You've been liened! Now what?

It is a typical but frustrating scenario: You are an owner or property manager and you have just been served with a mechanics' lien filed against your building. Or perhaps you are a tenant in the building and, following renovations to your office space, a contractor or subcontractor has filed a mechanics' lien against the building and now the landlord or his agent is looking to you to remove the lien.

The situation is even more frustrating if the building owner happens to be in the process of selling, transferring or refinancing the property to take advantage of current low interest rates. Unless the mechanics' lien is satisfied or discharged, the lender will not advance the new loan.

There are a number of options available to the parties in each of the foregoing scenarios. As you might imagine, the easiest but worst option is to do nothing. If the contractor who filed the lien is successful in foreclosing on the lien, the court will order a sale of the building to pay off the lien. This is true even where the lien is worth just a few hundred dollars and the building is worth millions. Of course, a foreclosure action would take well over a year to prosecute, and the owner or tenant would have opportunities to defend the action, but nonetheless, failing to challenge the lien or the foreclosure lawsuit could result in a judgment against you and a forced sale of the premises.

There are several options for removing the lien: Post an undertaking as security for the lien; deposit funds into court as security for the lien; challenge the lien (if it is defective on its face) in a summary proceeding; or settle with the contractor.

Posting an Undertaking

If, as suggested above, the building is about to be sold, transferred or refinanced, the owner likely would need to remove the lien quickly. Moreover, most standard leases require the tenant to take whatever action is necessary to remove the lien, often under a contractual deadline of, for instance, 20 or 30 days. In this situation, the preferable option may be to have a surety post an undertaking or bond which discharges the lien of record, as permitted by the Lien Law, Section 19. The goal here is to have the Court substitute the bond as security in place of the building.

By so doing, you can remove the lien in a relatively quick fashion but still preserve defenses against the lienor, which can be asserted in a summary proceeding or an eventual foreclosure lawsuit. If successful in challenging the lien, the bond is returned. If the lienor is successful in proving his lien, the contractor may recover the funds secured by the undertaking.

Although a relatively quick procedure, the discharge process still takes a number of weeks to finalize and involves costs of procuring a bond and legal fees. An owner will typically employ knowledgeable legal counsel for this process; however, it is helpful for the owner or tenant to be familiar with the process, so he or she can decide on the best course of action. The first step is to apply to the court where the lien is filed for an order "fixing" the amount of the undertaking. Pursuant to Section 19 of the Lien Law, the court will generally fix the undertaking at the value of the mechanics' lien plus 25 percent (to cover interest until the time of any potential judgment). Thus, a bond to discharge a lien in the stated sum of $100,000 will be fixed at $125,000.

It is possible to bypass this step, and thereby accelerate the discharge process, by simply stipulating in advance with the lienor as to the amount of the undertaking. Since the amount of the undertaking is prescribed by statute, there is no valid reason for the lienor to refuse his consent, and experience indicates that most do consent.

Once you have obtained either an order or stipulation fixing the amount of the undertaking, the next step is to contact a surety to arrange for a bond. Your insurance broker can usually locate a reliable surety which can provide the bond in a matter of days. The cost may vary, but the surety generally imposes an annual premium of approximately two percent of the bond amount. The surety bond, to be approved by the court, must be accompanied by a Certificate of Solvency issued by New York State and a statement of the surety's assets and liabilities.

The next step is to apply to the court for an order discharging the lien. The application must be accompanied by a copy of the lien, the original undertaking, and the order or original stipulation fixing the amount of the undertaking. A copy of the application must be served on the lienor and filed on at least five days' notice to the court. If the court's docket is not unusually crowded, an order signed by a Justice of the court will issue in approximately one week after the application is submitted. The discharge order is then filed with the lien docket clerk in the courthouse, and the lien is officially removed of record.

Depositing Certified Funds 

A faster though seldom utilized method to discharge the lien is to deposit certified funds or cash with the County Clerk's office at the courthouse, as authorized by Section 20 of the Lien Law. Under this procedure, an owner or tenant would deposit cash or a certified check in an amount equal to the value of the lien plus interest until the time of deposit. This deposit may have to be increased if the lienor commences a foreclosure action. Like the bond, the deposited funds stand as security for the lien in place of the property.

