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Hotel Syracuse Litigation Illustrates the Requirement that Lenders Must File Building Loan Contracts

The historic Hotel Syracuse in downtown Syracuse was recently the subject of a mortgage foreclosure action which led to litigation involving the priority of the liens against the property. The New York State Court of Appeals case of Altshuler Shaham Provident Funds, Ltd. v. GML Tower LLC (21 N.Y.3d 352), decided in June 2013, illustrates the requirement that lenders must file building loan contracts when the loan proceeds are advanced over time to pay for real estate construction purposes.

The New York Lien Law requires a lender to file a building loan contract in the county clerk’s office where a lender agrees to make loan advances for the purpose of funding improvements to real estate and the loan is secured by a building loan mortgage on the real estate. The building loan contract must be filed on or before the date on which the building loan mortgage is filed in the county clerk’s office. In the event the building loan contract is not timely filed in the county clerk’s office, the building loan mortgage may lose its lien priority position to subsequently filed mechanic’s liens.

In the Altshuler case, the lender agreed to provide GML Tower, LLC, a former owner of the Hotel Syracuse, a $10 million loan for the acquisition and renovation of the Hotel Syracuse. The loan was bifurcated into two separate amounts whereby $5.5 million was used to purchase the property and $4.5 million was deposited into an escrow account created for the benefit of GML Tower. The funds from the escrow account were to be released over time on the satisfaction of certain conditions set by the lender to pay for the construction costs associated with the renovation of the Hotel Syracuse.

The lender in the Altshuler case recorded a building loan mortgage but did not file a building loan contract.  Mechanic’s liens against the Hotel Syracuse were subsequently filed in the Onondaga County Clerk’s Office.  The Supreme Court and Appellate Division both ruled that the building loan mortgage lost its first lien priority position to the mechanic’s liens in light of the fact that a building loan contract was not filed in the county clerk’s office.  The Court of Appeals agreed with the lower courts except that the Court of Appeals ruled that the $5.5 million acquisition portion of the $10 million loan retained its first lien priority position and only the $4.5 million construction portion of the loan is subordinate to the subsequently filed mechanic’s liens.

The Altshuler case emphasizes the requirement that lenders must file building loan contracts when loan proceeds are to be advanced over time for construction purposes.  This case also illustrates the fact that lenders cannot circumvent this requirement by advancing all of the loan proceeds at the initial loan closing into a restricted escrow account to be released over time to the borrower for construction purposes.

 

TAGS: Construction, Litigation, Real Estate, Building Loan Contract, Mortgage Foreclosure, Property Lien