Lien & Mean

You’ve just bought a posh condominium overlooking central Park. It’s the newly refurbished portion of a distinguished hotel, and you couldn’t be happier. Then you get the letter. “To whom it may concern,” it begins. “We represent Component Assembly Systems, Inc., a subcontractor [on a project in your building]. Please find for service upon you a copy of a Notice Under the Mechanic’s Lien Law filed in the office of the Clerk of the County of New York on April 3, 2009.”

You read further and find that the so-called mechanic’s lien is for $8,334,400, and that you are responsible for a proportionate share.

It’s a scary scenario and it happened this spring to the much-ballyhooed Plaza Hotel Residential Condominiums at 768 Fifth Avenue and Central Park South. And it isn’t just an issue for newly constructed condos. If you’re in a co-op or a condo, prewar or recently built, you should be concerned – and prepared.

Lien Times

First, what exactly is a mechanic’s lien? It is part of a legal process seeking to guarantee payment for contracted services on a piece of property. If they have not been paid for their finished work within an agreed-upon time period, contractors, subcontractors, and suppliers can file liens. Until the debt is paid, the landowner does not own a clear title. In a co-op or condo that means the corporation or individuals cannot borrow and the property cannot get city work permits, among other things.

Originally, the mechanic’s lien was almost exclusively imposed by mechanics. If an owner of a recently repaired car failed to pay his bill, for instance, the mechanic could resort to a simple legal measure: placing a “lien”’ on the car’s title. That lien gave the mechanic the right to lawfully take possession of the car until the owner paid him. If the owner decided to pay the bill voluntarily, the lien would be lifted.

The system was eventually used in the construction world. A property owner might seek out a contractor to construct an apartment complex, for example. The project would require licensed subcontractors such as carpenters, general laborers, and, possibly, landscapers. They would all purchase supplies from outside vendors. The owner would pay the contractor, who in turn would pay off all the subcontractors. However, construction projects are often started and finished without guarantees, which gives the property owner much more leverage over the contractor.

It is this inequality that makes a mechanic’s lien so appealing to contractors and vendors. The threat of a lien can guarantee payment. Many states require that any contractor or vendor must first file a 20-day notice before pursuing an official lien. Some property owners may dread receiving the notice, but the contractor must file it in order to qualify for the actual lien.

A mechanic’s lien is not a fast cure, but it does offer more legal protection for the workers. Some contractors view a mechanic’s lien as a last resort, since they usually want to establish a good working relationship with property owners whenever possible.

Liens are treated differently, depending on whether they are filed against a co-op or a condo. In a cooperative, one size fits all. To place a lien against one unit is not possible; it must be placed against the entire building.

“That is because of a defect in the law,” notes Arthur Weinstein, an attorney in private practice. “For co-ops, there is only one block and one lot number for the entire building,” he says, referring to the figures assigned to the property for tax purposes. “We, in the co-op community, have been seeking desperately to get this law changed because it is manifestly unfair. Shareholder 1-D gets a new closet in his apartment and doesn’t pay the contractor. Suddenly, there is a lien against every single apartment in the building, and banks making loans and shareholders selling units are going to have to deal with it.” That gets the board involved, more so than in a condominium.

In a condo, there are separate lot numbers for each unit, so a contractor can be more selective in who he targets. He can place liens against every unit-owner, of course. It is just time-consuming and costly. Naturally, the more people who get hit by the lien, the greater the pressure on the property owner(s) to settle. It’s not right, but it does happen.

Lienning Tower of Plaza

The Plaza Hotel got involved in this lien brouhaha because of the recently opened section of the historic property that was rehabilitated as luxury condominium residences. According to papers filed with the county clerk, the bare bones facts of the case are simple: Component, a subcontractor on the renovation work begun at the Plaza in 2006, was reportedly not paid by the developer, El-Ad Properties, which has also hired Tishman. According to Mark A. Rosen, of McElroy, Deutsch, Mulvaney & Carpenter, the attorney for Component, the balance was “due on what is an approved contract and monies are also due for additional work approved by El-Ad.”

“The Plaza retained Component to perform certain carpentry and other services at the Plaza Residences,” Aliza Ganza, counsel for El-Ad, explained in a letter to the owners. “The dispute, initiated by Component, arises from its own unreasonable position at the close-out of its contract, demanding considerable monies for which it has no entitlement. Indeed, Plaza has met numerous times with Component and attempted to resolve the dispute; however, Component persists with its unsupported and excessive demands.”

Rosen, the Component attorney, disputes this scenario, and says that his client did the job requested and should be paid for it. He has offered to go to binding arbitration, as required in the contract, but he says that El-Ad has refused.

What the lien means is that, in theory, the Plaza unit-owners cannot refinance or sell their units until the lien is lifted. “It is a big pain in the neck,” says attorney Steve Sladkus, a partner at Wolf Haldenstein Adler Freeman & Herz, who is not involved in the Plaza case.

Whatever the merits of the case, there is nothing to stop a contractor or subcontractor from placing liens on anyone. They may not stick, but the board – if it or the building is named – must take the time and money to defend itself and may prefer paying now to avoid legal hassles in the future.

