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New Jersey Construction
And Mechanic's Lien Law
- James H. Landgraf,
Esquire
New Jersey has
historically
provided, by
Statute, protection
for certain
construction
contractors,
sub-contractors,
vendors and design
professionals
through the right to
file a lien against
privately owned
property. Until
April of 1994, these
protections were
provided through the
New Jersey
Mechanic's Lien Law,
which is described
later in this paper.
In January 1994, the
New Jersey
Construction Lien
Law was passed,
effective April,
1994, and repealed
and replaced the New
Jersey Mechanic's
Lien Law with
respect to projects
for which a
construction permit
was issued on or
after April 22, 1994
and any improvements
upon which work or
services were
commenced on or
after April 22,
1994, if a
construction permit
was not required.
With regard to any
work for which a
construction permit
had been issued
prior to April 22,
1994, or for which
work had commenced
prior to that date
without the
requirement of a
construction permit,
the provisions of
the New Jersey
Mechanic's Lien Law
would continue to
apply. Issues that
would have arisen
under the New Jersey
Mechanic's Lien Law
have now been
effectively moot for
the past four and a
half years. The
following shall
concentrate on the
current New Jersey
Construction Lien
Law (CLL).
NEW JERSEY
CONSTRUCTION LIEN
LAW
Neither the NJCLL
nor its predecessor
statute applies to
public projects.
Claims for which
liens may be
provided on public
projects would be
found under the New
Jersey Municipal
Mechanics Lien Law,
which is discussed
later in this paper.
Under the CLL (N.J.S.A.
2A:44A-1 et seq.),
the filing of an MNI
(Mechanic's Notice
of Intent) is no
longer necessary. To
file a valid lien,
it is simply
necessary to file
the prescribed
information within
90 days following
the date of last
work, services,
materials or
equipment provision
with the County
Clerk of the county
in which the
property is located,
owner and (if
appropriate) the
contractor/subcontractor
who has failed to
pay (N.J.S.A.
2A:44A-6). The
Statute provides,
within its language,
a specific format
and requirements for
the lien claim
notice (see attached
forms).
The CLL has limited
the amount of a lien
claim by a number of
parameters.
Initially, a lien
claim may only be
filed when a written
contract between the
claimant and its
customer (whether it
be the owner,
contractor or
subcontractor)
exists. In the event
of a supplier, the
written contract
requirement may be
satisfied by a
purchase order
executed by the
owner, contractor or
subcontractor or
delivery tickets
signed by an
authorized
representative of
one of those
entities (N.J.S.A.
2A:44A-2). The
amount of the lien
claim is then
limited by the
written contract
amount for the work
performed through
the date of the
lien, less credits
for payments made.
The lien claim may
be expanded by the
amounts of any
written contract
amendments or change
orders which also
must be reflected by
written amendments
to initial written
contract. While the
New Jersey Courts
have not fully
addressed the form
in which an
amendment to a
written contract
must exist, at the
very least, a
written work
directive should be
received from the
claimant's customer.
Recent cases have
held that in the
absence of a written
contract or in the
absence of written
change orders, lien
claims for monies
that would be due
are invalid. (Gallo
v. Sphere
Construction Corp.,
293 N.J. Super. 558
(Ch. 1996) - where
the Court held that
the contractor had
performed work
during the pendency
of negotiations for
a written contract
with the owner where
the negotiations
broke down and no
written contract was
entered, a lien
claim cannot be
filed for that work;
Orefice v. ADR, 315
N.J. Super. 493
(A.D. 1998) - where
the Court found that
a lien claimant
could not include
within its lien
claim, the amounts
claimed to be due
under change orders
that were not
reflected by any
written amendment or
agreement).
The amount of lien
is further limited
by payments that may
have been made by
the owner,
contractor or
subcontractor (N.J.S.A.
2A:44A-10).
Obviously, any
payments made to the
lien claimant must
be credited against
the amount being
claimed.
Additionally, to the
extent that the
owner has made
claims, has made
payments to the
contractor which
have reduced the
balance due under
the contract with
the prime
contractor, the
total amount of a
lower tier lien
claimants claim
rights are limited
to the contract
balance due by the
owner to the
contractor. In other
words, if the
owner's contract
balance obligation
is $10,000 and a
subcontractor's
valid lien claim
entitlement is
$20,000, the total
amount of the lien
claim is limited to
the $10,000 contract
balance.
