New York Construction Lien Law
Lien Law Overview
The New York Lien Law applies to both residential and commercial loans. There are, however, certain requirements for single family homes. For example, for single family homes, a Notice of Lien must be filed no later than four months from the date that the last item of work was performed or materials were furnished. For all others (including commercial), the time is extended to eight months. See Lien Law §10. Commercial real estate brokers who negotiate a least a three year lease are allowed to claim a mechanics lien for their services/commission. See Lien Law §2.
Lien Waiver Summary
New York does not publish a lien waiver form, however, the state does have major limitations on how and when a lien waiver is used. New York prohibits lien waivers used prior to payment and conditional lien waivers can only be used with the simultaneous exchange for the payment and not before. See New York Lien Law §34. What this means is that the traditional use of conditional/unconditional waivers is supported, while the pre-emptive practice of waiving lien rights prior to the work commencing is prohibited.
Obtaining Lien Rights
Note that New York is different from many other states where a lien is created or attaches when the contract is signed or labor is performed and/or materials are furnished.
Under the New York Lien Law, mechanics liens rights attach when a Notice of Lien is filed. A Notice of Lien may be filed at any time during the progress of the work and the furnishing of the materials, or, within four months (for single-family homes, eight months for other projects) after the completion of the contract, or the final performance of the work, or the final furnishing of the materials, dating from the last item of work performed or materials furnished. See Lien Law §10. The Notice of Lien must comply with the strict requirements of the Lien Law. See Lien Law §9.
A contractor, subcontractor, laborer, materialman, landscape gardener, nurseryman or person or corporation selling fruit or ornamental trees, roses, shrubbery, vines and small fruits, who performs labor or furnishes materials for the improvement of real property with the owner’s consent or at the request of the owner will have a
mechanics lien for the principal and interest, of the value, or the agreed price, of such labor, including benefits and wage supplements due or payable for the benefit of any laborer, or materials upon the real property improved or to be improved and upon such improvement, from the time of filing a notice of lien. See Lien Law §3.
Are title companies required by law to manage construction loan disbursements?
Can a mechanics lien have priority over a pre-existing mortgage in New York?
No, if the mortgage includes the covenant set forth in section 13 of the New York Lien Law, which provides that the grantor or mortgagor will receive and hold the proceeds and advances as a trust fund to be applied first to the payment of the cost of the improvement; and if the building loan contract is filed. See Lien Law §§ 5, 10, 13 (3) (5)), and 22. Otherwise, a mechanics lien claim will have priority over a mortgage not recorded at the time the notice of such lien is filed. See Lien Law §13.
Between mechanics liens, claims of laborers for daily or weekly wages have preference over competing lien claimants. See Lien Law §13. Laborers, subcontractors, and material persons are to be paid out of any property sale before being paid to any person for whom they have performed the work. See N.Y. Lien Law § 56. Otherwise, mechanics lien claimants have equal preference. See Lien Law §§13 and 56.
Notice of Commencement (or similar like event)
New York does not specifically use a Notice of Commencement, they have other affidavits and agreements that must be filed to protect the lender’s lien priority. In New York, a Building Loan Contract (what a lender would recognize as a construction loan agreement) along with a Section 22 Affidavit must be filed and recorded by the Lender. See Lien Law §22
Who files the Notice of Commencement?
When must it be filed?
As required by statute. The documents recording sequence is important.
Preliminary Lien Notifications
Notice of Completion
Under the New York Prompt Payment Act, if an owner or contractor fails to approve or disapprove an invoice or fails to pay the undisputed invoice amount within the established time limits, a contractor or subcontractor may stop work if they provide the owner or contractor with a written notice of their intention to suspend work and an opportunity to cure at least ten days before stopping work. (N.Y. Gen. Bus. Law §756-b(2)(a)(ii).
A Notice of Lien that complies with Lien Law §9 is required for any mechanics lien claim. The Notice of Lien must be filed in the county clerk’s office where the property is located.
