The Court of Appeals Upholds the Fourth Department’s Lien Law Section 3 Consent Decision

On November 20, 2018, in Angelo A. Ferrara v. Peaches Café LLC, et al., 2018 WL 6047993 (N.Y. Nov. 20, 2018), the New York Court of Appeals upheld 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). As I discussed in my prior posts, “The Divide in Interpretations of Lien Law Section 3’s Consent Requirement Continues” and “Varying Interpretations of Lien Law Section 3’s Consent Requirement,” New York Courts have been at odds in their determinations of the consent requirement contained in Lien Law Section 3. Judge Wilson of the New York Court of Appeals clarified these distinctions in his recent decision.

The key facts in the underlying case are summarized as follows: Defendant Peaches Café LLC (“Tenant”) entered into a lease agreement (the “Lease”) with Defendant-Appellant COR Ridge Road Company, LLC, (“Landlord”), who also owned the subject premises. The Lease affirmatively required the Tenant to undertake the construction of various improvements at the premises. Specifically, the Lease detailed certain requirements for the electrical work. Nonparty Quinlan Ferrara Electric, Inc. (who assigned its claims to Plaintiff-Respondent Angelo A. Ferrara) (“Contractor”) contracted with Tenant to perform a portion of the electrical build-out work at the premises. Despite satisfactorily completing its work, Contractor was never paid the balance for its work performed. Accordingly, Contractor filed a mechanic’s lien against the premises and commenced a lien foreclosure action.

In the lien foreclosure action, the trial court granted Landlord’s motion to dismiss the complaint as against Landlord, because, according to Landlord, “it did not have any direct dealings with [Contractor] and did not explicitly consent to the specific electrical work performed by [Contractor.]” Peaches, 30 N.Y.S.3d at 767. The Fourth Department reversed the trial court, finding that that Landlord/owner’s consent for the electrical work was derived from the terms of the Lease, which obligated Tenant to install electrical upgrades on the premises. Thus, the Landlord/owner was obligated to pay for the reasonable value of Contractor’s services. Id at 768. Landlord appealed.

In the Court of Appeals decision, Judge Wilson held that “consent, for purposes of Lien Law § 3, was properly inferred from the terms of the lease,” and that the Fourth Department “appropriately declined to impose a requirement that [Landlord] either expressly or directly consent to the improvements” because consent, for purposes of Lien Law Section 3, can be inferred from the terms of the Lease. 2018 WL 6047993 at *1-2.

Judge Wilson explained that a contractor performing work for a tenant may properly file a mechanic’s lien if the owner either: (a) is an “‘affirmative factor in procuring the improvement,’” or (b) “‘having possession and control of the premises assent[s] to the improvement in the expectation that he will reap the benefit of it.’” Id. quoting Rice v. Culver, 172 N.Y. 60, 65-66 (1902). The “consent” required in the latter option cannot be established by mere knowledge of improvements, but certain lease provisions can establish the requisite consent if the landlord/owner requires improvements to be made and the improvement is inured to the landlord/owner’s benefit. Id. at *3. Based on Rice, as well as the other Court of Appeals precedents that were followed by the Fourth Department in the Peaches case (Jones v. Menke, 168 N.Y. 61 (1901) and McNulty Bros v. Offerman et al. 221 N.Y. 98 (1917)), the Court of Appeals concluded that the terms of the Lease, “taken together, are sufficient to establish [Landlord’s] consent under Lien Law § 3.” Id.

The Court of Appeals further examined Delaney & Co. v. Duvoli, 278 N.Y. 328 (1938), a decision relied upon by Landlord. Landlord asserted that the Court should adopt the position taken by certain of the Appellate Division Departments, which, it argued, interpreted Delaney as requiring a direct relationship between a tenant’s contractor and the property owner in order to constitute consent under Lien Law Section 3. The Court, however, explained that those decisions improperly stripped down the Delaney language. The Court stated:

“Read properly … Delaney simply noted that the lease did not contain any provisions requiring the tenant to undertake the improvement work made by the lienors. Absent such a provision, we looked to whether the property owner had taken any other ‘affirmative act’ sufficient to establish consent fort the purposes of Lien Law § 3. Finding none, we concluded that the owner could not proceed against the landlord.” Id. at *4.

Thus, the Court rejected Landlord’s argument that Delaney stands for the proposition that Lien Law Section 3 consent requires a direct relationship between property owner and the lienor. Delaney, it clarified, merely “stands for the proposition that some ‘affirmative act’ by the landlord is required,” and that that “affirmative act” can include lease terms that require the construction of specific improvements. Id. If a lease does not require improvements, the owner’s overall course of conduct and the nature of the relationship between the owner and the lienor may still demonstrate consent for purposes of Lien Law Section 3. Id.

The Court of Appeals made clear that not all cases that rely on Delaney are necessarily inconsistent with its precedents. For example, the decision in Paul Mock, Inc.  v. 118 East 25th St. Realty Co., 87 A.D.3d 765 (1st Dep’t 1982), “when read properly, is consistent” with the Court’s precedent. Nonetheless, the Court warned that, to the extent other Appellate Division cases rely on Paul Mock or Delaney for the suggestion that Lien Law Section 3 requires a direct relationship to establish consent, such decisions are contrary to the Court’s precedents and should not be followed.

Now that the Court of Appeals has made clear that consent, for purposes of Lien Law Section 3, may be inferred from the terms of a lease or affirmative acts of owners/landlords, owners/landlords should be cautious if they want to require a tenant to undertake construction work as part of its lease obligations. Such terms may result in mechanic’s liens being properly filed against the underlying premises, even if the owner/landlord did not explicitly or directly consent to the performance of such work, and possibly even if the lease otherwise stipulates that the landlord does not consent to such work.