Contractor Working for Tenant Allowed to Place a Lien on Landlord's Property

On November 20, 2018, the Court of Appeals issued a decision in Ferrara v. Peaches Cafe LLC, 2018 NY Slip Op. 07925, allowing a contractor working for a tenant to place a lien on the landlord's property, explaining:

COR urges that the Appellate Division erred because, as a matter of law, a contractor working for a tenant may not place a lien on a landlord's property unless the landlord has expressly or directly consented to the performance of the work, which COR says it did not do. We reject that argument; our precedents establish that the Lien Law does not require any direct relationship between the property owner and the contractor for the contractor to be able to enforce a lien against the property owner. Lien Law § 3 provides:

A contractor, subcontractor, laborer, or materialman, who performs labor or furnishes materials for the improvement of real property with the consent or at the request of the owner thereof, or of the owner's agent shall have a lien for the principal and interest, of the value, or the agreed price, of such labor from the time of filing a notice of such lien.

The impetus behind the law is to provide protection to those who furnish work, labor and services or provide materials for the improvement of real property. Accordingly, the law is to be construed liberally to secure the beneficial interests and purposes thereof.

To enforce a lien under Lien Law § 3, a contractor performing work for a tenant need not have any direct relationship with the property owner. Instead, to fall within that provision 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. We further explained that the owner's consent or requirement that the improvement be made, rather than mere passive acquiescence in or knowledge of improvements being made, is contemplated by the statute. In Rice, we concluded that the landowner could not be held liable for the work contracted for by the tenant who had leased the land to build and maintain an athletic field. Although the landowner consented in a certain sense of the word because he must have known at the time the lease was executed that the tenant planned to make improvements in order to use the property for the purpose covenanted for in the lease, that knowledge alone was insufficient to show that the appellant consented to the performance by the plaintiff of the work for which her lien was filed.

However, we distinguished Rice from our prior cases in which the tenant covenanted by the lease to erect buildings or make improvements. In those cases the landlord was properly held liable because not only did the landlord require the improvement to be made, but the improvement inured to the landlord's benefit, either because it reverted to the landlord at the expiration of the demised term or because rent proceeded from its use.

Jones, decided the year before Rice, reaffirmed the rule of that line of prior cases that certain lease provisions can establish consent for purposes of Lien Law § 3:

A requirement in a contract between landlord and tenant, that the tenant shall make certain improvements on the premises is a sufficient consent of the owner to charge the owner's property with claims which accrue in making those improvements, though it would not render the property liable for improvements or alterations beyond those specified in the contract.

In Jones, we based the landlord's consent on contractual provisions supporting the proposition that the landlord had consented to the improvements for purposes of Lien Law § 3. In particular, we noted the contractual requirement that the tenant convert the space to a first-class saloon, that the conversion be accomplished in a few months, and that failure to timely complete the conversion would terminate the lease and vest title to the improvements in the landlord. In that way, the owner sufficiently consented to the repairs and his property was chargeable with their value. A similar result obtained in McNulty Bros.

No material facts are in dispute here. The language of the lease agreement not only expressly authorized Peaches to undertake the electrical work, but also required it to do so to effectuate the purpose of the lease—that is, for Peaches to open the restaurant for business and operate it continuously, seven days a week, during hours specified by COR. Furthermore, the detailed language makes clear that COR was to retain close supervision over the work and authorized it to exercise at least some direction over the work by reviewing, commenting on, revising, and granting ultimate approval for the design drawings related to the electrical work. We therefore conclude that, under our prior precedents, the terms of the lease agreement between COR and Peaches, taken together, are sufficient to establish COR's consent under Lien Law § 3.

COR relies on our decision in Delany & Co. v Duvoli (278 NY 328 [1938]) to argue that we should adopt the position taken by certain of the Appellate Division departments in several cases it interprets as rejecting a finding of consent under Lien Law § 3 when no direct relationship between a tenant's contractor and the property owner is present. . . . Contrary to COR's argument, Delany does not stand for the proposition that consent under Lien Law § 3 requires a direct relationship between the property owner and the lienor. Instead, Delany stands for the proposition that some affirmative act by the landowner is required to find consent for the purposes of Lien Law § 3. Our decisions make clear that that affirmative act can include lease terms requiring specific improvements to the property. When 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 demonstrate consent for purposes of Lien Law § 3. The decision in Paul Mock, when read properly, is consistent with our precedents, as are most of the Appellate Division cases relied on by COR. To the extent that certain Appellate Division decisions relying on Paul Mock suggest that Lien Law § 3 requires a direct relationship between the landlord and the contractor to establish consent, they are contrary to our precedents and should not be followed.

(Internal quotations, citations and elisions omitted) (emphasis added).

We frequently litigate disputes over the sale or leasing of commercial property. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you are involved in a dispute regarding a commercial real estate transaction.