Understanding the type of project you’re working on is an important first step to securing your rights to payment. Your rights and requirements can vary depending on if it is a public project, a private project, or if the work was commissioned by a tenant. The intersection of these varying rules can be challenging to navigate. That was the issue in am important Court of Appeals case out of New York. In that case, the court declared that a lien cannot attach to a private leasehold on a public property.
NY lien rights for private improvements to public property
Under New York mechanics lien laws, there are technically two different types of liens that may be filed. There is your more traditional mechanics lien under NY Lien Law §3, and a lien under contracts for public improvements under §5.
A §3 mechanics lien is used for the “improvement of real property” which covers property not belonging to the state or a public corporation.” While a §5 lien is used under very specific circumstances where the project isn’t required to have a payment bond posted, and the improvement is done pursuant to a contract with the state of public corporation.
These distinctions seem fairly clear. However, this isn’t always the case. NY law also allows for liens against the leasehold interest of a tenant commissioned improvement. But what about tenants on a publicly owned property? This gray area of lien rights is exactly what the court dealt with in the following case.
See: Tenant Improvements Muddy Waters for Lien Claimants
Contractor files liens against a private tenant on public property
The case in question was Paerdegat Boat & Racquet Club, Inc. v. Zarrelli,
Project Snapshot;
- Owner: City of New York (NYC)
- Lessee: Paerdegat Boat & Racquet Club, Inc. (PBRC)
- Contractor: Joseph Zarelli (Zarelli)
PBRC had a building on public property leased by NYC used for their racquet club facilities. Zarelli was hired by PBRC to install some skylights and other minor renovations to the racquet club. As the project progressed, Zarelli has allegedly abandoned the project. Furthermore, Zarelli claimed he was owed an unpaid balance of around $14K. So Zarelli filed two mechanics lien claims for the full amount, one under §3 and one under §5.
Trial court allows private improvement lien against leasehold to stand
Accordingly, PBRC filed an action to have both lien claims dismissed. At trial, the §5 claim was swiftly dismissed, as the work wasn’t performed under a contract with the state or public corporation. However, the §3 mechanics lien was a different story. The court decided to tackle the issue of tenant improvements on public property.
The opinion of the case focused on the reasoning why a mechanics lien isn’t allowed on public property. Citing that the rationale is based on the fact that a public property is typically used for public purposes. Any encumbrance or threat of foreclosure would burden the public interest and safety. Yet, the court’s reasoning didn’t end there. A long discussion of whether the property was being used for a public purpose or not.
They concluded that since the property was being used for private purposes, and that the lien was attaching to the leasehold interest; the city’s interest in the property is not affected. Therefore the court upheld the §3 lien claim. the decision was appealed.
Appeals court dismisses the claim as interfering with public interest
On appeal, the court didn’t engage in much of a discussion. Rather, the opinion merely stated that the case was overturned for the reasons stated in a dissenting opinion of the trial court decision. There, Justice Hopkins stated that the test of whether the property was being used for “public purposes” was irrelevant. The lien laws clearly distinguish between public and private improvement liens,
Even though the claim is against the leasehold, allowing a claim to be filed would interfere with the public entity’s interest in the property. Specifically, the right to decide and control who is granted the use of the property. This, as Justice Hopkins discussed, would interfere with the public use of the property, which is exactly what the New York lien laws were designed to avoid.
Thus, the court concluded.
[T]hat the property against which the mechanic’s lien was asserted was exempt from such a lien since the realty was owned by the City of New York and a mechanic’s lien may not attach to city-owned property nor to the improvements erected thereon, and that Paerdegat’s leasehold interest in the city-owned land was similarly exempt.
Accordingly, the §5 mechanics lien claim was dismissed. So, until future legislation changes this precedent, those performing work or furnishing materials to a private company improving public property will not have any mechanics lien rights in New York. Regardless if the lien is attaching to the property itself, or the leasehold interest.
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Lessons learned
It may seem like rare circumstances, but construction improvements for private enterprises upon public property is more common that you think. States, counties and cities frequently lease out public land to private companies to do a variety of things (airports, for example, lease to airlines and vendors). These private tenants hire companies to make tenant improvements, and when those companies go unpaid, they look to the lien and bond claim laws and find themselves “in-between” regulations.
We wrote about the issue in a post a few years back titled Is Your Project Private, State, Federal or Something Different? Impressively, Oklahoma addressed the issue head-on by passing Senate Bill 1053, which makes the state’s Little Miller Act applicable to private construction on public land.
Not only is the situation overlooked in the construction industry, but it is a drastically misunderstood situation.
In some states, claimants can file a mechanics lien against the private company’s leasehold interest in the property. But this is not the case in all states, especially New York, where (as this case proves) that unpaid contractors and suppliers are simply, and unfortunately, between rules.
Learn more: How to Get Paid on New York Public Projects