NEW JERSEY MECHANIC S LIEN LAW With Changes Made in 2011 Section Contents Pre-lien Notice(s) Name of Notice Who Must Use This Notice When How to Serve Verified or notarized? Section Contents Mechanic s Lien Who is Entitled to a Lien? When to File/Record Where to File/Record How to Serve Amount of Lien Property Subject to the Lien Furnishing Information Verified or Notarized Priorities Lien Release Bond Miscellaneous Issues Section Contents Lawsuit to Foreclose Lien Introduction When Where to File Arbitration Need a Lawyer? Page 1 of 12
General Notes Be Careful: New Legislation: The courts consider a mechanic=s lien to be a privilege and not a right. You receive its benefits only if you strictly adhere to the state law requirements. Bottom line: miss a deadline by one day and you have lost it. Unlike other areas of the law where you can argue equities, find technical exceptions, and lawful excuses, there is no forgiveness here. In this case, knowledge is not only power, it=s a necessity. New Jersey replaced it s centuries old mechanic s lien statutory system with new legislation in 1994. This was followed by changes in 2010. Even further changes were made when the governor signed into law revisions on January 5, 2011. Like all mechanic s lien statutes, the new rules must be strictly complied with or you may lose your lien rights. In general, the new law was meant to simplify matters and in many cases it does so. Contract Requirement: Written Contract In most states a mechanic s lien can be foreclosed upon either a written or verbal contract. In those states it is nevertheless recommended the contract be in writing. New Jersey is different. It mandatorily requires that everyone, whether generals, subs, or suppliers, have a written contract in order to have the right to later file a mechanic s lien. But the New Jersey statutes go even further. They require that all change orders and contract addenda be in writing. Be very careful about this aspect of the law. If an extra is not in writing, it cannot be part of your lien. Attempt to get your change order signed before the extra work is done. If there is a refusal to sign, at least send a written confirmation. (It is uncertain at this stage of the law as to whether this will be effective.) It need not be a formal, comprehensive contract. In fact, the statute talks only in terms of a writing which describes the price and the improvement. As of 2011, material suppliers will satisfy this requirement by a delivery or order slip signed by a general contractor, subcontractor, or authorized agent. Typically these are signed by anyone on the job at the time and in most cases such persons are the authorized agent. The statute goes so Page 2 of 12
far as defining a signature also as a mark or symbol, which is intended to authenticate it. Apparently signing OK, Received, or someone s initials, would probably be sufficient (2A: 44A-2). In this State you will be writing down dates for at least three documents: a) Notice of Unpaid Balance and Right to File Lien; b) Contractor s Lien Claim; and c) lawsuit to foreclose the mechanic=s lien. Write down all the deadlines in your calendar. Use a highlighter or red pen. If you have a staff, use a Afail safe@ system by doubling up and putting it in their calendar also. This reminds you twice. The first calendar entry should be two weeks before the due date as a preliminary reminder. On the second calendar entry, do a white lie to yourself. Put the due date as one week before it is actually due as insurance in case you get busy or need legal advice. Time is money. You will waste a lot of valuable time running around and doing it at the last moment, as opposed to doing it early. PRELIEN NOTICE This state requires a prelien notice be sent out on residential projects before the mechanic=s lien is filed/recorded. For simplicity, this notice will be referred to as a APrelien Notice@. The basic information on this Notice is as follows: Name of Notice: Notice of Unpaid Balance and Right to File Lien. As of 1994, there is no longer a requirement to serve a prelien notice except for residential construction. Residential construction is defined as construction or improvement to a one- or two-family dwelling, condominium, cooperative, townhouse, subdivision, or other planned unit development. Remember that this prelien notice is only the first step in protecting your mechanic s lien. You must also take the second step of filing the construction lien claim. Who Must Use this Notice: Unlike most states where only subcontractors and suppliers are required to file the prelien notice, all lien claimants are required to file the notice in this state. This means generals, Page 3 of 12
subs, equipment/material suppliers, laborers, design professionals, and any other persons claiming a lien. When: See Time Deadlines table. How to Serve: The prelien notice must be filed in the County Clerk s office in the county in which the project is located. On commercial or industrial property, it is not necessary to serve anyone with the prelien notice. On residential projects, you must serve copies of the notice after filing with the County Clerk. If you are a general contractor, serve the owner by certified mail, return receipt requested, at the last business or residence address. If you are a subcontractor or supplier having a contract with the general, you will serve the owner and general contractor. If you are a sub-subcontractor or supplier with a contract with a subcontractor, you will serve the subcontractor, the general contractor, and the owner. It is recommended that the notice be served within 10 calendar days after filing with the County Clerk (as is done with construction lien claims). If more moneys are owed to you after serving your first prelien notice, it is a good idea to file an Amendment to Notice of Unpaid Balance and Right to File Lien. Service is done in the same fashion as the original notice. Verified or Notarized?: A verified notice simply means you sign it and are representing the contents are true and accurate. A notarized notice is signed in front of a Notary Public or other official. The notice must be both verified and notarized. Added Benefit of Prelien Notice on Commercial Property: Although it is not required to serve such a notice on commercial or industrial property, it is recommended you do so. It is especially handy if the property is later sold or permanent financing is recorded. If you file your prelien notice before this happens, the new buyer or lender takes subject to your lien rights. Page 4 of 12