A party filing a
lien claim is
entitled to
thereafter file
amendments to that
lien claim following
the prescribed
statutory form (N.J.S.A.
2A:44A-1). This most
frequently arises in
situations whereby a
subcontractor or
supplier has filed a
lien claim for work
performed, but
continues to perform
work under its
subcontract or
purchase order
agreement. If the
condition of
non-payment
continues, the
cliamant entitled to
amend its lien claim
to include the
additional value of
that work performed.
Once a lien claim is
filed on a private,
non-residential
project, a claimant
is to serve that
lien claim upon the
owner and the party
against whom it is
claiming within ten
(10) business days (N.J.S.A.
2A:44A-7). Service
is to be made by
personal service or
certified mail,
return receipt
requested. Failure
to so serve the
claim within that
period of time does
not serve to
discharge the lien
claim, but an owner
who may make
payments between the
time that the claim
is filed and when it
is ultimately served
(if beyond the ten
business days) may
raise the claim that
its rights have been
prejudiced by the
failure of the
claimant to provide
timely service.
Additionally, the
period of time
within which the
owner may have to
seek response from
the nonpaying
contractor or
subcontractor would
not come into play
in the absence of
such service. Upon
receipt of a lien
claim, the owner is
entitled to request
that the contractor
respond within
twenty (20) days of
service of the lien
claim with any
objection to payment
under the lien claim
(N.J.S.A.
2A:44A-12). If the
contractor (or
subcontractor in
such event) fails to
provide such written
objection, the owner
is thereupon
entitled to make
payment to the lien
claimant and to
receive a discharge
of the lien. Such a
payment can be
credited by the
owner to contract
balance amounts that
may otherwise be due
to the contractor
and the owner has a
legal defense to any
subsequent claims by
the contractor that
improper payment by
the owner was made
to the lien
claimant.
A lien claimant will
forfeit any rights
that it may have to
enforce the lien,
and the lien itself
is forfeited if
legal action is not
commenced in the New
Jersey Superior
Court within one
year of the date of
the last provision
of work under its
contract (N.J.S.A.
2A:44A-14). The
one-year time period
commences at the
time of the
provision of the
last work or
services, as opposed
to the date of the
filing of the lien.
If such action is
not brought within
that time period,
the lien rights are
forfeited and the
claimant is
obligated to file
within thirty (30)
days a discharge of
the lien (N.J.S.A.
2A:44A-30).
Additionally, the
owner or contractor
against whom the
lien claim is based,
has the right to
request, in writing,
that the claimant
commence legal
action within thirty
(30) days of the
written request (N.J.S.A.
2A:44A-14). If
claimant fails to
file its legal
action within that
time period,
notwithstanding that
such time period may
precede the overall
one year limit, the
lien rights are
forfeited and the
claimant is
obligated to file
the required
discharge. If legal
action filed by a
lien claimant
whether under the
one year requirement
or in response to a
thirty day notice to
be commenced in the
Superior Court. The
New Jersey Courts
have been somewhat
inconsistent with
regard to division
in which the action
is to be commenced.
There have been
actions commenced
within the Chancery
Division as well as
the Law Division
with neither
division taking a
position that it
lacks jurisdiction
over the issues. A
Notice of Lis
Pendens must be
simultaneously filed
with the county
clerk.
The lien statutes
specifically allow
for an exception to
the otherwise
standard New Jersey
Doctrine of "Entire
Case and
Controversy".
Although the parties
involved in a lien
claim may have
additional issues
(as an example, a
subcontractor or
contractor may have
claims for
additional damages
that are not
included in the
written contract
such as delay
damages,
acceleration claims,
disruption claims,
unapproved changed
order work, etc.),
the CLL specifically
provides that such
actions may be
brought in a
separate action, but
does not mandate the
same (N.J.S.A.
2A:44A-14). Further,
where the parties
may have entered
into an agreement
that includes an
arbitration clause,
it has been
judicially
interpreted that the
arbitration clause
will not control the
lien claim. The lien
claim action must
still be commenced
in the Superior
Court and will not
be precluded by the
existence of an
otherwise
enforceable
arbitration clause.
