The Lien Law is intended to give contractors some security against non-payment. If the contractor performs, and the owner doesn't pay, the contractor knows that through a mechanic's lien he can eventually force payment. But there is a scenario in New York where a contractor can be left without any lien rights and not even know it. Contractors beware: the private project on publicly owned land is a land mine.
Generally speaking, a public project is one where the owner is a public entity. It may be the city, the school board, the county or any one of a number of government agencies. On the typical public project, there is a "fund" of public money that is funding the construction. A Notice of Mechanic's Lien upon an account of a public improvement is governed by Lien Law Section 12. When a subcontractor on a public project is not paid, she can file a mechanic's lien against the public fund and secure her right to payment.
On the other hand, a private project, generally speaking, is one where a private entity is performing construction on a piece of privately owned property. This could be any number of residential or commercial developments. The majority of construction is private and takes place on private land. If the contractor performs, and is not paid, then the contractor places a mechanic's lien against the real property that was improved. When the lien is enforced, the contractor can force payment. Simple enough.
But there is a third scenario, one that happens more often than many contractors think about and one that they should take careful notice of: a privately run and funded project (i.e. there is no public entity involved) that is taking place on publicly owned land. A typical situation is where the owner is a public entity that leases the land to a private party. The private party then develops the land. In this scenario, there is no public fund to which a lien could attach since there is no public entity involved. The other option is to file a mechanic's lien against the real property. However, the law in New York forbids placing a mechanic's lien against a parcel of publicly owned land. See EMC Iron Works v. City of New York, 294 A.D.2d 173, 742 N.Y.S.2d 230 (1st Dept. 2002). Nor can the mechanic's lien attach to the leasehold interest between the public owner and the private tenant. See Matter of Paerdegat Boat and Racquet Club, Inc. v. Zarrelli, 57 N.Y.2d 966, 457 N.Y.S.2d 229 (1982). So a private improvement lien is impossible.
To top it off, since it is a private project, there is a good chance that there was no payment bond. In this doomsday scenario, that happens more often than you may think, the contractor is left without any lien or bond rights on the project. Better hope that the owner doesn't go under...
Vincent T. Pallaci is a partner at the New York law firm of Kushnick Pallaci, PLLC where his practice focuses primarily on the area of construction law. He can be reached at (631) 752-7100 or vtp@kushnicklaw.com
Vincent, this is a very good point and a very good post. This happens A LOT more often than people would think. New York seems to be unique in that it does not allow a private mechanics lien against the leasehold interest, since this seems to be the available remedy in most other states. I am currently writing a blog post on the lien blog that may have a tie-in here. The post will just give contractors and suppliers some ideas about what they can do in these circumstances, when there are no lien or bond claim rights (there are a few scenarios where this can play out). The potential solution? Get a letter of credit, personal guaranty, joint check agreement, etc.
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