Governor George Pataki has signed an amendment to the New York Lien Law providing that public entities must require private entities constructing improvements on publicly owned property to post bonds or other security to guarantee prompt payment of contractors and subcontractors. The amendment takes effect November 17, 2004.

A long-standing gap in New York's Lien Law left contractors exposed when a publicly owned property was improved through the use of private financing. Because the property was publicly owned, it was not subject to private mechanic's liens. Because no public funds were allocated to pay for the improvement, there was no right to file a public improvement lien. Thus, contractors, subcontractors and suppliers were left with no lien rights or payment security.

That gap was partially closed in 1992 when the Lien Law was amended to permit the filing of private liens when title to the project was legally held by an industrial development agency (IDA) but beneficial ownership rested with a private entity. However, when an IDA was not involved, contractors, subcontractors and suppliers could not file liens because the public property was not subject to lien.

Recently, Gov. Pataki vetoed another bill (A. 5805) amending the Lien Law to require the posting of a payment bond when no public contract funds would exist to finance a public improvement. That amendment was intended to provide security for contractors, subcontractors and suppliers on public, non-IDA developments with private financing through the use of payment bonds. Gov. Pataki acknowledged the "laudable" purpose of the bill but noted that "technical defects" warranted a veto. In particular, the governor objected to the absence of a threshold amount before the law applied, which would have had the "unintended consequence of unnecessarily adding costs to small public improvement projects," and the lack of provisions allowing alternate forms of security such as letters of credit.

The recently enacted amendment, A. 595, Chapter 155, was the Legislature's response to the governor's objections. The new bill includes a threshold project cost of $250,000, below which the protections of the amendment do not apply. It also permits the filing of a bond or "other form of undertaking." A letter of credit would appear to be a permissible form of undertaking.

The amendment to §5 of the Lien Law applies only to "public improvements," which involve projects for which the real property is owned by the state or a public corporation, including those of municipalities and counties.

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For more information about the issues covered in this report, please contact Paul Berning in our San Francisco office at 415-848-4996 or at paulberning@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.

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