Not-So-Peachy Mechanic’s Lien for One New York Landlord
According to a recent Court of Appeals decision, enforcing a mechanic’s lien on leased property in New York does not require consent of the landlord. That is, if the lease agreement required the tenant to improve the property.
Lien on Leasehold
Landlord/tenant agreements aren’t uncommon; just drive by any strip mall or shopping plaza and you’ll see oodles of stores operated by tenants that are leasing space from the property owner.
In a lease situation, the property is owned by one party & then a second party leases or rents the space from the owner. When improvements are made to the property, depending on the hiring party (the owner or the tenant), a mechanic’s lien may attach to the property, the leasehold interest, or both the property and the leasehold interest.
For this Court of Appeals case, there is one additional variable to be considered: the language within the lease agreement between the landlord (COR) and tenant (Peaches Café LLC).
In Ferrara v. Peaches Café LLC, Peaches Café LLC (Peaches) hired Ferrara (prime contractor) to perform electrical work. Peaches hired Ferrara because the lease dictated that Peaches would need to improve the property to meet electrical specifications.
“The lease imposed certain construction requirements on Peaches [tenant] for it to operate its restaurant, including adherence to specific electrical specifications. The lease also provided that COR [landlord] approve of any improvements to the premises, that Peaches submit to COR all design plans for the electrical work, and that any improvements made become part of the realty.” – Michelle Cuozzo of Pepper Hamilton LLP
As is common in the restaurant industry, Peaches went out of business and Ferrara was stuck with an unpaid bill of $50,000. To recover the claim, Ferrara filed a mechanic’s lien against the property and eventually filed suit to enforce its mechanic’s lien.
Once suit had been filed, the property owner (i.e. the landlord) moved to have Ferrara’s lien invalidated. The owner argued the lien could only be enforced if the owner expressly consented to the work performed. The court didn’t agree; here’s a recap from Michelle Cuozzo of Pepper Hamilton LLP:
“COR [owner/landlord] argued that a contractor performing work for a tenant can only enforce a lien on the property if the landlord expressly or directly consented to the work performed. The Court of Appeals rejected this argument… [T]o enforce a lien, the landlord must “either be an affirmative factor in procuring the improvement to be made, or having possession and control of the premises assent to the improvement in the expectation that he will reap the benefit of it.” Affirmative acts by a landowner include lease terms requiring the tenant to make specific improvements to the property.”
The lease clearly required Peaches to improve the property to meet the electrical specifications. Plus, the lease included language that the landlord could “retain supervision over the work by reviewing, commenting on, revising, and granting ultimate approval for the design drawings related to the work.”
Ultimately, the landlord consented to the improvement when it incorporated the requirements within the lease. Thus, the court held Ferrara’s lien to be valid.
Maybe the landlord should have read our post on Tenant Improvements? What’s a Landlord to do?
503(b)(9) claims are no match for UCC filings! A properly perfected security interest, in compliance with UCC Article 9, has priority over 503(b)(9) claims & consignment agreements. If you attended The Credit Research Foundation’s Fall Forum, the Bankruptcy Judge Panel – Three Judges/One Verdict reinforced the priority UCC filings have over 503(b)(9) claims and consignment agreements. Learn more when you check out this infographic!
- April 16: Understanding Lien Waivers
- April 30: UCCs Offer Security for Many Business Transactions
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