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Subcontractors face significant challenges when they are confronted with a general contractor which fails or refuses to pay for a contract balance or extra work. For any one of innumerable reasons, general contractors can be undercapitalized such that even a victory at trial can produce a hollow result when the execution of a judgment is returned unsatisfied. A Subcontractor’s right to file a mechanic’s lien is the Subcontractor’s primary protection under these circumstances. However, where a mechanic’s lien foreclosure action is not viable, either because there is no lien fund or there is some defect in the lien, a Subcontractor is left with limited recourse against the project owner.

For example, in the recent case of Palma Realty Assoc., LTD v. BLDG Oceanside, LLC, 59 Misc.3d 1206(A) (Sup. Ct. N.Y. Co. 2018), the Supreme Court, New York County, dismissed a subcontractor’s breach of contract and quantum meruit claims against the project owner. The plaintiff, Palma Realty Associates, sued the project owner, BLDG Oceanside, LLC, and the contractor with whom it was in privity, Master Development, Inc., for breach of contract, quantum meruit, account stated and to foreclose a mechanic’s lien. For reasons undisclosed by the Court’s opinion, Palma discontinued its causes of action to foreclose upon its Mechanic’s Lien and for an account stated. The Court granted Palma’s motion to dismiss the remaining causes of action for breach of contract and quantum meruit insofar as asserted against it, and severed and continued the breach of contract and quantum meruit claims as asserted against Master.

The Palma Court dismissed the breach of contract cause of action under the well-settled and well-known rule that a  subcontractor generally cannot maintain a breach of contract action against the project owner because there is no privity of contract between them, citing such authorities as Eastern States Electrical Contractors v. William L. Crow Construction Co.,  53 A.D.2d 522 (1 st Dept. 1989) and Braun Equip. v. Meli Borelli Assoc., 220 A.D.2d 312 (1 st Dept. 1995). See also Perma Pave Contracting Corp. v. Paerdegat Boat and Racquet Club, Inc., 156 A.D.2d 550 (2d Dept. 1989).

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When the New York Prompt Payment Act (“PPA”) was first enacted (effective 1/14/2003), many

believed that it would have a major impact on the payment process in the construction industry. That

has not been the case. United States District Court Judge Jack Weinstein recognized the limited reach of

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Last September, the New York Court of Appeals granted a motion for leave to appeal the Fourth Department’s decision in Ferrera v. Peaches Café LLC, 138 A.D.3d 1391, 30 N.Y.S.3d 765 (4th Dep’t 2016). In Peaches, the Fourth Department enforced a mechanic’s lien filed by a contractor who was hired by a tenant and had no direct relationship with the landlord/owner. However, if this same mechanic’s lien had been filed against real property governed by any other New York Appellate Department, the mechanic’s lien would have very likely been discharged.

Lien Law Section 3 states that a contractor “who performs labor or furnishes materials for the improvement of real property with the consent or at the request of the owner thereof … shall have a lien for the principal and interest, of the value, or the agreed price, of such labor ….”

The First, Second and Third Departments have determined that in order for a mechanic’s lien to come within Lien Law Section 3, the owner must be an affirmative factor in procuring the improvement, or else, having possession and control of the premises, assent to the improvement in the expectation that he will reap the benefit of it. See Paul Mock, Inc. v. 118 East 25th Street Realty Co., 87 A.D.2d 756, 448 N.Y.S.2d 693 (1st Dep’t 1982); Interior Bldg. Services, Inc. v. Broadway 1384 LLC, 73 A.D.3d 529, 900 N.Y.S.2d 311 (1st Dep’t 2010); Matell Contracting Co., Inc. v. Fleetwood Park Development, LLC, 111 A.D.3d 681, 974 N.Y.S.2d 573 (2d Dep’t 2013); Drapaniotis v. 36-08 33rd Street Corp., 48 A.D. 3d 736, 853 N.Y.S.2d 356 (2d Dep’t 2008; Sager v. Renwick Park & Traffic Assn., 172 A.D. 359, 159 N.Y.S. 4 (3d Dep’t 1916).

