Getting Paid Faster with Liens, Bonds and Contracts - NY Webinar

In this blog, presented by SunRay Construction Solutions and Ted Baum, Partner, Adams Leclair LLP, Attorneys, we'll walk you through the key types of liens in New York, their effectiveness, and what you need to know about bonds.

The Three Types of Liens in New York

While there are technically two main types of liens under New York law, we’ve created a third category to address important distinctions. Here’s a breakdown of the three main types of liens you should be aware of:

1. Public Improvement Liens

Public improvement liens are relatively unique to New York compared to other states. These liens don’t target private property but instead aim at public funds that are set aside for specific public projects. For example, if you're working on a public project, your lien would be filed against the public fund designated for that project rather than the property itself.

• Eligibility: Public improvement liens are primarily available to subcontractors and tiers below the general contractor. General contractors do not have the right to file a public improvement lien in New York.

• Impact: Once a subcontractor files a lien, the public owner is legally required to withhold 1.5 times the lien amount from the general contractor. For instance, if a $10,000 lien is filed, the general contractor must have $15,000 withheld.

• Withholding Process: The funds will remain withheld until the general contractor either settles the lien (often through a bond) or obtains a lien discharge.

This makes public improvement liens an effective tool to protect payment rights, especially since general contractors can easily bond off the lien, though this does come with additional costs.

2. Private Commercial Liens

Private commercial liens apply to non-residential projects. These are not limited to residential properties but instead cover larger-scale commercial and industrial projects, like apartment buildings or office complexes.

• Key Consideration: Unlike public improvement liens, there is no mandatory requirement for owners to withhold money in the event of a lien. However, construction contracts typically include provisions that allow the owner to withhold funds if liens are filed. This means that even though the lien itself doesn't guarantee a withholding obligation like in public projects, the contract may provide similar protection.

• Bonding Issues: Unlike public projects, private commercial projects are not required to have bonds by law (although they may be required contractually). If a bond exists, a lien can be discharged through the bond, but sureties are often reluctant to provide a lien discharge bond unless they have a solid relationship with the contractor or are provided with full collateral.

• Time Limit: For private commercial liens, the time to file a lien is eight months from the last day materials or labor were provided on the project. This is a significant distinction from the four-month time frame for private residential liens.

3. Private Residential Liens

Private residential liens apply to residential construction projects, including homes or smaller buildings like duplexes and triplexes.

• Time Limit: The filing deadline for a private residential lien is four months after the last day materials or labor were provided, which is shorter than the eight-month period for private commercial projects.

• Owner’s Perspective: From the owner’s perspective, a lien on a residential property is often less concerning unless they plan to sell the property soon. If there is a mortgage involved, however, the lien can complicate matters.

• Practical Impact: Residential owners may not always prioritize resolving a lien dispute unless the situation escalates, making it potentially more difficult for contractors to collect payment.

Key Considerations for Effective Liens

Liens are not a one-size-fits-all solution. For a lien to be effective, certain conditions must be met, and there are important distinctions that you need to be aware of.

• Money Availability: A lien is only effective if money is still available on the job. If the project owner has already paid out the funds before the lien is filed, the lien has no effect. Similarly, if the owner disputes the amount owed, the lien could be challenged, though this is harder to prove.

• Timing: For public improvement liens, the clock starts ticking from the completion and acceptance date of the project, which can sometimes be hard to determine. Ideally, this should be 30 days from completion, but it can be a gray area if the owner is holding retention funds for an extended period.

• Educating Local Authorities: Smaller municipalities or school districts may not be as familiar with the lien process, and sometimes it’s necessary to educate these parties about their obligations under New York lien laws. This can involve working with legal counsel to ensure proper compliance.

The Role of Bonds in Payment Collection

Bonds play an important role in both public and private projects when a lien is filed. A bond can be used to discharge a lien, which means the contractor can secure their payment without involving the property itself.