Underlying disputes
and disputes that
would not be
encompassed within
the lien claim would
still be pursued
under the
arbitration clause
which could be
operated
simultaneously (with
or without a stay of
the initiated lien
claim action).
The CLL has
established
sanctions for
violation of its
provisions (N.J.S.A.
2A:44A-15). The lien
claimant who
willfully overstates
the amount of the
lien or otherwise
improperly files a
lien claim or fails
to file the required
discharge of a lien
claim once the claim
has been satisfied
or determined to be
forfeited, may face
sanctions including
counsel fees and
costs incurred by
the owner or
contractor defending
the lien claim.
Further, a party who
fraudulently
deprives a person
entitled to benefits
under the CLL would
also be subject to
sanction. This
latter provision
would include an
intermediate
contractor who may
misrepresent to the
owner the lien
claimants status in
the project, the
amount claimed or
other issues that
could affect the
lien claimants
rights (N.J.S.A.
2A:44A-36).
If a lien claim is
filed, the statutes
alllow for a
discharge of the
lien by the issuance
of a bond in the
amount of 110% of
the lien claim
(N.J.S.A.
2A:44A-31). If such
is filed, the surety
essentially stands
in the shoes of the
defendant's on the
lien claim.
The statute further
provides the owner
with the ability to
make a request of
the contractor or
its subcontractors
an accurate and full
list of the names
and addresses of
each subcontractor
or supplier who may
have a right to file
a lien pursuant to
the act (N.J.S.A.
2A:44A-37). This
list is to be
verified under oath
and reliance upon
the list by the
owner or the person
who is requesting
the same is deemed
"prima facie
evidence" to
establish payments
made in reliance
thereon as well as
defense to a claim
that the party
making the payments
should have made
additional inquiry
to determine the
identify of
potential claimants.
If the list is not
provided in response
to such a request,
the person who was
to provide the list
shall be directly
liable in damages to
the requester for
not only damages but
court costs and
attorney fees.
Under the CLL, it
has been determined
that universal
waivers of lien
claim rights are in
violation of public
policy and are
therefore
unenforceable except
to the extent that a
release of lien
claim rights is
issued for monies
actually received by
the potential
claimant (N.J.S.A.
2A:44A-38).
The CLL is expansive
in the listing of
parties who have
rights to file under
its terms (N.J.S.A.
2A:44A-2). The
following parties
involved in a
project have lien
claim rights under
the CLL: the prime
contractors who have
direct contractual
relationships with
the owner, licensed
design professionals
and/or construction
managers having
direct contractual
relations with the
owner;
subcontractors to a
contractor who has
direct contractual
relations with the
owner; second tier
subcontractors who
have a contractual
relationship with a
subcontractor who is
in direct
contractual
relationship with
the prime
contractor; and,
suppliers including
suppliers of rental
equipment, who are
in direct
contractual
relationship with
either the owner,
the prime contractor
or the first tier
subcontractor. Since
a subcontractor is
defined as a person
"providing work or
services in
connection with the
improvement of real
property" under a
contract with a
contractor, and
since "contractor"
is defined to
include licensed
architect, engineer
or land surveyor or
certified landscape
architect, who is in
direct contract with
the owner, design
professional
consultants
providing services
to the architect or
engineer of record
would similarly
appear to have lien
claim rights.
Lien claims may be
filed to include
work, services,
material and
equipment (N.J.S.A.
2A:44A-2). The term
"work" under the CLL
includes any
activity, including
labor performed in
connection with the
improvement of real
property and further
includes design
services provided by
salaried employees
of a contractor or
subcontractor.
"Services" are
defined to included
professional
services performed
by architects,
engineers, land
surveyors or
certified landscape
architects who are
not salaried
employees of a
contractor,
subcontractor or the
owner and who are in
direct privity of
contract with the
owner for not only
the preparation of
plans and documents,
but also for
"studies, or the
provision of other
services".
"Materials" include
all goods delivered
to or used on the
site to be improved,
materials or goods
for incorporation
into the improved
property or for
consumption as
normal waste in the
construction
operations. It also
includes materials
that are used on the
site in the
construction or
operation of
equipment that is to
be used in the
improvement of the
real property
excluding fuel.
