with in court.
With respect to the lien itself, once it's filed, the contractor has one year to commence a foreclosure proceeding. Failure to do that would be fatal to that lien, meaning the lien would get canceled. The contractor can always apply for an extension, but they'd have to show good cause to the court.
When you say foreclosure of the lien, what does that actually mean?
It’s a proceeding where the contractor takes their lien and any supporting documentation, files a petition in court and asks a judge to find that you performed certain work or supplied certain materials and were not paid, and that you have a legal right to recover what you’re owed. Because a lien applies to real property, a judge technically can order the sale of the property to pay off the debt. That's obviously a very rare occurrence. The judgment is essentially for a certain monetary amount, and the real property owner will be forced to pay it.
So once a board buys a bond, will they have to go ahead with some kind of negotiation to avoid a foreclosure proceeding?
Bonding over a lien is such an inexpensive way to clear your title, to avoid insurance issues, subsequent purchaser issues and lender issues. Once that's done, your only liability is that you’ll be responsible for paying the full amount if you lose in court. If you don’t have any pressure from your insurance company, a board can just say: "Look, we're going to wait this out for a year and see if the contractor forecloses. If they don’t, the lien is canceled. "
Alternatively, if their carrier is saying premiums are going to go up by X thousand dollars if the lien isn’t resolved, the board can get aggressive and file a demand that the contractor actually pursue that foreclosure mechanism. And once that demand is served, the contractor has 30 days to do it. They have to have their ducks in a row, commence the filing and commence the court proceeding. So that's another pressure tactic. The only concern is that more likely than not, they are going to commence the foreclosure and start up the litigation. The incentive, though, is that rather than have the lienor a year before filing, you can really shorten that and just try to get it resolved as soon as possible.
Are there any other things boards need to know when it comes to mechanics liens?
They need to know whether the lienor has a clear legal right to the funds or the debts. So getting back again to the damaged windows example, if the contractor did damage property and did not repair it, they’re liable for breach of contract and they don't have a clear right to the debt. And if the lien is what's called willfully exaggerated, meaning they're not entitled to the sum set forth in the lien, the damages are treble. So if a board has increased premiums, loss of potential purchasers and an inability to get lending, you could go after the contractor for that amount times three. Now, whether a judge actually awards that and forces a settlement is another question. There’s a lot of things in the court process that contractors try to take advantage of.