lease agreementAt first glance, the holding of a recent N.Y. Court of Appeals case may have sent commercial landlords and lenders into a panic. Ferrara v. Peaches Café, LLC, 32 N.Y.3d 348 (2018), involved the enforcement of a mechanic’s lien against a commercial landlord for work performed at the tenant’s request.

By way of background, a mechanic’s lien is a statutory device used to ensure that contractors and subcontractors are paid for the value of the improvements they make to real property. New York Lien Law § 3 provides that “[a] contractor, subcontractor. . . 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 statute makes it clear that the lien may only cover the cost of work performed at the owner’s or an owner’s agent’s request or consent – a requirement that is necessary for obvious reasons. Someone who paints your house in the dead of the night cannot turn around, demand payment, and subsequently file a mechanic’s lien on the property.

The issue of a property owner’s consent is less straightforward, however, in the context of a landlord-tenant relationship. When a tenant engages a contractor to perform work on leased premises, equity would seem to require at least some participation by the landlord in order to hold the landlord liable for the costs of work requested by a tenant. Several Appellate Department decisions had suggested that direct involvement between the landlord and the contract was required. In Ferrara, however, the Court of Appeals clarifies what is required to establish a landlord’s consent in order to enforce a mechanic’s lien on a landlord’s fee interest. At first blush, the answer seems to be “not a lot.”

In Ferrara, COR Ridge Road Company, LLC (COR) leased Peaches Café, LCC (Peaches) a space in a retail shopping complex. Peaches intended, and the lease clearly contemplated, that the space would be renovated to operate a full-service restaurant. Peaches contracted with a third party, Ferrara, to complete the necessary electrical work. Ferrara completed the work, but was never paid, and ultimately filed a $50,000 lien on the property. Upon filing the lien, Ferrara noticed both COR and Peaches. In Ferrara’s subsequent action to foreclose the lien, COR argued that as a matter of law, a contractor working for a tenant may not place a lien on a landlord’s property unless the landlord “expressly” or “directly” consented to the performance of the work, and as COR had done neither, Ferrara’s action against COR should be dismissed.

The Court of Appeals flatly disagreed. Although more than “mere passive acquiescence in or knowledge of improvements being made” is required, “[t]o enforce a lien under Lien Law § 3, a contractor performing work for a tenant need not have any direct relationship with the property owner.” See Ferrara, 32 N.Y.3d at 353. The relevant inquiry is whether the owner was 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.” Id. Importantly, the Court held that this standard means that a landlord’s consent can be established by the terms of the lease, without any direct relationship between the landlord and contractor.

COR primarily relied on the Court’s decision in Delany & Co. v. Duvoli, 278 N.Y. 328 (1938). Several appellate division decisions had held that Delany stood for the proposition that there could be no consent under Lien Law § 3 where there was no direct relationship between a tenant’s contractor and the property owner. In response, the Court of Appeals chastised those courts that had interpreted Delany as such. When “read properly,” Delany “simply noted that the lease did not contain any provisions requiring the tenant to undertake the improvement work made by the lienors.” Ferrara, 32 N.Y.3d. at 357.

But is the holding of Ferrara as drastic as it sounds? In its analysis, the Court relied heavily upon the detailed language in the lease between COR and Peaches, which “makes clear that COR was to retain close supervision over the work and authorized it to exercise at least some direction over the work.” Id. at 355. The lease provided:

Peaches ‘shall retain competent and skilled contractors for the completion of’ the electrical work; Peaches ‘shall use only contractors approved by [COR];’ Peaches ‘shall not make … any … improvements … without first obtaining the consent of [COR];’ Peaches ‘shall retain the services of a competent experienced architect(s) and engineer(s);’ Peaches ‘shall provide [COR] with detailed plans and specifications for the build-out of improvements to be constructed on the [p]remises;’ the design drawings that Peaches was to submit ‘shall include’ electrical plans; the design drawings ‘shall be revised’ according to any proposed changes by COR, which it retained the right to do; and Peaches cannot open for business unless it completes the improvements according to the lease terms and submits to COR a certificate of completion certifying that the premises were ‘constructed and completed in accordance with [the] final Design Drawings as approved by [COR].’

Ferrara, 32 N.Y.3d at 351–52. Furthermore, the lease “outlined detailed requirements for the electrical work that is the subject of the challenged lien: it specified the type of service, the type of panel board and type of electrical system to be installed.” Id. Accordingly, the terms of the lease “not only expressly authorized Peaches to undertake the electrical work, but also required it to do so to effectuate the purpose of the lease.” Id. at 355.

“[C]onsent for purposes of Lien Law § 3 may be inferred from the terms of the lease” may sound like a drastic proposition, but, in the context of the detailed lease terms, the holding makes a lot of sense. This is not the case of a mechanic’s lien being enforced against a landlord based on some boilerplate lease provision. To the contrary, the lease in Ferrara not only contemplated the work that had to be completed, but also included detailed requirements for the particular work that was the subject of the challenged lien.

While Ferrara logically holds water, and is arguably equitable, the decision certainly puts commercial landlords in a tough position. Stringent requirements regarding tenant improvements in a lease gives commercial landlords comfort in a tenant’s ability to produce income moving forward – particularly if the tenant’s use, and therefore, profitability, depends on those improvements. However, after Ferrara, a detailed lease may be a double-edged sword.

Written by Taylor A. Henry, Esq. – Taylor A. Henry, Esq. is an associate in Boylan Code’s Real Estate and Litigation Practice Groups. She concentrates her practice on commercial lending and commercial and residential real estate transactions. She also represents municipal and individual clients in a variety of litigation matters.

This article was published inThe Daily Record.