Finally, "equipment"
is defined as any
machinery or other
apparatus, including
rental equipment,
that is delivered to
the site to be
improved or used on
the site to be
improved, for
incorporation into
the improved real
property or for use
in the construction
of the improvement
of the real
property.
Notwithstanding the
very expansive
definitions of what
work, services,
material or
equipment may be
included within the
lien claim rights,
certain caveats do
exist. "Services"
that pertain to
professional design
services will only
include those
services performed
by a professional
holding the specific
license. Material
will only include
material that is
actually delivered
to the site and does
not include material
that may be withheld
for non-payment, may
be in fabrication,
etc. A lien for
equipment only
arises after the
equipment has
physically been
delivered to the
site. While "work"
includes the labor
of salaried
employees performing
architectural and
engineering services
for a contractor or
subcontractor, that
definition does not
include services by
such salaried
employees of
suppliers. As a
general proposition,
since the CLL is a
statutory creation,
the New Jersey
Courts have
consistently
determined that its
language must be
read narrowly and
strictly construed.
In other words, if a
particular of work,
service or equipment
does not fall
specifically within
the allowable
definitions, it will
be excluded. If a
party fails to meet
the 90 day filing
provision ( note
that the 90 days is
measured by calendar
days and not
business days) its
failure will be
strictly construed
against it.
A lien filed under
the CLL is a lien
against the owner's
interest in the
property. It does
not constitute a
lien upon
construction funds
nor does it entitle
a lien claimant to
any "stop notice"
protections against
the owner making
additional payments
to the contractor.
However, the owner
does such at its own
jeopardy to the
extent that payment
to the contractor
after it has been
served with a
validly filed lien
claim can
conceivably subject
it to an obligation
to pay not only the
contractor but
additionally the
lower tier
subcontractor or
supplier. A lien has
priority over
subsequent financing
mortgage obligations
as well as efforts
to transfer the
property. It does
not have priority
over any preexisting
construction or
purchased money
mortgages. The lien
may only attach to
the property that is
being improved
notwithstanding that
the owner may own
other properties. By
the nature of the
statutory
enactments, the lien
claim will only
apply to work,
services, material
or equipment
involved in the
"improvement" of
real property. The
"term improvement"
has been given a
fairly liberal
definition and
includes real or
proposed physical
changes to real
property including
the construction,
reconstruction,
alteration, repair,
demolition or
removal of any
building or
structure, any
addition to any
building or
structure, or any
construction or
fixture necessary or
appurtenant to a
building or
structure for use in
conjunction
therewith. It also
includes excavation,
digging, drilling,
draining, dredging,
filling, irrigation,
land clearance,
grading or
landscaping
(N.J.S.A. 2A:44A-2).
As indicated above,
a lien claim filed
under the CLL is to
be filed against the
owner's interest in
the property. As an
additional statutory
allowance, a lien
claim can similarly
be filed against a
tenant who has
contracted for work
to be performed for
the improvement of
the property. Such a
claim will only
apply to the
tenant's interest
except in the event
that the owner has
provided written
authorization for
the improvement. In
such event, the
claimant may file
the lien claim not
only against the
tenant's lease hold
interest but also
against the owner's
interest in the
property.
Finally, with regard
to a private
non-residential lien
under the CLL, a
potential lien
claimant is entitled
to, but is not
required to, file a
"Notice of Unpaid
Balance and Right to
File Lien" (NUB)
(N.J.S.A.
2A:44A-20). The
statutes provide the
form that is to be
used by a potential
claimant for the
NUB. The NUB, as
with the lien claim
itself, is to be
filed with the Clerk
of the County in
which the property
is located. The NUB
need not be served
upon the owner or
contractor but if so
served, should
follow the same
procedures of
personal or
certified mail
service as pertain
to a lien. What will
show of record does
not constitute, in
and of itself, a
lien upon the
owner's title or
interest of the
property. The NUB
provides a benefit
to a prospective
lien claimant by
again creating a
document that, if
served upon the
owner and resulting
in payment by the
owner can allow the
claimant to such a
direct payment
without jeopardy to
the owner. It
further provides the
benefit of allowing
the owner to have
notice of a
potential lien
claim.
