Modifying a New York building loan presents an additional trap for the unwary that originating a New York building loan does not: the modification must be filed within 10 days after the modification is executed. This installment of the New York building loan series looks at what building loan modifications need to be filed and what it meant by a timely filing of that modification. Neither is as straightforward as you might think.
“Material” Modifications of a Building Loan Agreement
Section 22 of the New York Lien Law explicitly states that “any subsequent modification of any [properly filed building loan agreement] must be filed within 10 days after the execution of any such modification.”
Notwithstanding the express requirements of the statute, which applies to “any” building loan modification, New York courts have always – or at least since the 1908 landmark case of Pennsylvania Steel Co. v Title Guaranty & Trust Co. – interpreted “any modification” to mean any “material modification or variation” of the building loan.
New York courts determine that a building loan modification is material if the modification either (i) “alters the rights and liabilities otherwise existing between the parties to the agreement” or (ii) “enlarges, restricts or impairs the rights of any third-party beneficiary”. So for example, a building loan modification is material if it changes the net sum available from what was stated in the previously filed Section 22 Affidavit.
By contrast, a building loan modification that leaves “the parties with the same rights and liabilities as existed under the original contract” – as was the case in the 1963 case of New York Savings Bank v. Wendell Apartments, in which the court noted that the modification “merely extended the date for completion of the project but did not vary or modify any of the essential terms of the contract with respect to the amount or manner of payment of advances” – “it may not be interpreted as a material alteration thereof. No right of any person [is] enlarged or restricted or impaired by the extension of the completion date, and [such an agreement] is not a modification of the original loan contract within the purview of Section 22 of the Lien Law.”
Within 10 Days of What Exactly?
The statute states that the 10-day period for filing a building loan modification starts running when the modification is “executed,” but what does that mean? Is it the date the on the face of the agreement, the date that last signatory signed the agreement, the date that the first signatory signed, the date on which any of the corresponding signatures were notarized, the date the documents was released from an escrow, or the date on which the parties mutually exchanged fully signed versions of the modification? The statute offers no guidance other than its plain language, and the safest course is always to file the modification within 10 days of the earliest of any of those possible milestones.
Consequences of Failing to Timely File a Material Modification
Quite simply, failing to file a material modification of building loan, or even failing to timely file the material modification within 10 days after its execution, can result in the lien of the building loan mortgage being deemed subordinated to valid mechanics liens regardless of whether the mechanics liens were filed before or after the building loan mortgage.
However, it is not enough simply to timely file a material modification. As a practical matter, prudence dictates that materially modifying a building loan mid-construction is ongoing also requires going out and getting the consent of all contractors who are either still on the job or haven’t yet been fully paid, so that everyone is effectively governed by the same amended building loan terms. This can be a monumental task resulting in delays getting the modification in place.
Summary and Upcoming Installments
In additional to the potential traps for the unwary that entering into a New York building loan presents to lenders, modifying a New York building loan presents an additional trap in that material modification must be filed and must timely the modification must be filed within 10 days after the modification is executed.
Timely filing of the modification documents is only one aspect implicated by modifying a New York building loan.
We address those other considerations in other installments of this series.
