Better Protection for Contractors on Hybrid Projects

Recent changes to New York State's lien law has given contractors a better chance to recover payments on public-private hybrid projects that had long presented a risky business proposition.

By Henry Goldberg

One of the frustrating loopholes in the lien law in New York had historically been the inability of claimants to file liens against privately funded projects on public land. A recent amendment to the state's law appears to offer some relief to this longstanding problem.

The lien law generally provides contractors, subcontractors, and certain other project participants with a chance to recover unpaid sums beyond the typical breach of contract claim. Generally, the law allows the lien on a private project to go against the owner's interest in the land itself, while on a public project it would go against the public funds dedicated to the job. In either case, a properly filed lien protects the lienor in the event that a contractor goes out of business or a project dies.

However, these so-called hybrid projects involving private development on public land defied the process. With the land in public hands, the lienor could not file a claim against the property, and with investment from private sources, it also could not attach to public funds.

These projects are not uncommon. Many state universities, for instance, develop projects on public land using funds from affiliated but privately operated foundations.

While most hybrid efforts eventually found project teams, some contractors had been reluctant to bid on them because of the inability to file liens. Without liens, subcontractors had no remedy on a hybrid project if the general contractor were to go out of business.

An amendment to the law in 1992 diminished the loophole in that it allowed contractors and suppliers to file a private improvement mechanic's lien against the real property owned by an Industrial Development Agency. The change was meant largely to recognize that while the IDA may be the owner of the property, the "beneficial owner" is a private entity, and as such, the project constitutes a private and not a public improvement.

Last November, another amendment to the lien law took effect that may greatly expand the protection available to contractors, subcontractors, and suppliers. The recent change requires all private owners to post a surety bond or "other form" of security that can guarantee payment for privately funded projects located on publicly owned land. The change applies to instances where estimated construction costs exceed $250,000.

While the amendment does not technically allow the filing of a mechanic's lien, it is a significant step toward closing the loophole. It may well give contractors, subcontractors, and suppliers the cover they need to bid on a project, because suing on a payment bond is ordinarily an easier remedy than having to go through the formalities of foreclosing on a mechanic's lien.

The amendment is not foolproof. For instance, it sets no minimum or mandatory terms for the bond, meaning that it behooves the project participant to find out the exact terms of the bond prior to executing a contract. Those terms could include restrictive notice provisions or short filing periods that a party would have to meet in order to preserve a claim against the bond.

Likewise, the amendment leaves the status of projects with construction budgets under $250,000 without the bond payment protection. As of the writing of this article, there are no further amendments on the table.

It will take time to see how the amendment works and whether further legislative action is necessary. But the recent changes at least give building industry participants a few extra tools to work with as they pursue new projects.

Henry Goldberg is managing partner of Goldberg & Connolly, a construction and government contracting law firm based in Rockville Centre, N.Y.