Mechanic’s Liens - What a Design Professional Needs to Know
The COVID-19 Pandemic has impacted countless individual businesses and virtually every industry. The construction industry was no exception. Regardless of whether work was considered essential and allowed to proceed (albeit under very different circumstances), suspended, or even cancelled, a common theme has been delayed payment or non-payment of invoices. In this financial climate, design professionals should refamiliarize themselves (or in many instances, become familiar) with the basics and benefits of filing a mechanic’s lien. Please note that the requirements and elements of a mechanic’s lien vary by state. This article focuses on New York Lien Law and some of the more basic but misunderstood requirements.
A mechanic’s lien is a statutory lien, codified under the New York Lien Law §3, created in favor of contractors, laborers, design professionals and materialmen who have performed work or services, or furnished materials in the development, construction or repair of a building or other real property. The lien attaches to the real property improved by the labor and/or material and has the effect of encumbering the property, thereby theoretically providing a payment source for the lienor’s unpaid services, materials or equipment.
Only services for permanent improvements to property may be used to calculate the lien amount. The preparation of designs, plans and specifications, even if the project is not ultimately constructed, are usually considered services for permanent improvements. Supervision, inspection and oversight services of construction work, including demolition and/or new construction are also appropriate to support a lien. Examples of costs that may not be sought in a mechanic’s lien include reimbursement for filings for building permits and approvals, obtaining construction bids, negotiating contracts, reimbursement of attorneys’ fees, interest or late charges on the unpaid amounts, and any indirect or consequential damages. Keep in mind that an owner can, and typically will, make a demand for an itemized statement of the design professional’s services provided pursuant to Lien Law Section 38 so only those appropriate services should be included in the lien amount. A lienor must be careful when calculating the lien amount. The penalties for a willful exaggeration of a lien include cancellation of the lien, responsibility for attorneys’ fees, bond sums and additional damages equivalent to the amount by which the lien has been exaggerated.
For private projects, a mechanic’s lien may be filed at any time during the progress of the work and the furnishing of services, or within eight months from the date of the last substantive service provided for the benefit of the project and development of the property. However, if the project is a one-family residence, the deadline to file a mechanic’s lien is four months from the last date of substantive service performed. The notice of lien must be filed in the clerk’s office of the county where the property is situated. New York lien law also requires that a copy of the lien be served on the owner of the property within 5 days before, or within 30 days after the filing of the lien. The failure to file proof of the service of a copy of the lien with the county clerk within 35 days after the lien is filed is fatal to the lien.
The filing of mechanic’s lien does not guarantee the immediate payment of the outstanding fees. On a private project in New York, a mechanics' lien places an encumbrance on the property (similar to a mortgage) that makes it difficult to resell or refinance the property without first removing the lien. Unless the matter is resolved through settlement, the lienor must “foreclose” on the lien, which involves the commencement of a lawsuit, to seek its unpaid fees for services performed.
Significantly, there is relief available to the owner to remove the lien from the real property. A mechanic’s lien may be bonded under the Lien Law to remove the lien from the real property. The bond must be posted in the amount of 110% of the value of the mechanic’s lien. The ability to remove the lien gives the owner, amongst other things, the ability to sell the property. Significantly, the bond does not extinguish or dismiss the lien. The lien is essentially shifted from the property to the bond. The lienor may still enforce the mechanic’s lien after it has been bonded by foreclosing upon the lien. Importantly, even if bonded, the lien will still expire if it is not extended or foreclosed upon within the required time frame.
A mechanic’s lien is valid for one year. Liens in New York may be extended once, for a one year extension, without a court order by filing an extension of the lien before the original lien expires. Lien’s on single family residences cannot be extended without a court order. The extension of the lien gives the lienor an extra year before it is required to foreclose on the property.
New York also permits the filing of amendments to a mechanics' lien. An amendment is typically needed when there is an increase or reduction in the amount due to the lienor. Not all changes can be addressed through an amendment to the lien. For example, where the wrong property is identified in the original lien, a new lien would need to be filed.
If and when payment is made, whether in the full amount of the lien, or in a negotiated amount, a satisfaction or discharge of the lien should be filed. The mechanics’ lien is a valuable tool for the design community to secure a source of funding for unpaid fees for its professional services. In the past underutilized by design professionals, the economic uncertainties resulting from the Pandemic have many design professionals reconsidering their previous reluctance to file a mechanics’ lien.
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