Mechanic's lien legislation was first enacted in New Jersey in 1820. A critical need existed for new construction. There was no prior common law remedy, so the statutes were enacted to encourage the construction trades. Legislation previously enacted in Maryland and Pennsylvania had favored the construction trades over the rights of owners, so that remote and possibly unforeseen claimants subjected owners to liens. To remedy this imbalance, the New Jersey legislation included two provisions, the first, a lien remedy to mechanics and material man, and second, a contract filing provision which enabled the owner to restrict the liability of his property to potential liens only for the one with whom he was in privity, that is, the prime contractor. This was the so-called "stop notice" provision.
This statute proved to have particular and practical difficulties for the enforcement of a lien claimant's rights. The first was the necessity for filing a "Notice of Intention" or a filing of the Prime Contract before the commencement of any work or shipment of any materials. Many potential claimants were not aware of this requirement, or did not want to take these steps at the beginning of a project, fearing a disruption and possible irreparable harm to what could prove to be a lucrative and potentially long lasting relationship. Consequently, many lien claimants were not able to take advantage of their rights under the statute. Secondly, the statute permitted an owner, contractor, or subcontractor to waive their rights to file a lien. As a result of practical economic necessities, these waiver provisions remained in contracts.
Our present law, the New Jersey Construction Lien Law, N.J.S.A. 2A:44A-1, et. seq. (hereinafter "CLL") was signed into law on December 23, 1993, becoming effective on April 22, 1994. The CLL became effective for any improvement for which a building permit was issued on or after April 22, 1994, or, if no permit was required, for work or services commenced on or after April 22, 1994. The CLL is a comprehensive revision of the prior law, and remedies the two primary defects of the old law. The requirement of a Notice of Intention was eliminated, so that no filing prior to the commencement of work is required, except in certain specific circumstances. The CLL does not allow for the contractual waiver of lien rights, except where payment is received.
On July 25, 1996, the Governor signed into law revisions to the "Municipal Mechanic's Lien Law", N.J.S.A. 2A:44-126, et. seq. (hereinafter "ML"), and the "Bonds of Contractors on Public Works and Improvements", N.J.S.A. 2A:44-143, et. seq. (hereinafter "CL"). These changes implemented new notice procedures.
Construction Lien Claims
Who Can File a Lien?
N.J.S.A 2A:44A-3 provides that any "contractor, subcontractor, or supplier" may file a construction lien. N.J.S.A. 2A:44A-2 provides specific definitions for these terms:
- A "contractor" is defined as "any person in direct privity of contract with the owner of the real property". The statute specifically includes the following, provided they are not salaried employees of the contractor or owner and have a direct contract with owner:
- Construction managers
- Licensed architects, engineers, or land surveyors
- Certified landscape architects
- A "subcontractor" is defined as any person performing work pursuant to a contract, or pursuant to a contract with a subcontractor in direct privity of contract with a contractor.
- A "supplier" is defined as a person supplying material or equipment, including rental equipment pursuant to a contract with an owner, contractor, or subcontractor in direct privity with a contractor.
These are the so-called tiers of construction lien claimants. PLEASE NOTE, A SUPPLER TO A SUPPLIER IS NOT ENTITLED TO ASSERT A CONSTRUCTION LIEN CLAIM. However, please be aware that courts have been generous in defining a "subcontractor" for the purposes of this section.
PLEASE ALSO NOTE, THAT A WRITTEN AGREEMENT IS REQUIRED FOR ANY LIEN CLAIMANT. The statute specifically provides that a supplier may rely upon delivery or order slips signed by the owner, contractor, or subcontractor having a direct contractual relation with a contractor, or an authorized agent of any of them.
A lessor of rental equipment may also file a lien, provided the above requirements are met, and the equipment was used at the job site. The lien is limited to the rental rates set in the rental contract.
When May a Construction Lien Be Filed?
The Construction Lien Claim must be filed with the clerk of the county where the project is located no later than the 90 days following the date of the last work, services, material, or equipment provided.
