Governor Christie has signed into law an important amendment (“the Amendment”) to New Jersey’s Construction Lien Law (“the Law”), the first such change since the Law’s adoption 16 years ago. The Amendment, effective January 5, 2011, sets forth a new timeline for perfecting liens arising from residential construction contracts, clarifies key concepts relative to the Law’s application, and provides new definitions to aid in the Law’s interpretation.
The Amendment incorporates the entirety of the New Jersey Law Revision Commission’s final report on the Law. After learning that the Law was notoriously complicated, confusing, and inherently contradictory, the Commission set about modifying the Law to make it clearer, simpler, and more inclusive of language used in the construction industry. According to the Commission’s Chairman, Vito A. Gagliardi Jr., “The Law has been the subject of time‐consuming and costly litigation necessary to define the meaning and application of some of its most fundamental concepts, terms, and provisions.” The Commission’s goal, says Gagliardi, was to “clarify these concepts, such as ‘lien fund,’ ‘lien claim,’ and ‘residential construction,’ which, while vital to the Law’s application, had previously been left undefined.” “At the same time,” Gagliardi notes, “the Commission had to eliminate language that was repetitive, or, often, inherently conflicting, and reorganize certain provisions so they made more practical sense.” Gagliardi, a Principal at Porzio, Bromberg, & Newman P.C., in Morristown, New Jersey, believes that the Amendment “will effect a more concise, workable, and straightforward approach for perfecting construction liens in New Jersey.”
Among the Amendment’s changes is the expansion of the definition of lienable “work.” For years, both lien claimants and attorneys have struggled to determine whether services performed under a contract were lienable. Under both the Law and the Amendment, any contractor, subcontractor, or supplier who provides “work” pursuant a contract is entitled to file a construction lien. Under the prior version of the Law, the term “work” included “any activity, including labor, performed in connection with the improvement of real property.” The old definition of “improvement” included a limited list of conforming services. The Amendment makes a subtle, but potentially impactful change to the definitions of “work” and “improvement” by adding the expansive phrase “but not limited to” to each definition. Now, “work” includes, but is not limited to, “labor, performed in connection with the improvement of real property.” Similarly, “improvement” includes, but is not limited to, “excavation, digging, drilling, drainage, dredging, filling, irrigation, land clearance, grading or landscaping.” These broadened definitions should allow more services, for example those associated with environmental remediation projects, to be more likely lienable under the express terms of the statute. Undoubtedly, this slight change in language will lead to much litigation while courts grapple with the Amendment’s expansion of the universe of potential lien claimants beyond the limits previously determined by case law.
In another change, the amendment sets forth a new timeline for filing residential construction liens. The new timeline addresses an ambiguity present in the Law. That ambiguity would sometimes leave lien claimants who had made technically timely filings with no substantive legal recourse.
Before the Amendment, all construction lien claims had to be filed within 90 days of the date services were last performed under a given contract. However, prior to filing a lien claim and within the same 90‐day period, a prospective residential construction lien claimant first had to file (1) a Notice of Unpaid Balance and Right to File Lien (“NUB”) with the county clerk where the real property subject to the lien claim was located and (2) a demand for arbitration with the American Arbitration Association. Upon receiving a demand for arbitration, an arbitrator had 30 days to determine various issues surrounding the NUB, including the proper amount due under the contract and whether the NUB was properly filed. Only upon receipt of the arbitrator’s final decision confirming the validity of the NUB could a residential construction lien claimant then file a valid lien claim. Thus, a residential construction lien claimant could timely file a NUB, but receive the arbitrator’s decision after the 90‐day window had closed, and thereby be precluded from filing a valid lien claim. For example, a residential construction lien claimant could have simultaneously filed a NUB and a demand for arbitration 61 days or more after the date services were last performed on the underlying contract. Assuming the arbitrator waited the full 30 days to render a decision, the lien claimant would receive a final decision 91 days or more after the date services were last performed on the underlying contract. At that point, though the lien claimant timely filed his NUB and demand for arbitration, he or she would be time‐barred from filing an enforceable lien claim.