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According to the New York Lien Law, a mechanic’s lienor who is a subcontractor may only recover on its lien claim if it can establish there is a Lien Fund. That means the lienor must establish that funds were due and owing from the owner to the contractor in an amount at least equal to the amount of the lien. If the lienor in either a private or public setting cannot establish the validity of a Lien Fund, then the lien is subject to dismissal.

The Lien Fund concept is designed to protect an owner against an unfair “double liability.” In other words, if the owner has paid its contractor in full, an owner and its property should not be liable to pay a subcontractor simply because the contractor is the reason for, and source of, the non-payment. To that extent, a subcontractor’s mechanic’s or public improvement lien is derivative of the contractor’s claim against the owner. The Lien Fund concept also applies to a sub-subcontractor lien, so the sub-subcontractor must establish a contractor-subcontractor Lien Fund.

Generally, in order for the lienor to recover, it must establish that the Lien Fund existed on the date of the filing of the mechanic’s lien. If it can, then assuming the lienor can meet all the other requirements of proving the validity of its lien, it will be entitled to a recovery. In Specrite Design LLC v. Elli N.Y. Design Corp. (S.D.N.Y. 14 Civ. 6154) (July 26, 2017), Judge Edgardo Ramos addressed whether this general rule applies when the lienor was retained by a contractor that had been defaulted by the owner. Judge Ramos found that the general rule does not apply in these circumstances. Under the specific facts presented in Specrite, the lienor would not be able to foreclose on its lien even though the contractor was purportedly owed monies on the date of the filing of the subcontractor’s mechanic’s lien.

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A recent case from Supreme Court, New York County, brings clarity to a conflict that can arise when a building that shares a party wall is demolished and the site is redeveloped without relying on the party wall.

In 145 W. 21st Realty LLC v. First West 21st Street LLC, 653241/12, NYLJ 1202792788020 (Sup. Ct. N.Y. Co. July 26, 2017), Justice Kelly O’Neill Levy had to decide whether a new building that extends above the party wall that it had formerly shared with the adjoining building, could also be built over part of the party wall, thus preventing neighbor from ever being able to exercise its right to extend the party wall up in the future. The court followed earlier cases that favor modern construction practices, and allowed the cantilever of the new structure over the old, holding that the obligations to a party-wall neighbor do not extend to the space above the party wall.

A party wall is a single wall constructed along a property line that is used by the two adjoining buildings to provide structural support for their beams.  Typically, one half of the party wall sits on each owner’s property.  Each owner owns the half of the party wall on its property, and has an easement on the other half of the wall.  Brooks v. Curtis, 50 N.Y. 639, 642-3 (1873).

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For those in the construction industry, mechanics’ liens are sure to be a familiar occurrence. And, for those who have ever had a project of theirs liened, they will be aware of the tenacity of these legal devices. Mechanics’ liens are frustrating clouds on title and even though the party against whom the lien is filed rarely agrees with the amount purportedly owed, the liens themselves are difficult to remove One omnipresent option, is a claim for willful exaggeration of the lien. Section 39 of the Lien Law allows for vacataur of the lien if it has been “willfully exaggerated.” The ever-present question, however, is just what “willfully exaggerated” means.

The Courts have recently reiterated the standard for claims of willful exaggeration of mechanic’s liens. Hint: it’s still very high. In Blair v. Ferris, the Appellate Division of the Third Department once again dismissed a cause of action for willful exaggeration regarding a clearly inflated mechanic’s lien. 2017 WL 1712790.

As before, the Court made a point to state that if no exaggeration was intended, the inaccuracy simply does not matter. Willfulness truly is key. Essentially, this means that, unless it can be shown that the filer, at the time of the filing, had the intention to exaggerate the lien, a claim of willful exaggeration will fail. Considering that mechanic’s liens are meant to protect those who provide materials and/or labor against nonpayment, Courts appear to continue to take the view that there should be a heavy burden on the allegedly nonpaying party to rid itself of the lien. Allegedly wronged contractors and materialmen should not be deterred from filing liens because of the threat of a claim of willful exaggeration.

