Recently, the New York Court of Appeals has resolved an open issue under Lien Law section 3, concerning leased property. Historically, landlords in New York City have included language in leases purporting to shield their interest in property from mechanic’s liens arising out of tenant work by maintaining that the landlord does not “consent” to work and the landlord does not agree to any relationship with the tenant’s contractor. This approach relied on a 1938 Court of Appeals decision known as Delany & Co. v. Duvoli, 278 NY 328 (1938).
Many courts read that Delany as holding when, a relationship between the contractor and the landlord was absent, the landlord’s interest in the property should be shielded from mechanic’s liens by tenant contractors. That was certainly true in the First Department which serves Manhattan, and the Bronx and the Second Department, which serves Queens, Brooklyn and Staten Island among other counties.
In a decision made on November 20, 2018, in a case entitled Ferrara v. Peaches Café, No. 124, the New York Court of Appeals made clear that Delany does not mean the absence of an agreement between the landlord and the tenant’s contractor shields the landlord’s interest in its property from a tenant contractor’s mechanic’s lien. Specifically, the Court of Appeals held that “the Appellate Division appropriately declined to impose a requirement that [landlord] either expressly or directly consent to the improvements.” This effectively reversed long standing precedent from the First and Second Departments.
In reaching this decision, the Court of Appeals was sensitive the pro-contractor policies that underpin the Lien Law.
The “impetus” behind the [Lien] law is to provide “protection to those who furnish work, labor and services or provide materials for the improvement of real property.” Accordingly, the law “is to be construed liberally to secure the beneficial interests and purposes thereof.
The Court of Appeals went on to hold that “[t]o enforce a lien under Lien Law section 3, a contractor performing work for a tenant need not have any direct relationship with the property owner.” Instead, the Court of Appeals set forth a two-part standard, either the landowner had to be an “affirmative factor” in the “procuring” of the work or have “consented” to the work with the “expectation that he will reap the benefit of it.”
Ferrara presents a fairly typical arrangement for New York City. The landlord authorized the tenant to perform work under certain conditions in the lease. The landlord fixed the hours of work. The landlord had drawing approval authority. These elements, the con-sent in the lease, and the landlord control of the hours of work and the landlord’s approval rights as to the drawings were sufficient to create “consent” to the improvement under Lien Law 3, thereby making the landlord’s interest in the property subject to foreclosure.
Cooperative apartment managers and boards now face a conundrum. Obviously, residential buildings need to ensure that work in individual apartments will not impair overall building utility services, interfere with the property rights of others or violate the law in some respect. Any other course of action will place building wide insurance policies and compliance with the Housing Code and the Building Code at risk. However, by requiring drawing review, controlling work hours, managing access, demand-ing insurance, and all the other elements of project control, the cooperatives now face liability under the Lien Law to unpaid contractors for tenants.
While there is no easy answer on to how to han-dle this situation, one approach would be to adopt a policy of bonding off any such liens and assessing the bond premium and bond escrow against the offending unit. This would put the onus on offending tenants and leave the others in peace. Tenants may resent posting escrow accounts for the project and there will be endless accounting issues and expenses associated with managing agents to handle those accounts. It’s doubtless that any delay in returning escrows will result in bad feelings, if not litigation.
Additionally, residential buildings need to have tenants continue upgrading units to ensure the stability of property values. Buildings that make it difficult or unreasonably expensive for tenants and unit owners to make improvements engage in long term self-defeating conduct.
Finally, none of the foregoing regulations impacts condominiums, and therefore the only party impacted by the lien is the offending unit.