Mandatory Arbitration: New Jersey is the only state which mandatorily requires any disputes arising out of a prelien notice for residential projects (does not apply to commercial) to be quickly resolved through binding arbitration). After your serve your prelien notice, it is required that you take the following additional steps: A. Unless the parties have agreed in writing to another arbitrator, you must serve within 10 days of the Notice of Unpaid Balance and Right to Lien, a Demand for Arbitration with the American Arbitration Association. It will be an expedited proceeding with one arbitrator. B. If the arbitrator believes that some of your work is defective or there are valid set-offs or defenses, he/she may require you to post a bond in the amount of your lien. C. The arbitrator will hold a hearing and make a decision as to the probable validity of the lien. It is not binding either way, but is simply a signal that you have a likelihood of prevailing in court and the Notice was filed in good faith D. If the arbitrator determines you have a valid lien, within 10 days thereafter but no later than 120 days from the last performance of work, file your actual construction lien claim. This is a very beneficial procedure but it goes very quick, so pay attention to the time deadlines. MECHANICS= LIENS Name of Lien: Construction Lien Claim. Who is Entitled to a Lien: A mechanic=s lien is primarily for general contractors, subcontractors, laborers, as well as material/equipment suppliers. But it also covers licensed architects, engineers, and land surveyors (who are not employees of the owner or general). It additionally covers a number of claimants who have a direct contract with the owner, including not only the general contractor, but construction managers as well. It also includes subcontractors and sub-subcontractors. Sub-sub-subcontractors do not appear to be entitled to a mechanic s lien. The lien also applies to material and equipment suppliers who have a direct contract with the owner, general contractor, or a Page 5 of 12
subcontractor. If you have a direct contract with a subsubcontractor, unfortunately, you are out of luck. The old rule was a lien is not allowed for an equipment or material supplier who has a contract directly with another supplier ( supplier to supplier rule). As of 2011 this was changed: a supplier to a supplier is allowed, but only within the first three tiers of the contracting chain. So, a supplier can deal with another supplier who has a direct contract with the general contractor, but no further down the chain. For clarity, New Jersey classifies the tiers not based on your license, but who you have your contract with: 1 st Tier: (Commonly a general contractor). Any contractor, regardless of their license, who has a direct contract with the owner. This could be a traditional general contractor or a licensed subcontractor (roofer, painter, plumber, electrician, etc. who has a direct contract with the owner). But for simplicity, in these examples, we will make the assumption that person is a general contractor. 2 nd Tier: (Commonly a subcontractor or supplier to the general contractor). A subcontractor or supplier who has a direct contract with the general contractor. 3 rd Tier: (Commonly a sub-subcontractor or supplier to a sub). A subcontractor or supplier who has a direct contract with another subcontractor. Unfortunately, there can be no liens for a sub-sub-sub or a supplier to a sub-sub. By statute, the following persons or entities do not have lien rights: (a) work pertaining to mining, removal of timber, gravel, soil, or sod, unless it is an integral part of or required by some additional work; (b) fuel for machinery or equipment; (c) material and equipment that has not become permanently attached to the real estate and can be easily removed without damage; (d) evaluative work, such as feasibility studies, which do not result in actual construction work; and (e) equipment or materials that are subject to a UCC Security Agreement (for example, moveable fixtures, counters, shelving, restaurant equipment, and the like). When to File/ Record: See Time Deadlines table. The time periods are not extended for warranty or service calls for work provided after completion. Page 6 of 12