The statute specifically provides that warranty or other service calls, or other work, materials, or equipment provided after completion or termination of a claimant's contract shall not be used to determine the starting date of the 90-day period.
Who May A Lien Be Filed Against?
A Construction Lien Claim may be filed against the "owner" of real property. A tenant falls within this definition. A Construction Lien against the owner of a property becomes a lien against the property from and after the time of the filing of the lien, subject to prior filed liens, mortgages, and judgments. A Construction Lien filed for work and materials provided to a tenant attaches only to the leasehold interest of the tenant, and not the property itself, unless the improvements which are the subject of the lien have been authorized in writing by the owner. If so authorized, the lien attaches to the interest of the fee owner of the property as well.
Preparing The Construction Lien
The form of the Construction Lien is in the statute. Some key points include,
- Proper identification of owner and/or tenant
- Proper identification of contractors and sub-contractors
- Proper identification of street address and Lot and Block number of property
- Calculation of amount due, including original contract amount, amendments to contract, agreed upon credits, and amount paid to date.
- Proper execution by the lien claimant
Filing And Serving The Construction Lien Claim
The Construction Lien Claim must be served by personal service, or registered mail, return receipt requested, within 10 days from the date of filing, upon the owner, contractor, and subcontractor against whom the claim is asserted. Failure to serve in a timely fashion will not preclude enforceability of the claim unless the party served proves by a preponderance of evidence that the late service has materially prejudiced its position. Payment by an owner, contractor, or subcontractor without actual knowledge of the filing is prima facie evidence that the party has been materially prejudiced.
The CLL provides for penalties for any claim made without basis, where the amount is willfully overstated, or the lien claim is not filed in substantially the same form or in the manner or at the time required by the statute. Penalties include a forfeiture of all lien rights, to the extent of the amount claimed in the lien, plus court costs, the reasonable attorneys' fees incurred in defending against or discharging the lien, and any damages sustained by the aggrieved party.
Penalties will not be imposed if an excessive lien amount is the result of misinterpretation of the law or fact. "Willfully" overstating a lien amount is equivalent to a bad faith filing. See Legge Industries v. Joseph Kushner Hebrew Academy, 333 N.J.Super. 537, 756 A.2d. 608 (App.Div., 2000), where the court found that the forfeiture of a lien claim based on claimant's alleging a non-existent written contract depends upon whether claimant's allegation was made in bad faith.
The CLL also contains a frivolous claim provision. Any defense made to a lien claim "without basis" exposes the proponent of that defense to the imposition of attorneys' fees, court costs, and damages.
After a Lien Claim is Filed
- The owner or contractor/subcontractor may post a bond with the Clerk of the County where the lien was filed, in an amount equal to 110% of the lien claims. The County Clerk will mark the lien as discharged.
- The owner may serve a demand upon the lien claimant to institute suit within 30 days. Failure to institute suit within 30 days results in forfeiture of the lien claim.
- If neither of the above events occurs, then the lien claimant must file suit within 1 year from the last furnishing of work or delivery of material. Failure to do so will result in the forfeiture of the lien claim.
- After forfeiture of a lien claim, a lien claimant is obligated to file a discharge of lien. Failure to do so exposes the lien claimant to an award of court costs and reasonable legal expenses, incurred in causing a discharge of the lien.
- When payment is made on the lien claim, a discharge of lien claim must be filed with the County Clerk.
- When suit is filed, a Notice of Lis Pendens must be filed. Any claims that arise out of the work performed, but are not related to the action to enforce the lien claim may be brought in a separate action. A lien claimant must join as party defendant, the contractor or subcontractor who is alleged to have failed to make payments, and any other person having an interest in the real property.
Amendment of the Lien Claim
A lien claim may be amended after filing by filing an amendment with the County Clerk substantially following the form set forth in the statute. The amendment must be served in a timely fashion (10 days from filing, in the manner required for a lien claim). The portion of the lien claim that is in excess of the amount previously claimed attaches as of the date of filing amended lien claims.
