A mechanic’s lien is a powerful tool for workers, contractors and material suppliers who have monetary claims for work performed or materials supplied to improve real property. Mechanics’ liens are powerful, because the lien is a cloud on title which can cause great difficulties for owners, and because mechanics’ liens are inexpensive to file, yet difficult to discharge summarily. Basically, unless a lien is invalid on its face because the notice of lien itself does not contain the information required by New York State Lien Law Section 9, or is filed late, it cannot be discharged without litigating the underlying claim.
Most owners, or contractors whose subcontractors have filed liens, will argue to their counsel that the amount claimed to be due is not owed at all, or the amount claimed is highly exaggerated. Therefore, they argue, the lien is invalid and should be easily and summarily dismissed. Usually, their cry is that the contractor or subcontractor did not finish its work, did not perform its work in a timely and workmanlike manner, or the amount allegedly due is for extra work that is not extra work at all, but rather part of the base contract.
Unfortunately, those arguments do not entitle the lienee to a summary discharge of the mechanic’s lien. These are questions of ultimate entitlement that require a decision on the merits of the claim, before the validity of the lien can be determined. This presents a difficult problem for the owner who invariably wishes to discharge the lien as soon as possible because of an impending sale or mortgaging of the property, and to contractors who are typically contractually required to remove any lien filed by subcontractors. It also impacts commercial tenants whose leases invariably require the discharge of mechanics’ liens arising from work in the tenant’s space.
The purpose of this article is to provide some suggestions for dealing with mechanics’ liens when representing owners, general contractors, or leasees. We will deal only with private improvement liens which effect title to real property and not public improvement liens, which attach to the government appropriation for the improvement.
Bonding the Lien
The most commonly used means to discharge a mechanic’s lien is to “bond it off” with a surety bond. In effect, the security for any judgment in favor of the lienor is shifted from the real property to the bond. This is a statutory right available to all. (Lien Law Section 19(4))
A bond in a sum equal to 110% of the lien must be filed with the County Clerk on notice to the lienor, who has, in limited instances, 10 days to object to the sufficiency of the bond. If no objection is filed, the lien is deemed discharged without further action or proceeding. (Lien Law Section 19(4)(a))
The difficulty that many face is the prospect of procuring the bond itself. A contractor that regularly obtains payment and performance bonds for its work, usually has a certain amount of “bonding capacity,” and so, is able to obtain a lien bond without much difficulty. For a property owner or contractor without bonding capacity whose subcontractor has filed a lien, things can be much more difficult, with the surety usually requiring the posting of collateral equal to at least the amount of the bond. Additionally, bonds can be expensive with premiums ranging from two to five percent of the bond per year. If the litigation works its way through the state court at a typical pace, two or three years worth of premiums could easily be incurred.
Resulting from Imperfect Filing
Many lienors choose to simply file their liens without assistance of counsel. However, since 1988 this can be a very dangerous undertaking, because of the very specific filing requirements which, if not followed, are fatal to the lien.
A lien must be filed within 8 months (4 months in the case of real property improved by a one-family dwelling) from the date the last of the work or materials were supplied. (NYS Lien Law Section 10) In addition to the filing of the lien with the County Clerk in the county where the property is located, the notice of lien must be served upon the owner by certified mail within 30 days of the filing. (NYS Lien Law Section 11) An affidavit of service must be filed with the County Clerk within 35 days of the filing of the notice of lien. Id. Additionally, if the lienor does not have a direct contractual relationship with the owner, such as a subcontractor or material supplier, the lienor must also serve the entity with whom it had a contract, the general contractor (if different), and the owner with the notice of lien and file the affidavits of service within the 35 days. (NYS Lien Law Section 11-b)
The failure to serve the notice of lien upon the appropriate parties is a fatal defect that cannot be remedied nunc pro tunc and will result in the summary discharge of the lien. Hui’s Realty, Inc. v. Transcontinental Construction Services, Ltd., 147 Misc. 2d 1080, 559 N.Y.S.2d 114, aff’d 168 A.D.2d 302, 562 N.Y.S.2d 633 (1st Dept. 1990); Podolsky v. Narnoc Corp., 196 A.D.2d 593, 601 N.Y.S.2d 320 (2d Dept. 1993). Accordingly, when a client is served with a notice of mechanic’s lien, it is wise to first determine if service was effectuated on the proper parties, and whether the affidavits of service were timely filed. If they were not, the lien is invalid and subject to summary discharge through a special proceeding.
Here, a bit of strategy sometimes will go a long way. If before the eight month time period during which a lien may be filed (four months in the case of a one-family dwelling) has expired, the notice of lien is shown to be fatally defective because of failure to properly file or serve it, the lienor is permitted to simply file a new lien, and will most probably do so properly the second time around. However, once the time period for filing has expired, the lienor will not have an opportunity to re-file the lien. Therefore, the better strategy is to wait to raise the issue until the time a lien can be properly filed has expired, i.e., after the 8th or 4th month from the last of the work. The date when the last of the work or materials were supplied is easily obtained, since the invalidly filed notice of lien must include the date when the last of the work was performed or materials supplied (Lien Law Section 9).
Lien Law Section 59 Demand
A mechanic’s lien will expire, unless extended, after one year if the lienor does not commence a lien foreclosure action and file a notice of pendency before that time. (Lien Law Section 17) Except for property improved by a single family house, a lien can be extended for one additional year by simply filing an extension of lien. (In the case of a single family residence, the lien can be extended only by Court Order signed and filed before expiration; see, Lien Law Sec. 17)
Of course, if the property owner waits for one year from the filing and the lien is not extended, nor a foreclosure action and notice of pendency filed, the lien will expire by operation of law (Lien Law Section 17). Many times, however, the owner or contractor will not have the time to wait for the expiration of the lien by operation of law.
Lien Law Section 59 provides some relief from the one year or longer wait. A Section 59 Demand served upon a lienor requires the lienor to commence its foreclosure action by a date certain not less than 30 days after service of the Demand. If the action is not commenced, the lien is subject to summary dismissal.
It may seem as though an owner or contractor is inviting litigation, but a Lien Law Section 59 Demand can be a very useful and effective tool in lien law practice. While the filing of a notice of lien is relatively simple and inexpensive, the commencement of a lien foreclosure action is much more complicated and expensive.
There are services available to contractors that will file a mechanic’s lien and appropriate affidavits of service for less than $300. Accordingly, even if a lienor feels that it’s claim is marginal, it may be worth a $300 fee to simply file the lien, and hope that the owner will be desperate enough to discharge the lien because of pressure from the owner or an upcoming real estate transaction to settle the claim.
It is a completely different matter for the lienor to retain counsel to commence a lien foreclosure action. A lien foreclosure action is a complex matter where the owner, subsequent mortgagees and others who have filed liens against the property must be identified and named as defendants (Lien Law Section 44). Accordingly, the commencement of a lien foreclosure action will require the lienor to hire experienced counsel willing to commence the foreclosure action. In cases where the claim is marginal or the lienor not well funded, the lienor may not timely commence the foreclosure action in response to a Section 59 Demand.
It should be noted that a lienor, even without a valid lien, still has other remedies available to him, such as a claim for breach of contract, quantum meruit and account stated. However, without a valid lien, the cloud on title will disappear.
As indicated above, mechanics’ liens are powerful weapons that are generally difficult to dismiss without protracted litigation. However, the above procedures can result in the summary discharge of a mechanics’ lien, thereby clearing the encumbrance on title.
*Thomas J Rossi is a partner in the law firm of Rossi & Crowley, LLP located in Douglaston, New York. His practice is concentrated on construction and real estate litigation matters.