Where to File/Record: Filed with the County Clerk of the county in which the project is located. How to File: The clerk s office is quite busy and cannot always file of record a document on the spot. Instead they typically mark your copies as received and in the days and weeks later, process it for filing (formally record it on their computers and dockets). So, New Jersey came up with a compromise. When going in person, you will immediately get a stamped copy back. It will be formally stamped as filed of record (2A: 44A-6). This lodging date satisfies a requirement of it being filed on time. If you send your lien in by mail, the same process occurs, except you will get a stamped copy back in your return envelope. How to Serve: Within 10 business (not calendar) days after lodging (stamped as filed of record ) with the County Clerk, service is made on the owner by Certified Mail, Return Receipt Requested, at the last business or residence address. You can serve a copy, but it must have a copy of your signature and date signed. Many attorneys mail the original to the clerk and at the same time mail certified a copy to the owner or general. This practice is no longer allowed because the mailed copy does not have a court stamp. This means that employees are going in person to the court or using messengers--on the way back to the office they mail it certified mail with the stamped copy. Remember, you must serve by certified mail and ordinary mail simultaneously (2A: 44A-7). There is a provision that allows you to do this late if it does not cause the other party material prejudice, but do not take any chances. If you are a general, you serve the owner only. If you are a sub or a material supplier with a contract with the general, serve the owner and general. If you are subcontractor or supplier with a contract with a subcontractor, serve the subcontractor, the general and owner. Amount of Lien: Primarily for unpaid labor, material, and equipment supplied. The statutory form of mechanic s lien does not include blanks Page 7 of 12
for interest or finance charges, so it is uncertain whether you can receive these amounts. The amount you are owed is reduced by any mechanics liens filed by others under your contract. In other words, either the owner or the general contractor can deduct the amounts of mechanics liens owed from the amounts due you. As of 2011, the statute defines the lien amount as including monies owed on the base contract, retainage, and amendments (2A: 44A-2). It is uncertain whether the later refers to change orders. But based on the rule that the contract must be in writing, it may be the case that arbitrators and judges will insist upon written and signed change orders--so beware. Property Subject to the Lien: A mechanic=s lien applies only to private projects. The lien applies to the property itself as well as offsite infrastructure (example: utilities). No lien is allowed in public projects against government property. There is a continual debate in states as to whether a mechanic s lien goes against a subsequent purchaser. For example, contractor does work for owner A who then sells to B. Within the time limitations allowed, contractor files a lien after B takes title. In many states, B would take subject to the lien, but not in New Jersey (2A: 44A-3(g)). If the lien is recorded after B takes title, the contractor loses. This assumes B is a bona fide purchaser who is innocent of the facts leading to the lien. Solution? Make sure you record your Notice of Unpaid Balance and Right to Lien as soon as possible and before close of escrow to B. This will allow B s interest to be encumbered. Tenant Improvements: As of 2011 (2A: 44A-3), there is clarification on this issue as well. A lien is allowed against the tenant s interest as well as that of the owner, only if: 1. The owners signs a written contract with the contractor which provides the owner s interest is subject to a possible lien (the amount is limited to the money agreed under the contract, last partial payments made) something that almost never occurs, or 2. The owner pays the majority of the cost of construction, or Page 8 of 12
3. The lease specifies the owner is liable for unpaid construction bills for tenant work. In leases involving the construction of large improvements such as warehouses, factories, shopping centers, etc., it is common for the owner to finance the improvements in exchange for a long-term triple net lease, and by virtue thereof the landlord has indirectly agreed to pay for the bills. But there is typically separate contracts solely between tenant and the contractor for additional work, and NationalLawDocs has yet to see a lease where the landlord would be responsible for those items. Furnishing Information: Verified or Notarized?: Priorities: Lien Release Bond: The general contractor may demand a verified list from subcontractors of the names and addresses of all subcontractors and suppliers on the job. The recipient then has 10 days to furnish the list, verified under oath. A verified notice simply means you sign it and are representing the contents are true and accurate. A notarized notice is signed in front of a Notary Public or other official. A verified notice is all that is required in this state. The lien must be both verified and notarized. Many times an owner secures construction financing followed by permanent financing. If you file your prelien notice before the permanent financing is recorded, that lender will take subject to your lien. Because of this added benefit, file your prelien notices early. The owner may post a bond and have the lien released by securing a surety bond or making a deposit with the Superior Court Clerk in the amount of 110% of the lien. You can then continue as before with the lawsuit to foreclose, joining the surety bond company, and if you are successful, you receive the money from the bond. Miscellaneous Issues: Written Objection to Lien: If a general contractor or subcontractor receives a mechanic s lien, it must notify the owner and the holder of the lien, in writing, within 20 days that it is contesting the lien, Page 9 of 12
