Suffolk County Electrical Contractor’s Association (SCECA), “The Light.”
In the course of their profession, while contractors often perform work directly for a property owner (landlord), there are also occasions where the contractor performs work directly for the landlord’s tenant. Indeed, the landlord may or may not know that the contractor is performing work for the tenant. The question is this – if the tenant does not pay the contractor, can the contractor file a mechanic’s lien against the landlord’s (fee simple) interest in the property or can the contractor file a mechanic’s lien against the tenant’s (leasehold) interest in the property? In essence, the contractor would want the most protection for its unpaid work, so the value of the landlord’s property is better protection than the value of the tenant’s interest in the property.
New York’s Lien Law § 3, provides that:
A contractor, subcontractor [and other listed protected categories of people] who performs labor or furnishes materials for the improvement of real property with the consent or at the request of the owner … or of his agent … shall have a lien for the principal and interest, of the value, or the agreed price, of such labor … from the time of filing a notice of such lien….
A lessee (tenant) is deemed to be an “owner” under the Lien Law. Therefore, a lessee’s leasehold interest in rented property (as opposed to an owner/landlord’s fee interest in the same property) can be the subject of a mechanic’s lien.
Moreover, if the landlord consents to a tenant’s improvement, a mechanic’s lien is properly placed on the fee interest of the landlord’s property. So, the next question is – what constitutes a landlord’s consent so the contractor can lien the interest of the landlord, not just the tenant. This question was not always addressed adequately by courts, so there is often a gray area leaving contractors and landlord’s unsure about liens on the property.
In late 2018, New York State’s highest court, the Court of Appeals, decided Ferrara v. Peaches Café LLC and clarified the law in New York on this issue.
The landlord in Ferrara leased space in which the tenant was to build and operate a restaurant. Under the lease, several requirements were imposed on the tenant with respect to the construction-related electrical work. In fact, the lease provided that the tenant “shall”: retain a competent electrical contractor; obtain consent before making any improvements; provide the landlord with detailed plans and specifications (including electrical plans); and revise design drawings “according to any proposed changes.”
Moreover, the restaurant could not open for business unless the improvements were completed in accordance with the lease terms, including obtaining a certificate of completion in accordance with those terms. Clearly, the landlord was extremely involved in the improvement. As stated, the lease also contained detailed requirements for the electrical work that was the subject of the lien challenged by the landlord as improper.
The tenant contracted with the lienor, an electrical contractor, to perform the work, which was satisfactorily completed. Unfortunately for the tenant and the electrical contractor, the restaurant failed and the tenant was evicted within a few months of opening. The electrical contractor lienor was owed over $50,000 and, thereafter, filed a lien against the tenant and the landlord. The electrical contractor also commenced a lawsuit to foreclose the lien. The lower court dismissed the lawsuit and the lien, stating that the electrical contractor could not file its lien against the fee simple interest of the landlord. The next level of the court system upheld the lower court’s decision that the lien was improper and invalid.
However, recognizing that the Lien Law should be liberally construed to protect contractors, the Court of Appeals rejected the landlord’s argument that “a contractor working for a tenant may not place a lien on a landlord’s property unless landlord has ‘expressly’ or ‘directly’ consented to the work.”
The Court of Appeals determined that “[t]o enforce a lien under Lien Law § 3, a contractor performing work for a tenant need not have any direct relationship with the property owner.” Instead, the Court of Appeals held that such an owner’s liability could be imposed if the landlord is “an affirmative factor in procuring the improvement to be made, or [in] having possession and control of the premises assent[s] to the improvement in the expectation that he will reap the benefit of it.”
The Court of Appeals also held that the Lien Law requires more than “passive acquiescence” on the part of the owner – who must consent or require that the improvement be made – before a lien may be properly placed on the owner’s interest in the property.
So here, the Court of Appeals placed a minimum standard for a contractor to be able to lien the landlord’s interest in the property. In Ferrara, the electrical work was expressly authorized by the lease and was required to open the restaurant. Moreover, the lease language also provided that the landlord was supervising the work and was permitted to exercise some control over the work “by reviewing, commenting on, revising, and granting ultimate approval for the design drawings related to the electrical work.” Therefore, under the facts in Ferrara, the facts were sufficient to demonstrate necessary “consent.”
In summary, the ability for a contractor to file a lien, not just against the leaseholder’s interest in the property but also against the landlord’s interest, will be fact dependent. Also, as demonstrated in the Ferrara decision, landlords face increased potential liability for work done for their tenants when they impose certain protective lease language concerning work performed on their property.
