Bond or Guaranty Requirement on New York Projects Clarified

The New York lien law, for private projects being built on public land, requires that the project owner furnish “a bond or other form of undertaking guaranteeing prompt payment of moneys due.” Lien Law § 5. In a dispute concerning construction of the Atlantic Yards project, the NY Appellate Division has held in a split decision that a “Completion Guaranty” issued by a developer affiliate met the requirements of Section 5.

Public property in New York, like that in many other states, is not subject to mechanic’s liens. Thus, the NY lien law requires a project developer commencing a private project on public land to furnish adequate security for payment. Per the language noted above, this security could be in the form of a bond “or other form of undertaking.” When Forest City Ratner, the developer, was negotiating with the Empire State Development Corporation (ESDC), a public authority, ESDC approved a guaranty furnished by a Forest City affiliate.

The guaranty provided that the Atlantic Yards owner would "cause Substantial Completion of the Improvements and perform the Development Work," including "to fully and punctually pay and discharge any and all costs, expenses and liabilities incurred for or in connection with the Guaranteed Work, including, but not limited to, the costs of constructing, equipping and furnishing the Guaranteed Work." This, the majority found, complied with Lien Law § 5, albeit with the admission that “there are better guarantees available.” The dissent argued that the guaranty language did not meet the statutory requirement of assuring prompt payment for contractors, subcontractors and the like. But the majority has ruled in favor of this guaranty at the intermediate appellate level; a further appeal is possible.

The case is Skanska USA Bldg. Inc. v. Atlantic Yards B2 Owner, LLC, 2016 N.Y. App. Div. LEXIS 6834 (Oct. 20, 2016) (LEXIS subscription required), and represents an unfortunate falling-out between two respected and sophisticated companies who were embarking on a major modular construction effort. One hopes that progress of modular construction will not be set back by this dispute.