- Notice of Assignment. Before any contract or work order can be assigned, a “Notice of Assignment” must be filed within ten days after the date of that assignment in the office of the county clerk of each county where the real property to be improved is located. The Assignment or order will be of full force and effect from the time it is filed. Any Assignment that is not filed is void. See Lien Law §15.
- Notice of Lis Pendens. A mechanics lien is only good for one year unless a court action is brought to enforce it and a notice of lis pendens or an extension of lien is filed with the county clerk of the county in which the notice of lien is filed. See Lien Law §17.
New York’s Lien Law has a notice that applies to public improvement projects. Any subcontractor on a public improvement project may send a written demand for a Notice of Completion and Acceptance to the head of the government body (bureau or department) responsible for the project. The demand may be sent at any time before project completion but no later than within 30 days of project completion. See Lien Law §11-a.
New York uses ALTA title commitments that allow for the Construction Loan Update Endorsement, which is used when the lender requests endorsements as additional disbursements are made. It gives coverage up-to the new outstanding mortgage balance and shows whether any other instruments have been filed and recorded since the last title update. The endorsement also ensures the priority of the insured mortgage over instruments that are not specifically listed in the endorsement. Like title companies in other states, since the title company has a stake in the disbursements, you may find that they exercise some due diligence relating to construction draws which will vary based on the title company.
Online resources, state and local laws and ordinances (local more so than state) are the best ways to determine the various permitting requirements for a specific project.
Implications of Permit Non-Compliance
Because permits are issued by local governments, the failure to comply can result in any action within the local government’s authority including, but not limited to, any of the following:
- Permit denial or cancellation. If the requirements for obtaining a permit are not met, the contractor may be denied a permit or have their permit subject to cancellation (e.g. failure to complete permit application requirements, not obtaining inspections on time).
- Code enforcement. Local governments with active code enforcement departments can issue citations for violations, impose fees on a project, and significantly delay the project.
- Correction of structural violations. A contractor may be required to structurally move or remove work that does not comply with local permit requirements.
Overview of a Construction Loan
New York is extremely unique from all other states in the methods they use to balance the interest of contractors, borrowers, and lenders. In New York the Construction Loan Agreement is known by a more technical name a “Building Loan Contract” and is considered essential for construction lenders. It’s critical that the Building Loan Agreement and the non-flexible statutory requirements of the States Lien Law (such as the Section 22 Affidavit) are followed. If a lender fails to comply with the Lien Law requirements for a Building Loan (or a Building Loan modification) or Section 22 Affidavit, the penalty lender’s mortgage lien can end up subordinated to all mechanics liens, regardless of when filed.
What is a Building Loan Contract?
A Building Loan Contract is basically a Construction Loan Agreement that complies with the requirements of the Statute. The building loan contract is an agreement where the lender, in consideration of the expressed promise of an owner to make an improvement on the property, agrees to make advances that are secured by ‘Building Loan Mortgage’ on the property. The important part of the definition is the language: no promise to build, no building loan contract; no building loan contract, no building loan; and no building loan, no statutory protection for the construction lender’s building loan mortgage. There are other requirements for a construction loan agreement to be considered a ‘Building Loan Contract’ but the concept of the promise to build in exchange to disburse loan process is essential of the Building Loan Contract.
With Building Loan Mortgages, lenders have protections for certain types of “hard cost” advances in accordance with the Lien Law requirements, which are specifically defined in the state’s Lien Law as “Cost of Improvement. The “cost of Improvement’ although defined, is ambiguous to some categories and is discussed in a manner that the specific cost types mentioned are considered “cost of improvements” whereas those that are not mentioned are excluded. Advances by construction lenders are only protected to the extent they constitute a “cost of improvement”.
New York statutes and case law speak on what are/are-not allowable costs. It is important to note, however, that there is no exhaustive list for every allowable fee charged under every circumstance. Building loans are generally for costs that go into improving the actual structure. All other costs cannot be financed by the building loan proceeds but can be financed out of a “Project Loan”. The term “project loan” is a creature of practice, not statute, and may be used alongside a building loan to cover additional costs that are not allowable under a building loan.
