A Limited Liability Company
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A Limited Liability Company
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By: Kenneth Hayes, Counsel.
The New Jersey Construction Lien Law, codified at N.J.S.A. § 2A:44A-1 et seq., permits a contractor, subcontractor, or supplier who has provided materials or labor to improve real property that has not been paid for the work performed or materials to file a construction lien against the property. The lien is filed with the county clerk where the property is located.
A valid construction lien attaches to, and is secured by, any interest the owner has in the real property at time of and after the lien is filed. A holder of a valid construction lien, like a bank holding a mortgage lien, can seek to obtain payment by foreclosing on the lien.
The key term here is “valid construction lien.” Obtaining a valid construction is a multi-step process that differs depending on whether the lien desired lien will be against residential or commercial property. A construction lien cannot be filed against publicly owned land.
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The Construction Lien Law sets out a complex process for obtaining a construction lien against a residential property. Missing a single step or deadline renders the desired lien invalid.
A construction lien on residential property must be filed no later than 120 days of the last date that the contractor last provided labor or materials to that property. The date that the contractor “last provided labor or materials to the project” is defined as the date of substantial completion. Taking care of punch list items or performing repairs will not extend the deadline.
That 120-day period is a busy one. The contractor must complete several tasks prior to filing the lien.
First, a Notice of Unpaid Balance (a “NUB”) and Right to File Lien must be filed with the County Clerk within sixty days after labor or materials were last provided. Within ten days after filing the NUB, the NUB and a demand for arbitration must be served on the property owner. A contractor can file a residential construction lien only after an arbitrator determines that the contractor has the right to do so.
The statue provides that the arbitration hearing must be held before the American Arbitration Association (“AAA”) within 30 days of filing the demand for arbitration. A single arbitrator will decide whether the contractor has the right to file the proposed lien. The AAA has issued its own rules with tight deadlines that are specific to New Jersey residential lien law arbitrations. As of the date of this article, the AAA’s fee for a single claimant, single respondent case is $300.00 for a paper submission only hearing and $525.00 if an oral hearing is requested. The respondent property owner is permitted to assert counterclaims and the right to offsets against the amount sought by the contractor.
If the arbitrator decides that the contractor has the right to file a lien, the contractor must do so within ten days of the arbitrator’s decision. The contractor then must serve the filed lien on the property owner within ten days.
The process applicable to commercial property projects is simpler than the residential construction lien process. For commercial construction projects, the lien must be filed with the county clerk within ninety days after the contractor/vendor last provided labor or material to the project. A NUB need not be filed nor is arbitration required. The lien must be served within ten days of it being recorded.
A construction lien can be foreclosed on in much the same way as a residential mortgage lien. There are, however, important considerations that need to be taken into account before doing so.
For example, a construction lien will be junior to a prior mortgage lien. And, depending on the circumstances of a particular project, there may be multiple construction liens against the property. The priority of those liens will be determined by the order in which they were filed. Therefore, foreclosing on a construction lien may make sense only when the proceeds from a sheriff’s sale of the subject property will yield a sufficient amount from which payment can be made after all senior liens are satisfied.
A lawsuit to enforce a construction lien must be filed within one year of last providing labor or materials to the project. That is, the one-year time limit to commence a lawsuit to enforce a construction lien starts to run when the work is completed – not from the filing of the lien. In addition, the property owner can serve a notice on a construction lienholder demanding that the lienholder commence an action to enforce the lien within thirty days. If the lienholder fails to commence an action to enforce the lien by either deadline, the lien will become unenforceable, and the lienholder must immediately discharge the lien.