• Public Projects: Public improvement projects typically require payment bonds. When a lien is filed, it’s common to discharge the lien through bonding. A payment bond ensures that subcontractors and suppliers are paid even if the general contractor fails to do so.

• Private Projects: For private commercial projects, bonds are not always required but may be included by contract. In private projects, the lien discharge process can be complicated by the fact that the contractor might not have a bond or may not be able to secure one without collateral.

The Importance of Avoiding Lien Exaggeration

Exaggerating the amount of a lien can lead to severe consequences. "Willful exaggeration" means claiming an amount that is significantly higher than what is legitimately owed. This is a serious issue in lien foreclosure actions and can lead to the cancellation of the lien and potential legal costs for the party that exaggerated the claim.

• Defining Exaggeration: Exaggeration occurs when a contractor knowingly claims more than what is due, without a reasonable basis for the higher amount. If, however, there is a legitimate dispute over the amount owed, that would not be considered exaggeration.

• Legal Ramifications: If a lien is exaggerated, the court may cancel the lien and order the contractor to pay legal fees. It’s important to ensure that lien amounts are accurately calculated to avoid any legal complications.

New York Prompt Payment Act

The New York Prompt Payment Act is an important law that applies to private construction projects over a certain value (typically $150,000). This law requires payment within a set period and imposes penalties for non-compliance.

• Payment Timeliness: Contractors or subcontractors must be paid within a certain period, usually 30 days. If an invoice is disputed, the payer has 12 days to respond.

• Interest Penalties: If payment is delayed, the law imposes a 1% per month interest penalty, which is far higher than the standard 9% interest for most other contracts in New York.

The Prompt Payment Act also invalidates any contractual clauses that require dispute resolution in another state or under another state’s laws. This makes it an essential tool for contractors in New York to ensure they are paid promptly and under the state’s laws.

Key Takeaway

Understanding the different types of liens available in New York—public improvement, private commercial, and private residential—is key to protecting your payment rights in construction projects. By knowing the nuances of each lien type, the timing requirements, and the importance of bonds, you can navigate the complexities of the construction industry and secure payment faster. Additionally, understanding the Prompt Payment Act and avoiding lien exaggeration will help safeguard your financial interests and maintain smooth project operations.

For construction professionals in New York, leveraging liens and bonds effectively can make the difference between delayed payments and timely compensation.

Common Questions for Contractors Ask

1. Who receives the lien-upon funds?
The law dictates that the lien-upon funds for a public improvement must be filed with the Chief Financial Officer (CFO) for the public owner and the head of the department in charge of the construction. The CFO is typically easier to identify (like a city controller), but determining the head of the department managing the construction can be more challenging, as it depends on the specific department running the project.

2. What are you actually liening in a lien?
In a lien, you are claiming a right to funds owed for work performed on a project. The lien typically covers unpaid funds associated with public improvement projects or private work, protecting the person filing it from non-payment.

3. What is the filing deadline for a lien upon funds?
The deadline is 30 days from the completion and acceptance of the work. However, determining the exact completion and acceptance date can be tricky. It's recommended not to wait until the end of the job, as lien rights may still exist even if work was done years earlier, provided the project hasn’t been completed or accepted.

4. What happens if there isn’t a bond on a private project and the general contractor (GC) was paid in full?
For private projects, the existence of a bond doesn’t affect lien rights. Bonding is only required by contract and doesn’t change the timing or rights related to filing a lien. On public jobs, bonds are required by law, ensuring protection against non-payment.

5. Do you have to be licensed to file a lien in New York?
It depends on where the work was done. New York does not have a general licensing requirement for contractors, but contractors working in the metro New York area must be licensed for home improvement projects. In some cases, being unlicensed can prevent filing a lien, though there are differing opinions on this.

6. Do you need a physical location in New York to assert lien rights?
No, you don’t need a physical location in New York to file a lien or bond claim. However, to file a lawsuit in New York courts, you must be authorized to do business within the state. If this requirement is missed, it may invalidate your claim, although it’s possible to resolve this issue by registering your business after filing.