JR KASMAN, PLLC TRANSACTION TIP SERIES: A MECHANICS LIEN WARNING

August 24, 2020 | by

During the Great Recession, it was not uncommon for a mechanics lien to be part of a messy commercial real estate deal. For starters, a number of distressed owners ran out of money. Unfortunately, budgets were not followed and reserves to pay contractors were depleted or non-existent on a number of deals. Mechanics lien litigation can be expensive and time consuming. In some jurisdictions, delays in the judicial system or outright moratoriums on cases during the Great Recession made resolution of claims impossible for extended periods of time.

We already know that there is some distress in the current market. Although we can hope that lending and budget standards in the years following the Great Recession have tightened for construction and renovation projects, things happen and the current pandemic is a wild card. Among other things, we already see that the pandemic had led to changes in the timing of litigation cases. And let’s not forget how the title insurance world has changed with respect to mechanics lien coverage (not that good counsel would ever advise an owner or lender to rely on a title insurance claim exclusively to begin with, if coverage even exists).

Although many in our industry like to respond in summary and say that a mechanics lien as a result of work incurred by a tenant does not impact an owner – that is not always true!!! In fact, in New York for example, there has been some clarification by statute and judicial opinion relatively recently as to when a tenant’s work may lead to a lien on an owner’s interest in an asset. Facts like whether the owner consented to the tenant’s work that became the subject of a mechanics lien may be considered.

So in any case where you are buying or lending, think carefully about mechanics liens — and not just liens that an owner’s work may lead to but also those that a tenant’s work may lead to. And in any case where you are an owner considering consent to a tenant performing work, think and plan carefully for what you need to mitigate risk.

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