In New York, the following costs are deemed to be improvement(s) and are generally considered to be allowable costs under a building loan. Lien Law Section 2 provides that the term “improvement,” includes costs for:
- The demolition, erection, alteration or repair of any structure upon, connected with, or beneath the surface of, any real property and any work done upon such property or materials furnished for its permanent improvement;
- Any work done or materials furnished in equipping any such structure with any chandeliers, brackets or other fixtures or apparatus for supplying gas or electric light’;
- The drawing by any architect or engineer or surveyor, of any plans or specifications or survey, which are prepared for or used in connection with such improvement;
- The value of materials actually manufactured for but not delivered to the real property;
- The reasonable rental value for the period of actual use of machinery, tools and equipment and the value of compressed gases furnished for welding or cutting in connection with the demolition, erection, alteration or repair of any real property, and the value of fuel and lubricants consumed by machinery operating on the improvement, or by motor vehicles owned, operated or controlled by the owner, or a contractor or subcontractor while engaged exclusively in the transportation of materials to or from the improvement for those purposes; and
- For non-residential loans, the performance of real estate brokerage services in obtaining a lessee for a term of more than three years of all or any part of real property pursuant to a written contract of brokerage employment or compensation.
Generally, New York Project Loan Agreements will set forth what costs they are covering (some say they cover “soft” costs implying that building loan mortgage costs are “hard” costs, but be advised that the law does not define soft or hard costs). Sometimes a project loan and building loan mortgage will be made at the same time to cover two sets of costs. See Lehman Bros. Holdings v Broad, LLC, 2011 NY Slip Op 31931[U] [Sup Ct, NY County 2011]. What New York courts consistently do is apply the law to the building loan agreement or project loan agreement. For example, in the J. Coffey case, the project loan was for the “borrower’s legal fees and costs, marketing expenses, and leasing and brokerage commissions, which are not “costs of an improvement”. See generally J Coffey Contr. Inc.v Bluestone Org., Inc.
The purpose of a Section 22 Affidavit is to give parties notice of how much money is available in the “Building Loan” and how the funds are broken out by various categories/costs. It becomes a public record to show the funds available for parties that intend to complete work, have completed work, or completed work on a project.
It’s also important to note that the modification of a Building Loan is also complicated and can render the lender in trouble with their lien priority if the Lien Law is not followed correctly. When making modifications that are “material”, the modification must be recorded within 10 days.
Ultimately, failure to comply with New York’s Building Loan Contract and Section 22 Affidavit has catastrophic consequences and can render the lender’s lien priority subordinate to construction liens.
Building Loan Contract. The term “building loan contract,” when used in this chapter, means a contract whereby a party thereto, in this chapter termed “lender,” in consideration of the express promise of an owner to make an improvement upon real property, agrees to make advances to or for the account of such owner to be secured by a mortgage on such real property, whether such advances represent moneys to be loaned or represent moneys to be paid in purchasing from or in selling for such owner bonds or certificates secured by such mortgage upon such real property, providing, however, nothing herein contained shall be deemed to construe as a building loan contract a preliminary application for a building loan made by such owner and accepted by such lender if, pursuant to such application and acceptance, a building loan contract is thereafter entered into between the owner and the lender and filed as provided in section twenty-two of this chapter.
Building Loan Mortgage. The term “building loan mortgage,” when used in this chapter, means a mortgage made pursuant to a building loan contract and includes an agreement wherein and whereby a building loan mortgage is consolidated with existing mortgages so as to constitute one lien upon the mortgaged property.
Contractor Requirement: No state license. Locally regulated.
Subcontractor Requirement: Locally regulated.
Contractor Warranties: Housing merchant implied warranty. Free from defects due to unskillful construction for 1 year. Free from defects due to plumbing, electrical, heating, cooling, and ventilation installation for 2 years. Free from material defects for 6 years.
Contractor License Search – Locally Regulated
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