QUESTION: A contractor is threatening to put a lien on our building as a result of a dispute with an apartment owner over a renovation. What should we do?
“A lien impairs title and puts a dark cloud over your property,” says Steve Wagner, a real estate attorney and partner at the Manhattan law firm Wagner, Berkow & Brandt. Having a lien on your building or apartment means someone else has a claim on it, and it could prevent your building and apartment owners from refinancing, as well as scare off potential buyers. In short, you should make it a priority to get it removed.
“Liens are highly technical creatures of statute,” says Wagner, who has considerable experience contesting and removing liens as well as advising boards on how to protect themselves against these types of claims against a building.
Contesting and removing a lien
Companies that help contractors file liens don’t necessarily defend a contractor if there’s an effort to remove one, so your odds of successfully challenging a lien increase significantly by working with an experienced attorney who can carefully examine the validity of the lien and guide you through the process of contesting it.
If a board has given an apartment renovation limited approval—meaning the alteration agreement states that the work only benefits the apartment owner, not the building—the contractor cannot properly file a lien against the building.
“In this case, a lien against the building can be successfully challenged,” says Wagner.
A lien on your building, whether as a result of a unit owner’s renovation or a vendor working directly for the building, can also be contested for being overstated. As an example, say the contract was for $200,000 and the contractor has already been paid $100,000 but files a lien for $250,000. That is an overstated lien and can be removed.
“There are many technical requirements for the proper service and filing of a lien and also strict time limits for filing a lien. If the liens don’t comply with the law, the board can go to court and get them removed,” says Wagner.
Going to court, if necessary
With the right legal representation, you can fight a lien in court. Wagner recently had liens removed from a co-op building after a shareholder went bankrupt renovating his place.
“The co-op unit owner paid $1.5 million for a wreck of an apartment that was worth about $2 million, and then put over $1 million into renovating it, so there was no way the place was going to be sold with sufficient funds to pay everyone. We went to court to determine the priority of liens, and arranged for the liens to be removed so the apartment could be sold and, fortunately, recovered all of the co-op’s expenses,” says Wagner.
Protecting your building against liens arising from apartment renovations
Your building’s alteration agreement should build in several protections against mechanic’s liens arising from apartment renovations.
It should have language preventing the contractor from putting a lien on the building by making clear the work does not benefit the whole building, just the condo owner or tenant-shareholder.
“A contractor cannot put a lien on the building if the building did not hire him or authorize the work. Approvals by the board and the board’s architect should be limited solely to an assessment of whether the plans comply with building’s rules and don’t negatively impact the building’s structure,” says Wagner. “There should be language in the alteration agreement and in any approval stating that approval given by the co-op or condo only indicates compliance with the co-op or condo’s requirements and is not an authorization to perform work or file a lien against the building.”
If the contractor files a lien against the building, in spite of the terms of the alteration agreement, there should be a requirement that the apartment owner arranges to remove the lien by settling with the contractor or by “bonding” the lien within 30 days. Bonds are issued by insurance or bonding companies and can be issued without a court order if the bond is for 110 percent of the amount claimed in the lien.
The bonding company will typically require that funds be put in escrow to cover the amount of the bond, where it is held until the dispute is resolved. Bonding technically removes the lien from the building and gives the building protection from creditors. Once the lien is bonded, the building is protected and the unit in which the work was performed may be refinanced or sold.
Additional protection for condos
“The Condominium Act gives condo buildings more protection from liens than co-ops. Section 330-I of Condominium Act prohibits a contractor renovating an apartment for its owner from filing the lien against the common elements. This gives an additional basis for getting a lien removed from a condo building,” says Wagner.
A lien may be filed against a condo anyway, at which point your building should get counsel involved to make sure the lien is removed by the unit owner.
If an apartment owner is unable to pay a contractor who puts a lien on the building or to put up a bond, the board may need to start a lawsuit against the contractor to challenge the lien and/or against the owner of the co-op or condo to force compliance with the requirement that the lien be removed. Alteration agreements usually have legal fee clauses that allow the co-op or condo to recover expenses.
“It can get very messy,” says Wagner. “Your best bet is to have clear documents that protect your co-op or condo.”
New York City real estate attorney Steven Wagner is a founding partner of Wagner Berkow & Brandt, with more than 30 years of experience representing numerous co-ops, condos, and individual owners and shareholders. To submit a question for this column, click here. To arrange a free 15-minute telephone consultation, send Steve an email or call 646-780-7272.
This post originally appeared on Brick Underground.