The Lien Fund
N.J.S.A. 2A:44A-10 provides that a lien claim attaches to the interest of an owner from the time of the filing of a lien claim. For a lien claim filed by a contractor, the lien claim attaches to the extent of the total amount of the contract price between the owner and the contractor, less the amount of payments made, prior to the receipt of a copy of the lien. For a lien claim filed by a subcontractor or supplier, the lien claim attaches to the extent of the contract price between the contractor or subcontractor, and the subcontractor or supplier, whichever is applicable, less the amounts of payment made.
This is the "lien fund", the amount up to which the lien claim may attach to the interest of the owner.
Underlying the "lien fund" is the principle that an owner cannot be compelled to pay twice for the same work or services when a valid lien claim is filed. The owner's property is never subject to liens in an amount greater than the amount unpaid by the owner to its prime contractor at the time the lien claim is filed by one claiming a lien through the prime contractor.
However, payments made by the owner must be consistent with its contract with the general and prime contractor for the payments to reduce the amount of the lien claim. The owner must make payments for work actually performed. Payments made in collusion with a contractor to defeat the legitimate rights of a lien claimant may not reduce the lien fund. The lien fund does include retainage, provided the other requirements of this concept are met.
Notice of Unpaid Balance
The Notice of Unpaid Balance ("NUB") is a new concept under the CLL. Except for residential construction (discussed infra), filing an NUB is discretionary with the claimant. It can be filed at anytime within 90 days from the date of last services or materials provided, but is only effective during this period. It is not a substitute for filing a Construction Lien Claim.
The filing of an NUB preserves the claimant's priority in the event of the sale or lease of the project property before the filing of a Construction Lien Claim; the filing of a mortgage on the property before the filing of a Construction Lien Claim; or the entry of a judgment against the property before the filing of a Construction Lien Claim.
In all of the above cases, the lien claimant maintains his/her priority when a Construction Lien Claim is filed.
An NUB has to be filed, but it does not have to be served on any other party. This feature has practical benefits to the party asserting rights.
The Verified List
An owner, contractor, and subcontractor may require those persons or entities to which they have contracted to identify, by name and address, all subcontractors and suppliers who may have a right to file a Construction Lien Claim.
Each person or entity that receives this request must provide a verified response within 10 days. Failure to provide a response exposes the party to damages, plus an award of attorneys' fees and costs. The party requesting the list may use the response as prima facie evidence of a bona fide payment, and an absolute defense to any claim that the requesting party should have made additional inquiry to determine the identity of potential claimants.
The CLL provides a unique procedure for filing a Construction Lien Claim on residential projects.
Residential construction is defined as a written contract for work done on a one or two family dwelling, condominiums, cooperatives, townhouses, or planned unit developments.
A lien claimant must file an NUB and serve it upon the owner of the property and any other contracting parties. The lien claimant must simultaneously file a demand for arbitration with the American Arbitration Association ("AAA").
The AAA is required to establish an arbitration to determine the amount that the lien claimant may include in the construction lien. This determination includes any back charges, credits, counterclaims, or other defenses raised against the lien claimant. If the arbitrator cannot make this determination, the arbitrator is required to order the lien claimant to post a bond, letter of credit, or funds with an attorney-at-law of the State of New Jersey, or such other person whom the arbitrator may designate, in an amount of 110% of the fair and reasonable value of the set-offs or counterclaims.
The arbitrator is required to make his/her determination within 30 days from receipt of the demand for arbitration. The lien claimant has 10 days from the date of the award to file a construction lien.
This whole process does not extend the 90-day time period to file a construction lien claim. Therefore, a lien claimant on residential property must be diligent, to afford sufficient time for the arbitration process.
The statute provides for the imposition of attorneys fees and costs in the event the NUB is determined to be without basis, overstated, or not substantially in the form, manner, in the time required by the CLL.
