By C. Jaye Berger, Esq.
The topic of mechanic’s liens never grows old and people can never hear enough about them. Just last week a new client called about a mechanic’s lien that she had just received from the building manager of her co-op building. She wanted to know why she had not received her own copy. She also wanted to know if I saw anything obviously “wrong” with the lien. These are all typical good questions.
When a mechanic’s lien is filed, the County Clerk does not look the lienor in the eye and say, “Are you sure all the information is in here and is accurate?” or “Are you really owed that much money?” If anything is blank on the form or jumps out at them as being incomplete, they will no doubt say some thing, but it is really your job, once you receive the lien, to figure out if anything is wrong and the lien can be discharged. The general rule is that if it appears to be complete “on its face,” it cannot be discharged.
Keeping all of that in mind, my first thought was to see if the contractor on this residential project was licensed by the New York City Department of Consumer Affairs. Sure enough, it turns out that he was not licensed and had let his license expire. Unlicensed contractors cannot file mechanic’s liens or recover in a contract action or quantum meruit (ie. the fair value of the work). They cannot foreclose on a lien because they will be unable to plead that they are duly licensed. This is when you may also consider whether it is more cost effective to jump into action to file a petition to discharge it or to bond it and just wait it out until it expires.
So what is a mechanic’s lien? They are a creature of statute, and the laws vary from state to state. They are basically a form of legal 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 and cooperative apartment buildings, for example, they generally must be filed within eight months of the last date of work. For single family residential homes, it must be filed within four months.
However, it is important to remember that just filing the lien does not get the contractor paid or mean that the owner is going to lose his property in a foreclosure sale. 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 pressure off of the owner. The lien becomes a civil fee dispute and no longer involves the real property. They are a powerful tool for contractors who believe they are owed money, because they are a blemish on the title to the property.
Sometimes you can wait it out because there is no pressure to take any action immediately because you may not have a co-op Board urging its removal or you don’t have a mortgage and a bank is not asking that it be bonded. If that is the case, you can hold on it for one year and see if they let it expire or they take any action to renew it for another year or to foreclose it. They have two years before it expires.
One of the other things people typically do is try to “bond” the lien. The lienee has to apply to a bonding company for a bond, with the assistance of legal counsel, and show the requisite financial statements to the underwriting department. For your “average” size mechanic’s lien, this should not be a problem. Bonds are usually 10% higher than the mechanic’s lien amount. A fee or premium is paid for this bond, not unlike an insurance premium. This mechanic’s lien bond has to be served on the lienor and others, then filed with the County Clerk.
Once the mechanic’s lien is bonded, it clears up the title issues so that a closing can occur, but does not eliminate the underlying dispute that lead to the mechanic’s lien in the first place. The contractor or architect who filed the mechanic’s lien can still sue the owner on a variety of legal theories, including breach of contract.
Foreclosures of mechanic’s liens take place in court not in an arbitration proceeding. However, if there is a contract with a provision requiring arbitration of any disputes, the issues in controversy will have to be arbitrated before the mechanic’s lien issues will be dealt with, so there may be an arbitration proceeding first, followed by litigation in court.
If the time period for filing a lien is close to expiring, the homeowner should be aware that inviting the contractor over to look at his work can re-set the clock for filing a lien.
Some contractors and design professionals try to save money and file mechanic’s liens themselves or by using inexpensive filing services, which may or may not obtain the correct filing information or follow all the steps. 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 by legal counsel later on. 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.
Therefore, mechanic’s liens should be prepared by attorneys experienced in doing so. When owners and shareholders receive mechanic’s liens, they should also seek legal counsel knowledgeable in this area to understand what their legal options are.