New York Court of Appeals Clarifies When a Contractor Hired by a Commercial Tenant Can File a Mechanic’s Lien Against the Owner’s Interest in the Property

When a contractor is hired by a commercial tenant to improve the leased property, the contractor’s lien will ordinarily attach only to the leasehold interest, and not the property itself. In a recent Court of Appeals decision, however, the Court clarified in what circumstances the contractor can file a lien against the owner’s interest in the property.  Ferrara v. Peaches Café, 32 N.Y.3d 348 (Nov. 20, 2018).

In Ferrara, the tenant leased the commercial property for purposes of operating a restaurant, and its lease agreement with the owner contemplated that the tenant would build-out the space for purposes of operating the restaurant. After allegedly not being paid for work performed, the tenant’s electrical contractor filed a mechanic’s lien naming the owner, and sought to foreclose on the owner’s interest in the property.

Lien Law § 3 provides that the owner must have requested or consented to the work in order for a mechanic’s lien to attach to its interest.  Because the owner had no direct dealings with the contractor, and did not “expressly” or “directly” consent to the work, the owner argued that the lien was unenforceable against it.

The court rejected the owner’s argument and held that the owner need not have expressly consented to the particular work at issue, nor had any direct dealings with the contractor, for the lien to attach to the owner’s interest in the property.  Rather, “the owner 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.”

To determine whether the owner’s interest can be subject to a lien, the terms of the lease agreement are important. In particular, where the lease agreement requires the tenant to make certain improvements, the owner will be deemed to have consented to those improvements. The Court contrasted its prior decision in Rice v. Culver, 172 N.Y. 60 (1902) where the lease agreement, at best, merely authorized the tenant to make certain improvements. There, the tenant leased the property to build and maintain an athletic field, and was given the general right to construct and improve buildings upon the land. While the owner “must have known” that the tenant intended to make improvements upon the land, that general knowledge was insufficient to show that the owner consented to the specific work in issue which resulted in the filing of a mechanic’s lien.

The Ferrara Court found that the lease agreement evinced owner’s consent to the work. The lease agreement “not only expressly authorized [the tenant] to undertake the electrical work, but also required it to do so to effectuate the purpose of the lease[.]” Further, the lease provided that owner was “to retain close supervision over the work” and permitted owner to “review[], comment[] on, revise and granted ultimate approval for the design drawings related to the electrical work.”

Although the Court did not look to the parties’ course of conduct, it noted that consent need not be founded on the lease agreement alone. Consent can also be founded on the “owner’s overall course of conduct and the nature of the relationship between the owner and the lienor[.]”

Ferrara makes clear that an owner cannot insulate itself from liens on their real estate solely because it does not have direct dealings with the lienor. Where the lease requires certain improvements, and a lien is filed as a result of such improvements, the owner faces liability under the lien law despite having no direct dealings or even knowledge of the particular lienor’s work.