If an NUB is filed, and the owner sells before a lien claim is filed, the owner may make a deposit with the County Clerk in an amount equal to the amount identified in the NUB. The Clerk is directed to discharge the NUB.
In the event of the sale of the property, the amount of all liens may not exceed the amount due under the sale, less any amount due for recorded mortgages or liens other than construction liens. Each lien claim is reducedpro rata.
Municipal Lien Claims
A municipal lien claim is a lien against funds in the possession of a "public agency", defined as a county, city, town, township, public commissions, public board or other municipality. The State of New Jersey, and any entity serving as a state, rather than local entity, is not a public agency within this definition.
The "Municipal Mechanic's Lien Law", which was revised in 1996, contains notice provisions that are not found in the CLL.
A written notice, in the form as set in the statute, N.J.S.A. 2A:44-128, must be filed within 20 days of the first performance of labor or materials. This notice must be sent to the Municipal Clerk, Chief Financial Officer or Chairman of the public board authority.
If the notice is not filed, lien rights are barred except to the extent that the general contractor owes money to the subcontractor to whom the labor and materials were provided. If the notice is filed after the 20-day period, a lien may only be filed for labor or materials provided after the filing of the notice.
The lien claimant must file a claim, verified under oath, with the public agency. It may be filed at any time during the work, but no later than 60 days after the work is completed or accepted.
Suit must be commenced within 60 days after completion or acceptance of the project.
The statute contains a "trust fund" section. Funds received by a contractor and paid to a subcontractor or supplier must be applied only to amounts due and owing for work performed on labor and materials supplied for the public job. Any subcontractor or supplier who knowingly applies funds received to other jobs forfeits all lien rights, and may be liable for all damages incurred by any contractor as a result of the misapplication of funds, including attorneys fees, court costs and other expenses incurred by the contractor in defending or causing the discharge of the lien claim.
Payment Bonds on Public Works
N.J.S.A. 12A:44-143 requires a contractor to provide a payment and performance bond under the terms, and in the form, required by the statute. The statute contains notice provisions that must be followed.
Any person who does not have a direct contract with the contractor who furnishes the bond is obligated to provide written notice to the contractor, by certified mail, that he/she is a beneficiary of the bond prior to commencing any work. Failure to provide this notice results in a forfeiture of all rights under the bond, except for labor or materials provided after the date the notice was provided.
A Notice of Claim for payment must be made to the surety within 1 year from the last date upon which the materials or labor have been provided.
Suit cannot be instituted until 90 days after notice is given to the surety, but no later than 1 year from the date opened which labor or materials were last provided to the project.
The Trust Fund and Bankruptcy Issues
N.J.S.A. 2A:44-148 provides that any money paid by the State of New Jersey, or agency, commission, or department, or any county, municipality, or school district for any public job becomes a trust fund in the hands of a contractor until all claims for labor and material have been paid in full. As noted, supra, N.J.S.A. 2A:44-128 has a similar provision for municipal lien claimants.
Funds that are merely owing to a contractor, but not yet paid, are not considered to be held in trust.
If the contractor is in receipt of trust funds, but has not yet paid these funds to subcontractors or suppliers, the bankrupt contractor must hold these funds subject to the statutory trust. The bankrupt contractor may not allocate these funds to general creditors, or use these funds in its effort to reorganize.
Unpaid subcontractors and suppliers do not have standing to sue the State or other public agency directly for unpaid amounts. The usual remedy of subcontractors and suppliers is to seek recovery from the surety pursuant to the statutory payment bond. A bankruptcy petition of the party providing the bond does not effect the continuing obligations of the surety to honor the terms of the bond.
For private jobs, the failure of bankrupt contractor to pay its subcontractors and suppliers, in breach of its contract, precludes consideration of monies owed by the project owner as part of the bankrupt contractor's estate. Therefore, a creditor of the bankrupt contractor cannot attach or seek monies owed by the owner to the bankrupt contractor.