Practically, waiting until the 60th day to file a NUB could prove fatal to a valid residential construction lien claim. As such, prospective residential construction lien claimants were often pressured into deciding whether to file a NUB only a matter of days after sending out monthly invoices.
To address this, the Amendment revises the timeline for filing a valid residential construction lien claim. Going forward, residential construction lien claims must be filed not later than 120 days (not 90 days) after the date on which services were last performed on the underlying contract. The Amendment also creates some guideposts to help navigate a prospective lien claimant through the filing process. A residential construction lien claimant must file a NUB within 60 days after the date contract services were last performed. Once a NUB has been filed, the lien claimant must demand arbitration within the next 10 days. The arbitrator then has 30 days from the date the demand is filed to render a final decision. After receiving the arbitrator’s final decision confirming the validity of the NUB, the lien claimant must file the lien claim within 10 days. The Amendment enables the parties to consent to an extension of the arbitrator’s 30‐day decision timeframe, but prospective lien claimants must be mindful of the 120‐day deadline.
While the Amendment provides a clearer timetable, it still requires a residential construction lien claimant to make a quick decision whether to initiate the process. For instance, though the deadline for filing a lien claim has been extended from 90 to 120 days, a residential lien claimant must still decide within 60 days whether to file a NUB. The Amendment does create a 10‐day grace period within which to file a demand for arbitration, a period during which the matter could be settled. Still, contractors, subcontractors, and suppliers must monitor their past‐due accounts closely and make quick decisions on whether to begin the lien process.
The Amendment also provides clarification as to what constitutes “residential construction” so to make the additional residential lien provisions kick in. Under the Law, parties were confused as to whether mixed‐use developments were “residential” or “commercial” in nature. The Amendment clarifies that “residential construction” includes the construction of or improvement to a “residential unit,” which includes one that is “part of a multi‐use or mixed use development project.”
Additionally, community associations may now be made subject to a lien. Under the Law, it was unclear as to what property interest a construction lien arising out of a contract with a community association for the repair to or improvement of the community’s common elements could attach. Typically, a construction lien must attach to an owner’s interest in real property. In a condominium regime, individual unit owners own title to undivided interests in the community’s common elements. Community associations are allowed by statute to contract for the repair of or improvement to the community’s common elements. Many associations, including condominium regimes, do not hold title to any attachable real property themselves.
The Amendment provides that a construction lien claim may be filed directly against a community association with the clerk of the county in which the property is located. Unlike a traditional construction lien, a lien against a community association will not require a reference to a lot and block number. Instead, a lien claimant will simply be required to set forth the name of the community association and the name and location, presumably a street address, of the property development. Interestingly, such a lien will not attach to any real property or any interest in real property held by the association’s individual unit owners. To later satisfy a lien claim, community associations are now authorized by the Amendment to collect a special assessment from unit owners. If the association is administering a community that includes residential units, the residential pre‐lien procedures – the NUB and demand for arbitration and their associated time limits – must be followed.
The Amendment provides several new mandatory forms to be used in filing a NUB, a demand for arbitration, and a lien claim. On the one hand, potential lien claimants must be cognizant of the fact that failure to comply precisely with these forms could result in the forfeiture of a lien claim. On the other hand, the existence of clear, uniform, and readily obtainable forms should provide comfort that attempts to invalidate a lien claim due to the use of an improper form are unlikely to prevail.
Another new provision holds that, in the event a lien is satisfied before a foreclosure action is filed, the lien claimant must file a discharge of the lien within 30 days of receiving payment. If the lien claimant fails to file a discharge, any party in interest may file an Order to Show Cause to have the lien discharged. Moreover, if 13 months have passed since the lien was satisfied, the owner or community association against whom the lien was filed may apply to the Superior Court for a discharge using a new form affidavit. A party forced to discharge a lien in this manner may seek reimbursement for court costs and legal fees from the lien claimant who failed to properly discharge the lien.
The Amendment is a welcome development in the field of construction liens. The Amendment clarifies previously amorphous and nebulous areas of the Law, especially relative to residential construction liens. Still, despite the many improvements brought by the Amendment, perfecting a construction lien in New Jersey remains a complicated and time‐sensitive undertaking.