When the Contractor Doesn’t Get Paid

Let’s say a co-op hires a vendor to do facade work, and he damages the building in the process. The board decides to hold back a significant sum and gets slapped with something called a mechanic’s lien. What is a mechanic’s lien?

A mechanic’s lien is a claim of debt, meaning that the lien holder — the contractor — is saying that the property owner owes money for certain materials or services provided, and the lien is on file with the county clerk. Once it’s filed, the contractor has one year to commence a foreclosure proceeding. It’s a proceeding where the contractor takes the lien and any supporting documentation, files a petition in court and asks a judge to find that it performed certain work or supplied certain materials and was not paid, and that it has a legal right to recover what he’s owed. The judgment is for a certain monetary amount, and the real property owner will be forced to pay it. 

How does that impact the building?

Once the lien is filed, it becomes what’s commonly known as a “cloud” on the title or the chain of title for that property. As such, it impacts many financial transactions in a co-op corporation. If the co-op wanted to refinance its mortgage, a bank would consider the size of the lien before providing financing. 

Would the lien pop up in a purchaser’s application to a bank, and is it possible he or she won’t get financing because of it?

It would pop up. As for financing, it would depend on the amount of the lien, meaning a low five-figure sum probably would not be too controversial. If it’s $1 million or more, it may give a potential purchaser and the lender pause before the proprietary lease is signed. Oftentimes, the lender will say the issue has to be resolved before finalizing any transaction and actually taking on the shares.

What exactly should a board do when a vendor puts a mechanic’s lien on its building?

I always recommend that once you have a lien, the board should demand that the contractor provide a detailed, itemized accounting within five days of what comprises the debt amount set forth in the lien. If the contractor fails to do that, the board could go to court and seek an order either canceling the lien or directing that an itemized statement be provided. Without the itemized statement, you won’t have a full understanding of what you’re going to be faced with in court.

There is a statute of limitations, meaning a contractor has to file the notice of lien within eight months from the last date that services were performed or materials were supplied. If the contractor is late, the lien should be canceled as a matter of law. So it’s really important for the co-op and its counsel to review the lien to make sure that there are no technical defects like that statute of limitations issue because if there are, that’s a quick and easy way to get the lien canceled.

And if the board can’t get the lien canceled? What next?

The first consideration is business-centric, meaning is it cheaper to pay the lien or bring on litigation counsel to fight it? The board can obtain a bond, typically at a fraction of the cost of the total lien amount, and file that bond with the county clerk. That way, you’re substituting the bond as the security interest. The bond is held until the resolution of the lien, but your chain of title is cleared. It’s a much cheaper alternative to paying the total debt claimed.

So once a board files a bond, will it have to go ahead with some kind of negotiation to avoid a foreclosure proceeding?

Bonding over a lien is such an inexpensive way to clear your title and avoid issues with subsequent purchasers and lenders. Once that’s done, your only liability is that you’ll be responsible for paying the full amount if you lose in court. Bonding is also effective when it comes to your insurance. It depends on the scope of the liability, but any lien will at a minimum trigger insurance review, which could have an impact on the insurance premiums if the lien amount is significant.

If you don’t have any pressure from your insurance company, a board that files a bond can just say: “Look, we’re going to wait this out for a year and see if the contractor forecloses. If the contractor doesn’t, the lien is canceled.”

What if your insurance carrier tells you premiums are going to be increased?

If your insurance carrier is saying premiums are going to go up by X thousand dollars if the lien isn’t resolved, the board can get aggressive and file a demand that the contractor actually pursue that foreclosure mechanism. And once that demand is served, the contractor has 30 days to do it. It has to have its ducks in a row, commence the filing and commence the court proceeding. So that’s another pressure tactic. The only concern is that more likely than not, the contractor is going to commence the foreclosure and start up the litigation. The incentive, though, is that rather than have the contractor possibly wait a year before filing, you can really shorten that and just try to get it resolved as soon as possible.