The New York Supreme Court issued an opinion last week that could spell trouble for the growing green building industry, as it ruled that a Cogen Energy System installation did not constitute an “improvement” subject to a mechanics lien. Despite the complex installation required for this system — on a property’s rooftop — the system did not qualify its installer to a mechanics lien filing.

The opinion was short on reasoning and simply affirmed the trial court’s decision, but as time goes on, it will be interesting to see how this affects similar installations in other states, and installations of similar items such as solar panels. The New York Supreme Court Opinion in Trystate Mech., Inc. v. TEFCO, LLC can be read here.

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Is A Cogen Energy System An “Improvement” Under New York Mechanics Lien Law?

Wikipedia defines “cogeneration” as the “use of a heat engine or a power station to simultaneously generate both electricity and useful heat.”

It’s common in the green industry for companies to contract with building owners to construct, install, own and operate these systems on-site. This is what happened in this case, when BluePoint Energy (who went bankrupt) contracted with Macy’s in New York, promising to install the Cogen System on Macy’s rooftop. BluePoint would own, operate and maintain the system on top of Macy’s roof, which would produce energy, and Bluepoint would sell the energy to Macy’s as a discounted rate.

Although the Cogen System would be installed on-top of the Macy’s roof, “Macy’s was to pay no funds, and contribute no capital whatsoever to Chapeau for the construction of the Cogen System, and Macy’s was to acquire no ownership, operational control or possession in the equipment…”  The trial court and the supreme court quoted the underlying contract between BluePoint and Macy’s which provided that “this Agreement is a contract for the provision of services and not for the sale of goods.”

Trystate Mechanical agreed to hoist and install the system on top of  2 Macys stores for payment of $780k and they got stiffed $250k of the total. They filed a mechanics lien.

The $250k question for Trystate Mechanical was probably surprising to them, considering the complexity of installing the Cogen System atop the Macys’ stores:  Was the installation of this system a qualifying “improvement” under New York’s mechanics lien law.

NY CLS Lien §2(4) defines “Improvement:”

The term “improvement,” when used in this chapter, includes the demolition, erection, alteration or repair of any structure upon, connected with, or beneath the surface of, any real property and any work done upon such property or materials furnished for its permanent improvement, and shall also include any work done or materials furnished in equipping any such structure with any chandeliers, brackets or other fixtures or apparatus for supplying gas or electric light and shall also include the drawing by any architect or engineer or surveyor, of any plans or specifications or survey, which are prepared for or used in connection with such improvement and shall also include the value of materials actually manufactured for but not delivered to the real property…

Cogen Systems cannot be considered permanent improvements to Macy’s real property so as to invoke the applicability of the Lien Law. Previous New York cases hold that where an improvement “was not intended to be permanent,” the Lien Law does not apply (Nevbesky v. United Interior Resources Inc.).  Since the BluePoint contract established that the Cogen System remained BluePoint’s property throughout the term, and that it “would be removed or sold by Chapeau at the conclusion of the performance or termination” of the contract…the “Cogen Systems cannot be considered permanent improvements to Macy’s real property so as to invoke the applicability of the Lien Law.”

What This Means For Mechanics Lien Rights For Solar Panels, Cogen Systems, Other Green Building Elements

The solar and green industries are heating up across the globe, and to support the growth of this industry, complicated and unique offers are being created. In the past, if a building wanted an energy system, it would buy and install it. Today, however, solar panels and cogeneration systems are being installed at the installers expense, and then leased back to the building owner in some strange energy purchase program. At the end of these lease terms, the equipment — which no doubt is somewhat attached to the structure — is usually bought by the building owner for a nominal sum, or a significantly reduced sum.  Or, it’s just left there because the cost of removing it is greatly outweighed by the convenience of just leaving it be.

How do these unique payment arrangements affect the mechanics lien laws?

Those installing solar panel mounting systems and cogen systems probably think they have legal ground to assert a mechanics lien right. After all, in determining whether you have a right to file a lien, you typically think about some key questions: (i) Did you furnish labor or materials to improve a property; (ii) Were your labor and materials incorporated into or attached to the structure; (iii) Are you unpaid?

But, as you can see from this recent New York Supreme Court case, there are more layers here. If the property owner is only allowing someone else to install these systems on its property, and that agreement contemplates the possibility that the system may be removed in the future…is it a permanent improvement??

Every state’s lien laws are quite different from one another, and the decision in New York here really hinged on the “permanent improvement” language. Without the word “permanent” and the case law talking about the “intention” of permanency, I think this case goes the other way. The answer in New York, for now, is no. The real trick is to determine how these questions will be answered by courts in other jurisdictions, and even if the legislators in jurisdictions in New York might see the inequities in this Trystate Mechanical decision and create a legislative fix.

Every state’s lien laws are quite different from one another, and the decision in New York here really hinged on the “permanent improvement” language. Without the word “permanent” and the case law talking about the “intention” of permanency, I think this case goes the other way. Every state is going to have their own nuances in determining what is and what is not qualified for a mechanics lien claim.

While we don’t know what each state will do, one thing appears certain: This issue will arise again, and again.