RESIDENTIAL LIEN
CLAIMS
The most dramatic
change in the law
following the
adoption of the CLL
is that the CLL now
prescribes a precise
process for
construction liens
on residential
properties (N.J.S.A.
2A:44A-21). Under
the preceding
Mechanic's Lien Law,
residential and
commercial
properties were
treated identically.
Under the CLL, while
the basic provisions
apply to both
commercial and
residential private
projects, additional
steps must be taken
by a lien claimant
from a residential
project. While there
has not been
significant
litigation in which
the courts have
provided a great
deal of direction,
the statutes define
a residential
construction
contract as
including any
written contract for
the construction or
improvement of a
one- or two-family
dwelling, or any
portion of the
dwelling, which
shall include any
residential unit in
a condominium… any
residential unit in
a housing
cooperative, any
residential unit
contained in a
fee-simple townhouse
development, any
residential unit
contained in a
horizontal property
regime… and any
residential unit
contained in a
planned unit
development."
(N.J.S.A. 2A:44A-2).
It has not yet been
determined whether
construction work
performed on common
elements such as
drainage, streets,
etc., in a
residential
development prior to
constructing the
actual dwellings
falls within a
commercial or a
residential project.
Where the project is
within the
definition of a
"residential
construction
contract" several
additional steps
must be taken by the
lien claimant to
assure that its lien
is properly filed
and perfected
including:
1. A NUB must be
filed and served
upon the owner and
intermediate
contractor/subcontractor.
2. At the time that
the NUB is served
upon the owner and
contractor/subcontractor,
a Demand for
Arbitration under
the American
Arbitration
Association program
that has been
specifically created
for residential
construction lien
claims must be
filed, a copy of the
demand similarly
served by personal
service or certified
mail upon the owner
and
contractor/subcontractor.
3. The arbitration
action may proceed
on the documents or
with a hearing but
is to be promptly
scheduled before a
single arbitrator
for the express
purposes of
determining whether
or not the claimant
is entitled to file
a lien claim. The
proceeding is not
for the purposes of
determining whether
or not the owner or
intermediate
contractor/subcontractor
may have viable
defenses to the
claim, but simply to
determine whether
the claimant is
entitled under the
Statute to file a
lien claim.
4. Upon issuance an
Arbitration Award
that affirmatively
finds that the
claimant is entitled
to file a lien
claim, the claim
must be filed with
the Clerk in the
County in which the
property is located
and served upon the
owner as well as the
contractor/subcontractor,
as the case may be.
5. All of the above
must still occur
within the requisite
90 days from the
provision of the
last work, services,
material or
equipment. The time
is not extended as a
result of having to
through the
arbitration process.
Accordingly, on a
residential project,
a potential claimant
must decide quickly
that it intends to
start the lien claim
process to assure
that sufficient time
exists to file and
serve the NUB, serve
the Demand for
Arbitration, have
the arbitration
hearing and to file
the lien claim all
within the 90 day
limit.
MUNICIPAL MECHANICS
LIEN
In August 1996, the
Municipal Mechanics
Lien Law (MMLL) in
the State of New
Jersey underwent
substantial changes
that will have a
significant impact
on the ability of a
subcontractor or
supplier to be
afforded protection
under the lien
provisions (N.J.S.A.
2A:44-127, et.
seq.).
As under the
previous New Jersey
Statutes, a separate
method of protecting
amounts due to
subcontractors and
supplier existed on
a public project.
The lien to be
established would
apply only to funds
remaining under the
prime contractor's
contract balance,
and would not apply
to the real estate.
A Notice of Lien
Claim is to filed
with the public
owner with a copy to
the prime
contractor, from
whom the debt is
owed. Upon receipt
of such a notice,
the public owner may
not make further
payments to the
prime contractor as
such sums may fall
due. The owner has
the rights to hold
up any further
payments to the
contractor unless
and until the lien
claim is satisfied
or the contractor
posts a bond in
double the amount of
the lien claim.