Although this relatively simple procedure can discharge the lien within a few days, it has an obvious drawback of tying up an owner's or tenant's liquid assets until a judgment is awarded to either side in the eventual foreclosure action (which, as noted, can take several years). Considering that liens are often valued at thousands (or hundreds of thousands) of dollars, owners are understandably reluctant to part with large sums of cash for such extended periods and lose its investment potential.

Challenging the Lien

A third option upon being served with a mechanics' lien is to challenge the lien's validity, where the lien is deficient on its face or was served improperly on the owner or tenant. This option is markedly slower than the alternatives previously discussed. Also, bear in mind the contractor in most cases may be free to cure the deficiency and re-file the lien, if he is still within his statutory time period for filing the lien. If successful, however, the lien is stricken and removed of record without the need to post a bond or other security, and the building may then be refinanced or sold with clear title. A lawyer well versed in construction law will be able to review the lien and determine whether it is in compliance with the statutory requirements.

A lien may be challenged by initiating a summary proceeding with the court, pursuant to Section 19 of the Lien Law. An example of common mistakes made by the lienor is to misdescribe the property or the true record owner of the property. For instance, listing the wrong address or naming an individual as owner when the property is actually owned by a corporation are considered substantial defects which will invalidate the lien.

Other frequent errors occur when the contractor attempts to serve a copy of the lien on the tenant and/or owner. Assuming the owner of the property to be a partnership, trust or individual, the lien must be personally served on such entity or persons, and there are strict requirements set forth in the Lien Law governing such service. This service must be completed within 30 days after the lien has been filed. Proof of such service must be filed within 35 days after service has been effectuated. The contractor's failure to adhere to these strict timeframes and service requirements will cause him to lose his lien, but only if a wary owner or counsel brings such errors to the court's attention.

The contractor must be properly served with notice of the summary proceeding so that he has an opportunity to defend the lien. Given the likelihood of adjournments and delays by the court in issuing a decision, this process can consume several weeks.

There are numerous other defenses which may be asserted against a mechanics' lien and/or lien foreclosure action. However, most of these defenses cannot be asserted by way of a summary proceeding. Instead, the owner or tenant is forced to wait until a contractor elects to bring an action to foreclose upon the lien. The lienor generally is under no time constraints to bring the

foreclosure action, and he may wait years before doing so, providing he continues to renew the lien each year on the anniversary of the filing date. (Failure to do so renders the lien invalid).

However, if you have valid defenses to the lien, you can compel the lienor to commence the foreclosure action within a given period of time (not less than 30 days) by serving him with appropriate notice under Section 59 of the Lien Law. This prevents a contractor from "sitting" on his lien, hoping that one day an owner seeking to sell or refinance his property would be forced to satisfy it.

Owners should also take note of situations where their tenant has hired a contractor to do work, without obtaining the owner's permission. If a lien is filed as a result of such unauthorized work, the owner has grounds for invalidating the lien. This authority is derived from Section 9 of the Lien Law, which requires the owner of the premises to provide consent to all improvements in order to subject the property to a mechanic's lien. This defense is among those defenses which can only be raised after the contractor has commenced his foreclosure action.

If the lien is valid and the contractor is properly owed money for his construction services, the owner or tenant may wish to negotiate a settlement of the lien amount. During such negotiations, the contractor should be asked to provide proof or "backup" of the amount claimed. Such back-up commonly includes requisitions, invoices and pay-roll records. The contractor's incentive to provide such information is the prospect of a quick settlement, which is far less costly then bringing a foreclosure action.

If a settlement is reached, the owner or tenant must be mindful of the need to obtain a duly executed satisfaction of lien, which is filed with the County Clerk's office to remove the lien of record.

The foregoing is a brief description of the options involved in discharging or removing a lien from the record, and the time-frames required for each. Again, an owners or tenant is well served by engaging legal counsel with construction experience to discuss the best course of action.

Ira C. Wellen, Esq., Attorney at Law, Cilmi & Associates PLLC