stating the reasons. If this is not done, the owner has the option of paying the lienholder directly and deducting the amount from your contract balance. Full Discharge: If you are paid in full after your lien is filed, make sure you go to the County clerk s office and file a Certificate of Discharge of Construction Lien within 30 days or you can be assessed court costs and reasonable attorney s fees to discharge the lien. If your claim has been paid but you have not discharged the lien and thirteen months have lapsed after the date of filing, the owner can discharge lien by simply filing a discharge certificate and affidavit. Lien Waivers: Previous law allowed a contractor, sub, or supplier to waive his or her mechanic s lien rights, but this can no longer be done because it is against public policy. You can now waive your lien rights only to the extent of the actual receipt of moneys for the labor and materials you have conferred. This means that the waiver is effective only upon receipt of a payment for all or part of your services. LAWSUIT TO FORECLOSE LIEN Introduction: When: Your lien is not valid forever. Because it directly affects the owner=s title, it has a limited shelf life and must be enforced within a short period of time. That enforcement is done by filing a lawsuit to foreclose. Just like the time deadlines for a Pre-Lien or Mechanic=s Lien, the courts strictly construe these time limits which are called statutes of limitation. Again, if you are literally one day late, the lien is ineffectual. Within one year from the completion of your work. The only exception is if the owner serves a demand that the lawsuit be started within 30 days, you must comply. Arbitration: Many construction contracts state that all disputes will be decided by binding arbitration, as opposed to a court proceeding by judge or jury. In fact, it has long been a tradition to do so in the construction industry. Arbitration is usually quicker and less costly, especially because it cuts down on expensive discovery. The decision is final and binding, with no right to appeal. You lose your right for a jury trial, but few contractors want that in the first place. You usually pick an experienced construction attorney or retired Page 10 of 12
judge to hear the case in their conference room. It is just like a court proceeding with the same general rules of evidence, but more informal. On the other hand, you can only foreclose your lien through a court proceeding, not arbitration. So, how do you keep your arbitration rights and at the same time preserve your lien rights? Simple. You bring a lawsuit to protect the lien and then immediately request the court to stay the court proceedings. When arbitration is done, you go back to court and turn the arbitration award into a judgment. Need a Lawyer? In this country, every individual has the statutory right to represent themselves. This means they can prepare all necessary papers, appear at hearings, and actually try the case. In so doing, the court considers you to be acting either in pro se or pro per. Before making this decision, consider the following factors: 1. You are a professional and thoroughly know the ins and outs of not only the construction industry but of the project itself. The best lawyer on his or her best day will probably not know more than 50% of what you know. 2. How is your public speaking abilities? If you are uncomfortable speaking to a group, you will even more uncomfortable in court or arbitration. You could be the sharpest wit in town but may not be able to present your arguments. Remember, appearing uncomfortable is perceived as having deficiencies in your case. People usually think that if you are not comfortable about your own facts, then they must not be that strong. 3. If the other side has a lawyer, you might want to think twice about representing yourself. You will certainly know the facts quite well, but you may be blindsided by legal technicalities. 4. You may also want to think twice if this is a really nasty and emotional case. In other words, if the other side is going for blood. Having a lawyer can shelter you from this emotional trauma. No matter how strong you are, lawsuits are taxing not only on your time, but on your physical and emotional energies. Page 11 of 12
5. If you have a good case in which you have complied with technicalities and performed good work, you are essentially engaging in a collection action. These actions are typically very simple because there are few defenses or defects alleged by the other side. It makes it easier for you to represent yourself because it is more a question of when and how much they will pay as opposed to whether you will win at all. 6. If you have a binding arbitration provision, you may consider representing yourself. These proceedings are much more informal and the arbitrator tends to give you more leeway. There are also fewer rules and not they are usually not quite as strict. 7. You could consider representing yourself but get advice along the way from a lawyer. It is much cheaper that way. On the other hand, the lawyer cannot watch over every move and you might slip up. Many times lawyers can also help you with preparing the forms, simply putting your name on the pleading. You can also bring in your lawyer at the end to actually try the case. 8. Judges and courts do not give legal advice. They only help you with what forms to use. However, clerks can be invaluable in steering you in the right direction as far as where to file, time limitations, the nature of the form or pleading, etc. But, remember when it comes right down to the ultimate advice, they cannot help you. 9. Judges usually treat you the same as an attorney which means they expect strict compliance with the rules. Although some judges give you more slack, don t count on it. 10. The biggest dilemma is whether you should hire an attorney for a smaller case, typically in the $5,000 to $10,000 range. You have to watch this because you may eat up that amount in attorney s fees. You never make money on lawsuits, only lawyers do. Try to settle for the best price you can get and move on. Page 12 of 12