Attorney Robert Braverman, a partner in Braverman & Associates, recalls a newly constructed condo that had mechanic’s liens improperly filed against the sold units in the names of the unit-owners. “So, here were unit-owners who, after they closed, got wind of the fact that there was a lien filed against their unit in their names,” Braverman notes. “They’re going to have to either convince the contractor’s attorney to discharge those liens [because they were improperly filed] or they need to start an action themselves to vacate the liens.”

Lien Lessons

Complicated as it all sounds, the methods of coping with contractor concerns are relatively straightforward. Proper planning could help boards avoid liens. First, if the board or a shareholder/unit-owner is contracting out work, be sure the agreements guarantee how everyone is paid and, if they are not to be paid for whatever reason, that there is enough money set aside in the final installments to pay for someone else to finish the work.

“The flaw is often in the way the construction process is set up and supervised,” says attorney James Samson, a partner in Samson Fink & Dubow. “The contract for the job often does not provide for adequate holdbacks. The amount left to be paid at each point in the process should be at least enough to get a third-party contractor to come in and finish it, if needed.”

One protection a board should employ is a lien waiver. “Every time a payment is made, get a mechanic’s release,” explains Samson, who adds that you should also either have your contractor stipulate (in writing) that there are no subcontractors, and if there are subcontractors (and you approve of that) that the contractor will get lien waivers from them, too.

If you do not have waivers and you get hit by a mechanic’s lien in an already established co-op or condo, the board may consider taking out an indemnification bond for the amount of the claim, guaranteeing any future potential lender that the property is a good risk. In a newly constructed condo, however, such an indemnification should be taken out by the sponsor/developer. The reason? Legally, a lien cannot be placed against the owner of a new condo unit because the buyer was not the one who hired the contractor placing the lien. In short, you are not legally liable for actions taken by the developer – hence, you are not responsible for the money the developer owes. It is up to the board and/or the owner to pressure the developer into getting a bond and then taking all actions necessary to remove the lien from the units not owned by the sponsor. The bond will protect the owners until the action is resolved in court or through a settlement.

In the two buildings cited by Braverman, the sponsors in each property reacted differently. In one, says the attorney, “the developer stepped up to the plate and took out the bond. In the other, a Manhattan condo of over 200 units, it was a different story.

“We took over the board in December of ’07, and then by January or February of ’08, it was brought to our attention through a couple of homeowners looking to refinance their units that they were held up by liens against the building,” says the board president in that second condo. “It was rather shocking.” As the months went by, the board discovered more and more liens. “There were liens from different vendors. One was a flooring contractor, one was for someone who did some landscaping.” They ranged from $50,000 to $200,000.

The board reached out to the developer, El-Ad Properties. “When we said they hadn’t paid some vendors, their initial response to us was: ‘We did that intentionally because we knew that you all had construction issues with various parts of the building,’” recalls the president. “One was to an HVAC vendor, because we had been having a number of HVAC difficulties, so the developer said, ‘We did this to give us leverage over these vendors, so we can come back and say that the building had complaints about things not being as they should be.’ That was the reason why they were not being paid. Because we had complaints.”

The board insisted that the developer do something because the liens were taking a toll on the owners. “It was really frustrating in the first couple of months,” explains the president, who saw the dispute as one between the developer and his subcontractors, with innocent homeowners caught in the middle. The board wanted the developer to issue an indemnity letter and post a bond for the liens. El-Ad refused.

The board took it to the attorney general’s office. “Their response was entirely favorable to us,” reports the president. “They said, ‘Oh, yes, the sponsor has to clear these liens.’ From the AG’s office, it was a no-brainer. This was a clear violation of the sponsor’s obligations. The AG’s office told him to post the bond and gave him 30 days to do that. The developer didn’t care and just didn’t do it. It took eight to ten months, and during that time, we would get different story after different story from the developer as to why the bonds hadn’t been posted and why the liens hadn’t been cleared. We were told half-truths and given every song and dance you can imagine.”

It was irritating, recalls Braverman, the attorney. “We had people who wanted to refinance, but couldn’t. So, the board itself finally gave an indemnity to the title company [in each case] for the amount of the lien.”

There was a cost to the condominium every time a unit-owner refinanced, too, since Braverman had to get involved to convince the title company to accept the board’s indemnity.

The bond was finally posted by the sponsor. The president, although frustrated by El-Ad, was even more irritated by the attorney general’s office: “I was amazed at how seemingly powerless the AG was in bringing down the hammer on the developer and saying, ‘Listen, I gave you an order seven or eight months ago, and you still haven’t done it. Here’s what’s going to happen to you now.’ The AG’s office has the power to do that, but, for reasons I’ll never understand, wasn’t willing to, or didn’t have the resources to, or made a calculation not to ultimately throw down their maximum leverage.”

At the Plaza, the same developer promised to fight the mechanic’s lien and said it would indemnify the condo owners against future claims – at no cost to the residents. It would also provide the services of its outside counsel, gratis, as needed.

That’s as it should be, concludes attorney Sladkus, who notes that a mechanic’s “lienning” on a building such as the Plaza is one-part nightmare, three-parts nuisance. “It’s like the dispute [between the developer and the subcontractor] is a car splashing the unit-owners with mud,” says Sladkus. “The owners were just standing there when they got splashed. They didn’t do anything. They shouldn’t have to pay the dry cleaning bill.”