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General Business Law § 771 provides a host of requirements for home improvement contracts, chief among them being that such contracts must be in writing and signed by all parties. Additionally, the contract must contain the name, address, telephone number, and license number of the contractor, the dates that the work is to begin and to end, a description of the work to be performed, a list of the materials to be provided by the owner, the agreed-upon compensation due to the contractor, and a schedule of any progress payments.  The contract must also provide a series of notices to the owner advising that claims for payment may be enforced against the property by lien, that the contractor is required to deposit all payments received prior to completion in accordance with Lien Law § 71-a (4) or the contractor may post a bond, contract of indemnity, or irrevocable letter of credit, and that the owner may cancel the home improvement until midnight of the third business day after the day on which the owner signs the contract.

Despite the strict requirements of General Business Law § 771, it is not uncommon that parties engage in such home improvement projects on the basis of a hand-shake deal. While it is always advisable to put any such agreements in writing, including any changes to the work along the way, a contractor who improves a home absent a written contract is not without remedy should a dispute arise.

Courts have held that the absence of a written contract prevents recovery on a breach of contract cause of action but does not prevent a remedy on a theory of quantum meruit.  Johnson v. Robertson, 131 A.D.3d 670, 672, 15 N.Y.S.3d 457 (2d Dep’t 2015); see also Home Construction Corp. v. Beaury, No. 2014-06600, 2017 WL 1240146, at *2 (2d Dep’t Apr. 5, 2017) (“Although a contractor cannot enforce a contract that fails to comply with General Business Law § 771, a contractor may seek to recover based on the equitable theory of quantum meruit…”).

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Section 1312(a) of the Business Corporation Law, New York’s “door closing” statute, precludes foreign corporations doing business in the state without authority from maintaining an action in the state.  The purpose of this statute is to regulate foreign companies actually conducting business in the state.  As held in Special Breaks, LLC v. 201 Murray Ave., 2017 WL 987199 (Sup. Ct. Westchester Co. Mar. 10, 2017), the statute does not apply to those foreign companies that are not “doing business” within the state.

The defendant in Special Breaks moved to dismiss the complaint filed by foreign corporate plaintiff on two related grounds:

  1. That the foreign corporation was barred from maintaining an action in New York because it was not authorized to do business in the state, and
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Claims involving adjoining land owners have proliferated in the last several years as construction activities in the New York City area have continued to be especially active. One area of concern, especially for builders of town houses and other residences is how to deal with party walls.  The First Department, in Ehrenberg v. Regier, 142 A.D.3d 765, 37 N.Y.S.3d 10 (1st Dep’t 2016), addressed various issues of note regarding these structures.

A party wall is a wall between two adjoining properties which exists for the common benefit of both owners. These walls provide for the support of structures on each property and can only be altered by one owner if they do not damage the building owned by the adjacent neighbor. Each owner of a party wall owns it to the extent the wall is on his property, and each owner has an easement of use and support over the wall to the extent it is on the neighbor’s property.

In Ehrenberg, the party wall in question dated to the 1840’s. After a bulge was found in a section of the party wall the Ehrenbergs removed and replaced a portion of the wall. After this work was performed it was discovered that the party wall was damaged. The Ehrenbergs commenced a legal action alleging that the damage was the result of the Reiger’s negligent maintenance of the Reiger’s side of the party wall. Reiger counterclaimed, alleging that the reconstruction and repair to the party wall undertaken by the Ehrenbergs had caused the damage.

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Courts are increasingly being called upon to decide disputes over access to a neighboring property during construction, and their guide is RPAPL § 881, titled “Access to adjoining property to make improvements or repairs.”  However, because the statue is vague, a body of cases interpreting RPAPL § 881 has developed that has expanded on concepts only implied in the statute.  A recent Appellate Division case confirms that the application of RPAPL § 881 can only be understood in light of the cases interpreting the statute.

A property owner who is renovating or constructing a new building often needs access to its neighbor’s property for a variety of reasons, including protecting it from falling debris or strengthening its foundation, as required by the building code.  The neighbor does not always agree to allow access, sometimes because of concerns that the planned construction could harm its building or inconvenience its occupants.  RPAPL § 881 provides relief for the party performing the construction—if it can meet certain conditions—by allowing a court to order access.   The statute requires that:  

The petition and affidavits, if any, shall state the facts making such entry necessary and the date or dates on which entry is sought. Such license shall be granted by the court in an appropriate case upon such terms as justice requires.

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