When a Contractor Walks

The board of the luxury Manhattan cooperative thought that it was getting a dream deal: $20,000 to paint and repair its once-elegant lobby. The directors had followed all the proper steps, as suggested by their manager: they had gotten references, then had obtained three sealed bids, and had then chosen. The painters selected had impeccable references, and they had given the lowest bid - $15,000 lower than the lowest of the other two bids.

That caused one director of the five-member board to hesitate, but the manager argued that it was okay to hire the contractors.

Wrong move.

The dream quickly turned into a nightmare. The board delayed giving the painters the final go-ahead. When they did, almost a month had gone by from their initial hiring. Now the painters - so eager for the work at first - were less available, having become busy with other jobs. They started the work, but it seemed to drag on interminably. Finally, says one board member, with only about a third finished, the painters just disappeared. They were gone, and so was the co-op's down payment.

The board eventually hired another painter, who finished the job, and the directors were happy to move on and forget the whole experience. It was about three months later that the first painters returned, demanding the rest of their money. “Outrageous!” cried the board. “They came back and said, 'We've done 90 percent of the work,' and we said, 'That's not true,'” recalls a director. “'You've done the prep work but no paint, no paint whatsoever,' and they didn't even finish the prep. So we said we wouldn't pay.”

And so the contractor slapped a lien on the property, which, among other things, effectively stopped the co-op's residents from selling apartments.

More outrage, more grinding of teeth. What could the board do now?

Not a lot, say experts, simply because of what the board didn't do. Indeed, this co-op's experiences are an object lesson in how not to hire a contractor. There are a number of steps that the co-op should have taken to protect itself, and which a board would be wise to follow when hiring anyone to do work on the property.

Be wary of the low bid. The low bid may be legitimate, but when there is such a wide variance between bids, it is not a good sign. In the Manhattan co-op's case, says a board member, “They said they would it for $20,000, even though every other bid was between $40,000 and $60,000. That seemed strange. And we were trying to figure out why, why, why? And it turns out that they probably had men available [when they bid], but they didn't a month later.”

Prepare a “road map.” The proper procedure for all contractual work is to have a contract, or an agreement, that basically spells out the terms and conditions of the work to be performed, the payment schedule, and so forth. It should also spell out the time frame within which the job has to be completed. “It should also be clear as to what happens if the contractor doesn't stay within the parameters of the time frame,” says Alvin Wasserman, director of Fairfield Property Services. “It should say when it is the co-op's responsibility to notify him and say, 'You're not compliant, you have X amount of time to correct the situation, and if you don't correct by such and such date, you're terminated from the job.'”

Because any agreement needs to be fair for both sides, Wasserman continues, the agreement should also say that “the co-op has an obligation to pay X amount of dollars to start, X amount of dollars as progress is made, X amount of dollars on completion, and X amount of dollars within a certain time period after completion,” in case there are any defects that surface within a few days or weeks after. There should also be warranties negotiated between the contractor and the co-op.

The co-op's attorney should review all this and, if the attorney thinks that the co-op is adequately protected and the contractor feels that it's fair to him, everybody signs. “You've got a map to work with that would allow you to go forward,” says Wasserman, who adds: “This way, you can get a quick remedy by going to court and showing the judge that, 'Look, this is what we did to notify him that he was not performing his duty as agreed upon,' and you can get that weight lifted pretty quickly if you did your job right.”

Get a payment performance bond. A co-op should also require a payment performance bond, which it can get before or after the dispute. “You have a payment and performance bond, and if the guy walks off the job and the job's not complete, you call on the payment and performance bond, and the insurance company comes in, finishes the job, and protects you against liens for work, labor, and materials,” explains attorney Steve Wagner, a partner in Wagner Davis. “There can be almost an absolute guarantee if you buy the payment performance bonds.”

“The co-op has a right to get a bond, so the lien is no longer leverage over them,” adds attorney Bruce Cholst, a partner in Rosen & Livingston, who notes that you can get a bond even after the lien has been filed. “Its really pretty routine legal work - two sets of legal papers,” he notes. “You file a paper saying, 'There's a bona fide dispute here, it's not a question of nonpayment. Set a level of the bond and I'm willing to get a guarantee from a bonding company that we have the assets in case he proves to be right.' And then the judge signs a court order setting the amount at a little bit over the disputed amount to allow for judgment interest.” It is similar to putting money in escrow. Then the lien is effectively lifted, at least for resale purposes.

Document the damage. Keep a visual record of the disputed area both before the work started and later, when the board has sent a letter saying, “You're off the job.” Because now, notes Cholst, “it's going to become a court fight over whether there was substantial completion, or no completion. I actually did handle this exact type of dispute - I'm in the midst of it - for a building on a hallway renovation. I made a point of bringing in Rand Engineering to photograph every one of the 48 hallways to show how it was incomplete. Now the contractor can come back and say, 'I was ready, willing, and able to complete the job, and they threw me out without justification,' and we now have a good documented description at the state of completion. And that's really what it's going to boil down to, a battle over whether there was substantial completion.”

According to Wagner, there's no way you can avoid having somebody file a lien. “You can't stop somebody from filing,” he notes, “but you can contest the lien, arguing that it was improperly filed, that it was not filed in a timely manner, that it was not served properly, that the amounts weren't due.” Also, as noted earlier, you can bond the lien after the dispute has begun. “The law now provides that you can bond the lien for 110 percent of the lien value,” says Wagner.

But the most important step you can take before - and after - the dispute begins is to have your agreement and disagreement in writing. Remember, warns Fairfield's Wasserman: if it's not in writing, it didn't happen. “Write down everything,” he says. “If you do your homework right up front, you protect yourself, and you won't get hurt in the end.”