Amending Building Loan Contracts in New York in the Wake of COVID-19-Related Closures of Local Recorders’ and Clerks’ Offices

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The closure of local recorders’ and county clerks’ offices in the wake of COVID-19, and the prospect of future closures, has had a profound effect on commercial real estate transactions. This is particularly true in New York where the closures are preventing the filing of mechanics’ liens and building loan contracts, in some cases preventing the commencement of new construction projects.

With respect to on-going construction projects in New York, current conditions likely will cause borrowers to seek modifications to their existing building loan contracts. However, Section 22 of New York Lien Law requires that any modification of a building loan contract be filed within 10 days after the execution of the modification along with an updated Section 22 Affidavit.ⁱ If the modification is not filed within such 10 day period, a building loan mortgage may lose some or all of its priority against later filed mechanic's liens.ⁱⁱ

As a result, as of the date of this writing, both lenders and borrowers are uncertain as to how building loan contracts will be modified and what protections, if any, are available if the requirements of Section 22 of the New York Lien Law cannot be satisfied. New York officials have not yet provided guidance as to potential relief from the 10 day period under Section 22, nor has there been guidance as to whether certain closed offices will be re-opened in some capacity to handle filings of this sort. Furthermore, title companies may be unable to provide a work-around to protect lenders.

Although Section 22 provides that building loan modifications must be filed, it is noteworthy that New York courts have recognized an exception for ‘non-material’ building loan modifications.ⁱⁱⁱ "A modification of a building loan agreement is ‘material’ if it:

1. 'alters the rights and liabilities otherwise existing between the parties to the agreement; or
2. enlarges, restricts or impairs the rights of any third party beneficiary.'"^iv

Some examples of ‘non-material’ building loan modifications include the mere extension of the term, the extension of the completion date for the project and a lender's decision to enforce or not enforce building loan covenants which do not impact the amounts available to pay for improvements.^v For example, in MLF3 Airitan LLC v. 2338 Second Ave. Mazal LLC, the Supreme Court of New York found that a lender’s failure to enforce certain loan covenants did not qualify as a material modification where “the building loan agreement specifically states that third parties shall not have any claims against the lender or the borrower.”^vi There, the Court distinguished the facts from another case, where the building loan agreement expressly created rights in third parties and thus the modification impaired the rights of third party beneficiaries.^vii While open for judicial interpretation, certain case law exceptions may provide some comfort that lenders would need in order to agree to a building loan modification in the wake of COVID-19. In any event, parties to a building loan contract in New York will need to carefully consult with their counsel and title companies to discuss if a modification is possible.

 

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ⁱ N.Y. Lien Law § 22.
ⁱⁱ Id.; Parties to a building loan contract and those contemplating an amendment thereto should consult with their counsel and title company regarding the effect of filing a Notice of Lending or an amendment thereto pursuant to New York Lien Law § 73.
ⁱⁱⁱ MLF3 Airitan LLC v. 2338 Second Ave. Mazal LLC, 55 Misc. 3d 241, 247, 45 N.Y.S.3d 759, 766 (N.Y. Sup. 2016).
^iv Id.
^v See id.
^vi Id. at 768.
^vii Id. (distinguishing from Yankee Bank for Fin. & Sav., FSB v. Task Assoc., Inc., 731 F.Supp. 64 [N.D.N.Y.1990]); See also Howard Sav. Bank v. Lefcon Partnership, 209 A.D.2d 473, 475, 618 N.Y.S.2d 910 (2d Dept.1994).