The New York Court Of Appeals Addresses The Issue Of When A Mechanic’s Lien Can Be Placed On A Landlord’s Property By A Contractor Performing Work For A Tenant

• Posted on: Dec 21 2018

“The object and purpose of [New York’s] mechanics’ lien law was to protect a person who, with the consent of the of the owner of real property, enhanced its value by furnishing materials or performing labor in its improvement, by giving him an interest therein to the extent of the value of such material or labor.  The filing of the notice of lien is the statutory method prescribed by which the party entitled thereto perfects his inchoate right to that interest.”  John P. Kane Co. v. Kinney, 12 Bedell 69 (1903).  Thus, 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….

Because a lessee is deemed to be an “owner” under the Lien Law, 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.  See New York’s Lien Law § 2(3).  If, however, the landlord consents to a tenant’s improvement, a mechanic’s lien is properly placed on the fee interest.  See New York’s Lien Law § 3.  The question of what constitutes an owner’s consent such that the fee interest in the property is subject to a mechanic’s lien for labor or materials requested by the tenant, is often litigated and has not been answered consistently by the Appellate Courts in New York.

Thankfully, on November 20, 2018, 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 tenant was to build and operate a restaurant.  Pursuant to the lease, several requirements were imposed on tenant with respect to the construction related electrical work. Among other things, the lease provided that tenant “shall”: retain a competent electrical contractor; use only landlord approved contractors; obtain consent before making any improvements; provide landlord with detailed plans and specifications (including electrical plans); revise design drawings “according to any proposed changes by [landlord], which it retained the right to do”; and, not open for business unless the improvements are completed in accordance with the lease terms and “a certificate of completion certifying that the premises were constructed and completed in accordance with the final Design Drawings approved by Landlord” is submitted to the landlord.  (Some internal quotation marks and brackets omitted.)  The lease also provided, inter alia, that the improvements would become “part of the realty” at the end of the lease.  The lease also contained “detailed requirements for the electrical work that is the subject of the challenged lien.”

The tenant contracted with the lienor, an electrical contractor, to perform the work, which was satisfactorily completed.  The restaurant was a quick failure and the tenant was evicted within a few months of opening.  The lienor, was owed in excess of $50,000, filed a lien against the leasehold and fee interests and, thereafter, commenced an action to foreclose the lien.  Supreme court granted lienor summary judgment and dismissed the action.  The Court of Appeals affirmed the Appellate Division, Fourth Department’s unanimous reversal of supreme court’s decision.

Recognizing that the Lien Law should be liberally construed to provide protections to those who provide labor and services for the improvement of real property, the Court of Appeals flatly rejected 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 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, citing to its decision in Rice v. Culver, 172 N.Y. 60 (1902), the Court reiterated that such owner 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 in Rice 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.  See Ferrara (quoting Rice, 172 N.Y. at 65). The Ferrara Court pointed out that, in Rice, the Court of Appeals ultimately held that the owner’s interest in the property could not be subject to a lien, because knowledge of the improvements alone was insufficient to show consent.

In reviewing all of its older related cases, the Ferrara Court explained that in Jones v. Menke, 168 N.Y.61 (1901), the Court confirmed the general rule that lease provisions can establish “consent.”  In Jones, the operative provision in the lease required the tenant to convert the space to a first-class saloon within a few months and that if the conversion was not timely completed, the lease would terminate and title to the improvements would vest in the landlord.

In Ferrara, the electrical work was expressly authorized by the lease and was required to open the restaurant (the purpose of the lease).  Moreover, the lease language made plain that 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 existing precedents, the Ferrara facts were sufficient to demonstrate necessary “consent.”

The landlord in Ferrara relied on the Courts prior decision in Delany & Co. v. Duvoli, 278 N.Y. 328 (1938), and certain Appellate Division decisions erroneously interpreting Delany “as rejecting a finding of consent under Lien Law § 3 when no direct relationship between a tenant’s contractor and the property owner is present.”  The Ferrara Court rejected landlord’s argument and stated:

Contrary to [landlord’s] argument, Delany does not stand for the proposition that consent under Lien Law § 3 requires a direct relationship between the property owner and the lienor. Instead, Delany stands for the proposition that some “affirmative act” by the landowner is required to find consent for the purposes of Lien Law § 3. Our decisions make clear that that “affirmative act” can include lease terms requiring specific improvements to the property. When a lease does not require improvements, the owner’s overall course of conduct and the nature of the relationship between the owner and the lienor may demonstrate consent for purposes of Lien Law § 3…. To the extent that certain Appellate Division decisions … suggest that Lien Law § 3 requires a direct relationship between the landlord and the contractor to establish consent, they are contrary to our precedents and should not be followed.  (Citations omitted.)

TAKEAWAY

The Court of Appeals has clarified the law in New York regarding an owner’s liability for tenant improvements.  The Ferrara decision highlights the tension that landlords face when weighing the benefits of certain protective lease language against the potential for liability like that which was realized by the owner in Ferrara.

Tagged with: Commercial Litigation, Landlord and Tenant, Mechanic’s Liens, Tenant Improvements