L. Priorities of Liens on Private Improvements

JurisdictionNew York

L. Priorities of Liens on Private Improvements

Lien Law § 13 provides the priority scheme for private improvement liens. Generally speaking, a mechanic's lien has priority over most unrecorded conveyances or subsequently recorded conveyances respecting the particular real property in question.299

Prior recorded conveyances generally have priority over a mechanic's lien, except where the conveyance was made subsequent to the commencement of the improvement and prior to the expiration of four months after completion of the improvement, in which case the prior recorded conveyance will only have priority over the mechanic's lien if the required covenant, as specified in Lien Law § 13(5), is satisfied. In other words, one who purchases improved real property within a lien period (eight months, except for one-family residences where the lien period is four months) and receives a deed with the lien clause set forth in Lien Law § 13(5), has priority over a mechanic's lien filed after the date of purchase even for work performed prior to the sale.300 It should be noted, however, that if a financial institution or lender fails to comply with the accurate reporting requirements concerning building loan agreements mandated by Lien Law § 22, a portion of the lender's mortgage may be subordinated to a mechanic's lienor. A decision by the Court of Appeals highlights the subordination issues. Those portions of the building loan which involve "acquisition costs" related to the site are not subordinated. However, the portion of the building loan mortgage that is dedicated to any construction costs can be subordinated. The case that sets forth the new parameters is Altshuler Shaham Provident Funds Ltd v. GML Tower, LLC.301 It abrogates Atlantic Bank v. Forrest House Holding Co.302 and adopts the reasoning of the federal court in Yankee Bank for Finance & Savings, FSB v. Task Associates Inc.303 In Atlantic Bank, the Second Department held that regardless of whether the lending institution loaned funds to a developer for acquisition of a site separately from the costs of the loan to pay contractors for construction work, the entire loan amount was subject to subordination in favor of a mechanic's lien if the Lien Law § 22 statement was not timely and accurately filed. Now the Court of Appeals, in a direct rejection of Atlantic Bank, holds that only that portion of a building loan agreement that is dedicated to construction of the project (not the purchase of the realty) is subject to the subordination penalty.304 Acquisition costs are not subject to subordination in favor of the lien in those circumstances. A vigorous dissent by Judge Graffeo was distinguished by the court. The majority, in materially pertinent part, states as follows:

This result is consistent with the language of Lien Law §§ 22 and 2(3), (13) and (14), and does not contravene the statute's purpose, to give contractors and material suppliers notice of how much money a building loan makes available...

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