The owner, upon
receipt of such a
notice, is to
provide a ten day
notice to the prime
contractor to
provide the
opportunity to
respond or object to
the lien amount. If
no such response is
received, the public
owner is entitled to
release the funds
sought by the lien
claimant. If the
prime contractor
provides a response,
objecting to the
amount or basis of
the lien claim, no
funds may be
released by the
owner to the
claimant, and the
owner pays the
contractor, only at
its own peril, as
such sums may fall
due. The owner has
the right to hold up
any further payments
to the contractor
unless and until the
lien claim is
satisfied or the
contractor posts a
bond in double the
amount of the lien
claim.
It is notable that
in the event of
multiple Municipal
Lien claims being
filed, whose value
exceeds the amount
of contract balance,
the ultimate
distribution between
the lien claimants
is left at the
discretion of the
Court, without
chronological
priority.
The MMLL applies
only to public
entities which are
not
instrumentalities of
the State (i.e.
counties,
municipalities,
boards of education
and their
authorities).
Under the MMLL,
prior to the
revisions, the lien
could be filed at
any time after the
work was performed
or materials
supplied until a
point of sixty (60)
days after the time
that the project is
either completed or
accepted by the
public agency.
(N.J.S.A.
2A:44-132). As such,
the subcontractor or
supplier normally
had a substantial
period of time in
which to attempt to
collect its funds
from the contractor
prior to resorting
to the lien claim
procedure. It is
this portion of the
MLL that has
undergone
substantial change.
Under the
amendments, any
person now seeking
to assert a lien
must, within twenty
(20) days of the
first performance of
work or delivery of
labor or materials
to a subcontractor,
file with the
appropriate
representative of
the public agency,
written notice that
he or she has
furnished labor or
materials to the
subcontractor. This
statute provides for
a number of items
that must be
included within that
notice including the
normal information
regarding the
identification of
the claimant or the
subcontractor to
whom the materials
for labor has been
furnished as well as
a more detailed
description of what
has been furnished
and the date that it
was first supplied.
Failure to provide
the written notice
within 20 days of
the first
performance of such
work or delivery of
labor and materials
shall constitute a
bar form securing a
lien unless there is
money owing from the
contractor to the
subcontractor to
whom labor or
materials were
provided. In such
case, the lien would
be limited in value
to a sum not greater
than the money owed
it form the
contractor to the
subcontractor.
A further caveat
exists where a
notice is filed
after the 20 day
period, the person
filing may still
assert a lien for
labor or materials
provided on or about
the fling date. No
additional notice is
required for work or
materials provided
under the contract
subsequent to the
initial notice even
if there is a
separate contractor
or purchase order
involved.
It should be noted
that this new
statutory mechanism
does not pertain to
a subcontractor in
direct relationship
to the prime
contractor but only
pertains to
suppliers or
subcontractors to
the subcontractor.
Although not
specifically
pertaining to lien
claims, the same
legislative act
which adopted the
above revisions
provided similar
additional
requirements to a
beneficiary of a
payment bond that
may be required for
a public contracting
work. Under the
recently enacted
provisions, any
person who is a
beneficiary of the
payment bond and who
does not have a
direct contract with
the contractor
furnishing the bond
shall, prior to
commencing any work,
provide written
notice to the
contractor by
certified mail or
other method whereby
there would be proof
of delivery, that
said person is a
beneficiary of the
bond. Failure to
provide such written
notice would bar any
bond claim benefits
for work occurring
prior to the date of
the notice.
Another change to
the Payment Bond Law
provides that a
beneficiary (here a
subcontractor or
lower tier
subcontractor/supplier)
has within a period
of time of the
expiration of one
(1) year from the
last date of
performing work or
delivering materials
to furnish a
statement of the
amount due to the
surety. Thereafter a
90-day hiatus period
exists before a
legal action can be
commenced against
the surety. Under
the revisions, there
no longer exists the
requirement that the
commencement of
legal action must
await the acceptance
eof the building
work or improvement
by the owner. In
addition to waiting
the 90 days, the
actin must be
brought within 1
year after the
beneficiary
completes its work.
Therefore, including
the 90-day hiatus
period from the time
of submitting the
Notice of Claim, the
subcontractor or
supplier seeking a
claim on a bond must
commence the process
within 275 days of
the completion of
work.
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